Cheniere: Innovative deal structuring on Corpus Christi

This year saw one of the first innovative upstream gas supply deals for a US Gulf Coast liquefaction plant.

In June, Cheniere had signed a long term gas supply agreement with Apache for its Corpus Christi Stage III trains. The Corpus Christi Stage III project is being developed to include up to seven midscale liquefaction trains with a total expected nominal production capacity of approximately 9.5mtpa.

The supply agreement will be for gas volumes of 15mmbtu/day, delivered to Corpus Christi, and more importantly Apache will receive a gas price that will be the LNG price less a fixed liquefaction fee and certain costs incurred by Cheniere.

The LNG associated with this gas supply is c.0.85mtpa and will be marketed by Cheniere.

“This first-of-its-kind long-term agreement with Apache represents a commercial evolution in the U.S. LNG industry, as it will ensure the continued reliable delivery of natural gas to Cheniere from one of the premier producers in the Permian Basin, while enabling Apache to access global LNG pricing and receive flow assurance for its gas,” said Jack Fusco, Cheniere’s President and CEO.

“This commercial agreement, which is expected to support the Corpus Christi Stage III project, reinforces Cheniere’s track record of creating innovative, collaborative solutions to meet customers’ needs and support Cheniere’s growth.

Apache’s agreement with Cheniere is part of the company’s long-term strategy to leverage the scale of our assets in the Permian Basin and diversify our customer base and cost structure by accessing new markets for natural gas produced at Alpine High. We are pleased to partner with Cheniere in this innovative marketing agreement,” said John J. Christmann IV, Apache’s Chief Executive Officer and President.

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Forties Pipeline System reopens in time for the New Year

On 11^th December, INEOS the owner of the Forties Pipeline System, had discovered a hairline crack in the pipeline at Red Moss near Netherley. The crack continued to grow upon monitoring and the entire system was subsequently shutdown. INEOS announced this morning that the repairs are "mechanically" complete with the system being restarted - export rates should resume to previous levels around the new year.

The system carries c.450mbbl/d of production from the North Sea to the Kinneil processing facility in Scotland. The 235 mile pipeline links more than 80 North Sea fields and delivers almost 40% of UK North Sea production. Upon its outage, Brent crude jumped to USD65/bbl signalling the importance of North Sea production to the global oil markets.

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Premier Oil exits Norway

Premier Oil Norwegian operation
Source: Premier Oil

On 16 November 2015, Premier Oil announced that it had agreed to sell its Norwegian business to Det Norske for USD120 million. The Norwegian business consists of the Premier Oil Norges subsidiary and includes the Vette development, adjacent Mackerel and Herring discoveries, a non-operated stake in Froy and seven exploration licences.

The transaction is expected to close before year end and proceeds will be used pay down debt. The exit of the business will give rise to a G&A saving of c.USD20 million p.a. as well as remove capital requirements for the Vette development that was progressing towards sanction.

For Premier Oil, the sale is in line with the company’s ongoing portfolio management strategy and is an important step to managing the high debt levels.

For Det Norske, the acquired business will bolster its Norwegian portfolio and Det Norske will be able to offset its production against the tax losses in Premier Oil Norges (from spend on Vette and Froy) which stood at USD146 million as at mid-2015. Det Norske will fund the acquisition from internal cash resources.

Tony Durrant, CEO of Premier Oil commented:

“We are pleased to have reached agreement to sell our Norwegian business to Det norske, one of our long term partners in Norway. Our team in Norway has done an excellent job in bringing the Vette project close to a sanction decision in a low oil price environment. The transaction will realise immediate value from the project as part of our strategy of active management of our portfolio.”

Karl Johnny Hersvik, CEO of Det Norske commented:

“Following the recent closing of the Svenska transaction, the acquisition of Premier is another bolt-on acquisition that further underlines our firm belief in and commitment to the Norwegian Continental Shelf.”

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The Apache Egypt treasure map

Source: Houston Geological Society, HGS

Apache is a significant acreage holder onshore Egypt with an extensive infrastructure network which allows new discoveries to be brought onstream quickly and at relatively low cost. Its acreage can be broadly split into four areas, the most significant of these is the Western Desert Gas area which underpins the portfolio’s gas reserves and is a key supplier of gas to the domestic market.

Source: OGInsights

 The highlights from each area are below.

Western Desert Gas

This area has been a key source of growth in recent years and accounts for 80% of Apache’s Egyptian 2P reserves (Wood Mackenzie). The area comprises three sub-areas with the Khalda Area, which has been producing since the 1970s, being the most established. The Fahgur, Sushan and Matruh Areas all commenced production post 2005 and have all been a target area for exploration. Production in the Western Desert is currently constrained by lack of gas processing capacity (currently 900mmcf/d) and further investment to debottleneck the facilities is dependent on increase in gas prices.

Apache Merged Area

The blocks in this area were acquired from BP in 2010 with production underpinned by two fields: Abu Gharadig and Razzak. Both of these fields are mature and in terminal decline, although horizontal drilling and water flooding efforts have been successful in arresting declines. The area is considered as underexplored and exploration success will be important to maintain production levels in the longer term. A seismic programme in 2010/11 and subsequent simulation studies has helped Apache identify new targets for future exploration and development.

East Bahariya Area

Apache aggressively explored the East Bahariya block between 2000-2005 bringing on-stream a number of discoveries. Since 2005, Apache has implemented water flooding on all the fields in the block which has boosted production. In 2008, the Heba Ridge cluster of fields were discovered which is now a key growth area on the block. Apache acquired the nearby El Diyur and North El Diyur blocks after recognising the

extension of one of the East Bahariya reservoirs into these blocks.

Qarun

The fields on the Qarun block are mature and in decline with production expected to cease in the next few years. The East Beni Suef block is also in decline, although Apache has been able to sustain production through water flooding. Exploration success on East Beni Suef has also helped to maintain production, although discoveries have been small in size (1-5mmbbl).

Apache exports its production via an extensive network of oil and gas pipelines and facilities. A schematic of the network is shown below.

Source: OGInsights

Source: Apache Egypt EIA
https://www.miga.org/documents/Apache_Egypt_2004_Egyptian_Oil_and_Gas_Activities_EIA.pdf

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Apache exits LNG business through sale to Woodside

Source: OGInsights

On 15 December 2014, Apache announced the sale of its interests in the Wheatstone and Kitimat LNG projects to Woodside for USD2.75bn. The move was widely anticipated with Apache announcing in its Q2 2014 results its intention to completely exit LNG; this message was reinforced in the company’s Q3 results on 7 November 2014.

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Apache's Egyptian Jewel

Apache entered Egypt in 1994 and has since built up a dominant onshore position through a series of acquisitions and an aggressive exploration campaign. It is the largest acreage holder in the Western Desert and operates 24 licences. In 2010, Apache expanded its position through the acquisition of BP’s entire Western Desert portfolio as part of a wider transaction involving BP’s North American assets. In 2013, Apache divested 33.3% of its Egyptian portfolio to Sinopec for USD3.1bn in an effort to refocus on its North American business.

Apache’s Egyptian portfolio contains c.594mmboe of 2P reserves (Wood Mackenzie) as at the end of 2014 with about half of these reserves being gas. Gas production is an important part of Apache’s business, which is a material supplier of gas to the domestic market with a 12% market share (excluding Sinopec’s interest in the portfolio). All gas is sold to EGPC.

One of the biggest concerns for Egyptian operators over the past couple of years is the receivables balance due from the EGPC. To date, EGPC have not defaulted (to Apache or any other operator); in fact, EGPC have been aggressively paying down the balance since the beginning of 2015. To manage payment default risk, Apache has insurance with USD300mm of cover from the Overseas Private Investment Corporation  and this is in place until 2024.

Egypt has been one of Apache’s success stories, where production and cash flow have grown strongly with each USD1mm of investment generating USD2mm. This has be driven by strong and consistent exploration success – success rate has averaged above 80%. The company holds a large acreage position with 72% still undeveloped which will provide significant opportunities for the future.

Historical production

Cash flow growth

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Apache divesting international assets? A hard one!

On 31 July 2014, Apache announced its Q2 2014 results

• Apache said it was looking to exit its Canadian LNG positions and was considering options around its international assets
• This comes amidst Jana Partners, a hedge fund which recently picked up c.USD1bn of shares in Apache, wrote to investors arguing that Apache should focus its efforts on the North American onshore
• Reasoning behind this is that over the last few years, a number of North American onshore pure plays have outperformed Apache
• Apache's international assets, it is argued, are diluting its North American onshore story
• However, analysts do not necessarily agree
• Apache's international assets, especially those in Egypt and the North Sea, generate significant free cash flow for the group
• These are areas of existing production and are low risk operations
• The cash flows are important for the funding of the North American portfolio
• It is further noted that given the number of North Sea assets on the market, the geopolitic issues plaguing North Africa and the relative maturity (though strong cash flow generation) of these assets, it is unlikely that Apache will fund a buyer willing to pay full value
• Its other main operations are in Australia, including the Wheatstone LNG project

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