An LNG dilemma

Anadarko’s decision to pursue Kerr-McGee, Western Gas influenced by inability to secure gas supply for Bear Head project

By Ray Tyson

For Petroleum News

Anadarko Petroleum’s admitted failure to secure adequate gas supply from overseas producers to help feed its planned liquefied natural gas receiving terminal in eastern Canada factored into the company’s decision to acquire Kerr-McGee and Western Gas Resources, U.S.-based exploration and production independents with sizable gas reserves.

“Yes, it had an impact on what we did in terms of pursuing Kerr-McGee and Western,” Jim Hackett, Anadarko’s chief executive officer, acknowledged in a July 28 conference call with industry analysts.

In fact, there generally is “an awful lot of uncertainty” in the market “as when to commit to these big facilities,” Bob Daniels, Anadarko’s senior vice president of exploration and production, added, noting that investors “are looking for what different options are available to them.”

In Anadarko’s case, “when we realized that securing access to those supplies was going to be more difficult and take longer than we anticipated, it made the option to consider growth through acquisition more attractive,” Anadarko spokeswoman Teresa Wong told Petroleum News.

Dale Miller, a natural gas consultant for Purvin & Gertz, noted in a recent Web cast that while the outlook is generally positive for LNG deliveries to North America, the LNG market has changed dramatically over the past five years.

“We need to remember that LNG, like crude oil, has become a global commodity, and other countries are counting on its supply as well,” he said. “Just because a terminal has the capacity doesn’t mean that’s where they will bring it in.”

In June Anadarko agreed to buy Oklahoma’s Kerr-McGee and Colorado’s Western Gas in blockbuster deals totaling $24.3 billion, including debt assumption. Within weeks of the announcement Anadarko put its Canadian exploration and production assets on the auction block and found a buyer for the company’s Bear Head LNG project at Point Tupper, Nova Scotia. Construction on the terminal began in October 2004.

Proceeds from the Canadian sales and future property divestitures that likely would include non-core Kerr-McGee and Western Gas assets would be earmarked to pay down Anadarko’s colossal acquisition debt.

Anadarko agreed to sell its Canadian LNG assets to privately owned U.S. Venture Energy for $125 million. However, the big Houston E&P independent salvaged an 18-month option to secure up to 350 million cubic feet per day of LNG throughput capacity “at competitive rates.”

“We’re still interested in the business (and) we think this is a great solution for us to continue on with that business,” Anadarko’s Daniels said.

Nevertheless, when viewing the Bear Head LNG project from the supply side, “things have slid fairly significantly,” he said. “The supply for the timing (2009) we were looking at, which we thought was pretty important — it was very difficult to get that lined up.”

Daniels added: “That lead to issues around our terminal being built in 2009 and our decision to monetize that and keep the capacity rights and let somebody else decide when they wanted to build that terminal.”

Anadarko had big plans for Bear Head when it acquired the project in August 2004 from privately owned Access Northeast Energy.

For one, Anadarko had hoped to use the LNG terminal as a “foothold” to attract national oil companies and other “major entities” to help fill a facility capable of processing up to 1 billion cubic feet per day of LNG. Moreover, Anadarko planned to step up exploration and production on its properties in Algeria and Qatar, two of the world’s top LNG exporting countries.

“We learned a lot,” Anadarko’s Hackett said in the July 28 conference call. “We learned about politics in Russia. We learned about where the state of the LNG industry is and how global it has become and how quickly it has become global. Now it is not just the United States that’s a tough area in terms of new supply or reliability of supply.”