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Kern Partners’ new fund backs LNG project

Aerial shot of Sarita Bay, B.C., the proposed site of the Steelhead LNG plant.

Handout/Steelhead LNG Corp.

Kern Partners, the Calgary-based private equity firm, has started up a new, $750-million energy fund that is partly focused on moving a British Columbia liquefied natural gas project forward as a way to help open up Asian markets for Canadian gas producers.

The new Kern fund, its fourth and largest to date, is aimed primarily at investing in diversified energy exploration and development, employing the same investment philosophy as the previous ones. That involves five-to-nine year investments with companies led by established management groups. But energy infrastructure and technology are also part of the mix, executives said.

Now in the process of raising funds, the firm is is already an investor in Steelhead LNG, a project proposed for Vancouver Island. This month, Steelhead and Huu-ay-aht First Nations signed a deal to co-operate on working toward building a plant at Sarita Bay, at the southern end of Alberni Inlet. It is one of at least 15 LNG projects proposed for Canada's West Coast.

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The industry is banking on LNG to open up new export markets for vast B.C. gas reserves. Producers face high development costs, while ample shale gas supplies in North America have kept a lid on prices for the fuel, and led to a discount on Canadian gas.

"It won't happen in a year or two, but over the coming decade, we're going to see those prices get closer and one way to do that is to help out our [exploration and production] companies through LNG," said Kern partner Jason Montemurro, who is on the Steelhead board along with Jeff van Steenbergen, Kern's co-founder.

"We think if you do it in a respectful manner with your partners, and in long-term partnership with the First Nations, you'll be able to bring more value to your upstream companies as well," Mr. Montemurro added.

With its first three funds, Kern has about $1.1-billion under management and $1.5-billion in its co-investment management program. It is among a number of private-equity firms that have taken on an increasingly important role in energy-industry financing in recent years. Companies in its portfolio include Altex Energy Ltd., Black Swan Energy Ltd., Cequence Energy Ltd. and Seven Generations Energy Ltd.

The latter company, a developer in the gas-liquids-rich Montney formation in northwestern Alberta, has been tipped as an initial public offering candidate.

The Steelhead executives, led by CEO Nigel Kuzemko, have much experience with LNG, having worked with such global players as Royal Dutch Shell Plc, Qatargas, Santos and others.

Still, the field of West Coast LNG hopefuls is crowded, and despite the National Energy Board's award of numerous export licences and the high hopes of the B.C. government, none has made a final investment decision on a plant.

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For supply, Steelhead is targeting the smaller, independent producers that may not have access to the pipelines which would be operated by the major developers, Mr. Montemurro said.

"You have to make sure that the supply agreements work for them and you have to have the right partnership with the First Nations," he said. "If you have the right partnership and it's fair and balanced, you'll be able to get the sites, finance pipelines and actually have them built."

Steelhead's agreement with First Nations may give it an advantage over larger players following last month's Canadian Supreme Court decision, which held that consent of aboriginals is required for how their ancestral lands are used, he said.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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