Related Articles
Forward article link
Share PDF with colleagues

Petronas abandons Canadian LNG

British Columbia's gas export dreams took another hit with the axing of the Pacific NorthWest project

When Petronas, Malaysia's national oil company, first proposed a massive C$36bn ($28.64bn) liquefied natural gas project on Canada's west coast in 2012, it looked like a sure bet. Prospects for global LNG appeared bright and Canada, with abundant supplies of unconventional gas and declining exports to the US, seemed a logical choice for large-scale exports. Petronas enrolled high-profile buyers in Japan's Japex, China's Sinopec, Indian Oil Corporation, and PetroleumBrunei as partners in an ambitious consortium known as Pacific NorthWest. The idea was to export 3.2bn cubic feet of gas per day—or a fifth of Canada's daily output—from the British Columbia coast to energy-hungry markets in Asia.

But even the best laid plans go astray. Five years of market and regulatory uncertainty finally forced Petronas to pull the plug in July. But not before it sunk a tidy sum into the venture. The company spent C$10bn buying unconventional gas producer Progress Energy, seen as a key supplier to the export plant. It also bought Talisman Energy's Montney shale-gas assets for C$1.5bn. Harder to quantify are the years invested navigating through the various levels of Canadian provincial, federal and aboriginal governments as the project became more politicised. Malaysiakini, a local news outlet, called it all a "colossal waste of money" for the state-owned producer.

Already, recriminations abound on both sides of the Pacific. The company politely suggested in a statement that global LNG prices were the main factor in its decision. But others complained that the regulatory process was overbearing and unpredictable and ultimately killed the deal. Canada's conservative opposition politicians laid blame squarely on the British Columbia and Canadian federal governments.

It was hardly a shock, though. In the intervening years, the global LNG market has taken a turn south for aspiring exporters. The tightness in the market that had driven LNG prices to as much as $20 per million cf when the project was proposed has given way to a glut of supply and sharply lower prices. That has complicated the economics of building new LNG capacity, especially for high-cost greenfield projects like the proposed British Columbia sites.

Petronas' growing irritation with the political morass has also been evident since at least October 2014. The chief executive at the time, Shamsul Azhar Abbas, threatened a 10 to 15 year delay if the project was approved immediately. The approval didn't come until December, 2016. By then it was too little, too late.

Apart from changing markets and a slow-moving approval process, a shift in Canada's climate change and environmental policies created further uncertainty. Canada's prime minister Justin Trudeau has vowed to impose a C$50 per tonne carbon tax by 2020—something unforeseen in 2012—which would have thrown a wrench into the already fragile economics.

Then there was the delicate diplomacy of overcoming fierce opposition from environmental and aboriginal groups, which Petronas attempted to assuage by throwing even more money into an ever-deeper pit.

The final straw was the election on 9 May in British Columbia of a left-leaning New Democrat and Green Party coalition government that vowed to kill the project.

Petronas was probably wise to cut and run. It now joins Shell, which in March cancelled a proposed LNG terminal at Prince Rupert and indefinitely delayed a C$40bn decision on its own Canadian LNG project. The Chevron-Woodside Kitimat plan remains the only major proposal on the books. That too is becoming a dimmer prospect by the day.

Meanwhile, to the chagrin of Canada's LNG backers, US LNG building continues apace. Most of the US plants now moving ahead are conversions of existing import facilities, which has given them a major cost advantage over their Canadian rivals in today's glutted market.

The US LNG expansion means that some Canadian gas may still make it onto global LNG markets, though via a more circuitous route. Cheniere Energy—the major US LNG player—said in May it is in contract discussions with multiple Canadian natural gas producers to supply its growing US terminal network.

Petronas-owned Progress Energy is likely one of them. Even though it pulled the pin on Pacific NorthWest, Petronas' Canadian vice-president Anuar Taib says the company still plans to position Progress as "one of the top natural gas exporters in North America". It apparently has devised a new strategy to avoid Canada's regulatory authorities while still increasing exports-saving billions of dollars in capital costs in the process.

Also in this section
Southeast Europe bets on gas
13 August 2020
Greece and Bulgaria plan dashes for gas to fuel cleaner energy futures
Aramco advances plan to lease out pipelines
5 August 2020
The cash-strapped Saudi NOC is looking to replicate the recent divestment success of its Emirati counterpart Adnoc
ExxonMobil announces Power Play finalists
4 August 2020
Community voting is now open across the three categories for the awards, which champion inclusion and diversity by celebrating remarkable women and men in the LNG industry