Petronas defers $32 billion Canada LNG project decision on costs

Petronas defers $32 billion Canada LNG project decision on costs

REBECCA PENTY and CHRISTOPHER DONVILLE

KUALA LUMPUR (Bloomberg) -- Petroliam Nasional deferred a decision to build a liquefied natural gas terminal in Canada in the latest global investment setback from plunging oil prices.

The slump has worsened the outlook for returns from the Pacific NorthWest LNG project in British Columbia, Petronas said on Dec. 03. Project costs of $32 billion (C$36 billion) need to be reduced before a decision is made, the company said.

Shamsul Azhar Abbas, CEO of Petronas said in a statement, referring to the threat of losing long-term contracts to U.S. LNG suppliers, “Petronas hopes that all outstanding factors can be resolved as soon as possible. This is vital in light of the current intense market environment.”

Petronas joins BG Group in pushing back plans for an LNG terminal in Canada as oil trades close to five-year lows, while projects in the U.S. and Australia are already under construction. The price decline threatens LNG contracts tied to crude as suppliers grapple with rising costs and competition from Russian gas commitments to China.

“I read this as a nail in the coffin for the project,” said Eric Nuttall, who oversees $105.57 million (C$120 million) at Sprott Asset Management in Toronto. Petronas can’t match the lower costs of U.S. facilities already under construction, he said. “Canada is uncompetitive relative to other jurisdictions such as the Gulf of Mexico, such as Australia, such as Qatar.”

Benchmark crude prices have fallen more than 35% from their June peaks and the Organization of Petroleum Exporting Countries’ decision last week to maintain output amid a global glut reduced the outlook for a rebound.

Other Proponents

Petronas and other producers including Shell and Chevron are considering exporting gas from Canada in liquid form to meet rising demand in Asia. Pacific NorthWest LNG, majority owned by Petronas, had been scheduled to start operating by 2019. Spencer Sproule, a spokesman for the project, declined to comment on the project’s timeline.

Canadian gas producers are counting on LNG exports to lift long-term demand for the fuel after modern drilling technologies allowed companies to extract vast supplies from shale formations across the continent, depressing prices.

The deferral may considerably lower expectations for 2 Bcfd of LNG exports from Canada by 2020, said Greg Pardy, an analyst at RBC Dominion Securities.

Petronas is delaying its decision after BG in October said it would pause development of its Canadian LNG project as it assesses global supplies, with U.S. volumes set to rise and prices falling. Apache partnered with Chevron on a Canadian LNG project, is seeking a buyer for its stake.

‘Not Good’

“This is not good news for B.C.,” said Bryan Yu, the funding manager for credit unions in British Columbia and Ontario and regional economist for Central 1 Credit Union.

British Columbia Premier Christy Clark has been counting on LNG to deliver an economic boost to the province and said the industry could eliminate government debt through taxes and other revenues.

After more than a year of discussions with proponents, British Columbia in October announced a plan to halve a proposed tax on the multibillion-dollar projects in a bid to encourage the investments.

Petronas’s Shamsul warned in an October statement before the tax announcement that the company needed clarity on costs by the end of that month in order to build the project in time to make deliveries. The next LNG marketing window would be 10 to 15 years away, he said in the statement.

Federal Taxes

LNG proponents in Canada are also pushing the federal government for more favorable tax terms for the industry.

As far as British Columbia is concerned, Petronas said on Dec. 03 that it has the necessary clarity on policies including a “competitive” tax, greenhouse-gas emissions targets for LNG and agreements with aboriginal groups whose traditional lands will be affected.

Rich Coleman, the province’s minister of natural gas development, told reporters he expects to hear from the company in 2015 regarding when the Petronas board will make a decision.

Partners in Pacific NorthWest LNG include Indian Oil, Japan Petroleum Exploration, China Petroleum & Chemical and Brunei National Petroleum.

Petronas’ $32 billion (C$36 billion) cost estimate includes its 2012 acquisition of Progress Energy Resources, as well as the $ 9 billion (C$10 billion) proposed terminal, a pipeline and the cost of drilling wells in the province’s northeast.