Petronas may defer Canada LNG project

Alexander WinifredTuesday, October 6, 2015
PROJECT DELAY: Fuel is transferred from a Petronas tanker to a petrol station’s tank in Puchong. An analyst says a delay (for the Canada project) is likely as deferring the project to 2022 or even 2024 would be less costly than a complete exit. (Pic by Hafzi Mohamed/TMR)

Petroliam Nasional Bhd (Petronas) is likely to defer commercial operations of its Canadian liquified natural gas (LNG) project to 2022 or 2024 as the depressed oil and gas (O&G) prices continue to shroud earnings prospects, analysts said.

The Canadian project, the national oil company’s largest investment abroad, was expected to begin operations in 2019.

But low LNG prices with the Asian LNG slumping around 60% since 2014 to US$8 (RM34.99)/Mbtu is a cause of concern for Petronas.

Analysts said Petronas would require LNG prices to hover between US$11-US$12/Mbtu for the project to break even.

“But with (gas) prices as they are, many projects, not only related to Petronas, do not look viable,” an analyst at a securities research firm covering the O&G sector told The Malaysian Reserve (TMR).

Petronas and its partners intend to invest about RM160 billion into the project over several years, projecting the global gas market to increase by 50% by 2040.

The project already faced multiple delays related to regulatory approvals, low gas prices and possible capital expenditure (capex) cuts, an analyst said.

Last week, TMR reported that Petronas could cut its 2015 capex up to RM16 billion, as revenues slide amid continuous low oil prices.

Moody’s Investors Service predicted Petronas’ revenue to fall from RM329.1 billion in 2014 to RM240 billion-RM250 billion this year.

An analyst at a local investment bank said: “A delay (for the Canada project) is likely. Deferring the project to 2022 or even 2024 would be less costly than completely exiting the project.

“Pausing for a while and then restarting when conditions improve isn’t a bad option. With additional capacity coming onstream, there is really no rush for Petronas to complete the Canadian project.” Oil giant Chevron Corp early this year announced it would slash spending on its LNG export facility in Kitimat, another district in Canada.

Additional capacity from the US and Australia is expected to come online before Canada’s mostly greenfield projects are completed, analysts say.

Last week Royal Dutch Shell plc shocked the market when it announced it would cease all offshore drilling in the Arctic after spending more than US$7 billion (RM30.61 billion) over several years to search for oil.

“If Shell is prepared to write off a substantial amount of investments on a project that it has deemed too expensive, then Petronas should do the same,” an analyst told TMR.

Petronas acquired Progress Energy Canada Ltd, the owner of the Canadian fields, in 2012 for US$5.9 billion.

Currently, its partners in the Pacific NorthWest consortium include Sinopec Ltd (10%), Indian Oil Corp Ltd (10%), Japan Petroleum Exploration Co Ltd (10 %), China Huadian Corp (5%) and Brunei National Petroleum Co Sdn Bhd (3%).

Analysts believe Petronas may look for additional partners to reduce its spending for the project but retain its majority control of the asset.

Moody’s in April said that Petronas appeared to be “leaning towards deferring (the Canada LNG) project as lower oil prices have reduced its cashflow and it directs more investments domestically to Malaysia”.

Within Canada itself, local opposition toward the project has not abated although the provincial government of British Columbia appeared to have lent its support to Petronas and its partners.

A Canadian native group said on Sept 18 it was making an aboriginal title claim on Petronas’ LNG export facility location at Lelu Island.

The proposed facility will comprise an initial development of two LNG trains of approximately six million tonnes per annum (MTPA) each and a subsequent development of a third train of approximately six MTPA.

The group believes an aboriginal title will allow it to force the government to seek its consent for the Petronas-led project.

Earlier in May, the group, which comprises of 3,700 members, voted against a US$1.15 billion offer from Pacific NorthWest LNG in exchange for support for the project.

Pacific NorthWest president Michael Culbert told investors on Aug 25 that he was frustrated with the delays in the Canadian Environmental Assessment Agency review, which has taken almost two years to be completed.

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