Petronas LNG regulatory green light is no guarantee the project will be a go

Analysts expect Petronas will wait until next year to make a final investment decision on Pacific NorthWest LNG

Petronas CEO Wan Zulkiflee Wan Ariffin. Image: Petronas

The Government of Canada has given Malaysian energy giant Petroliam Nasional Berhad (Petronas) the green light to go ahead with its $36-billion Pacific NorthWest LNG project, but a commercial decision to proceed is not expected in the near term.

Environment Minister Catherine McKenna approved the project's environmental certificate on Tuesday, subject to 190 conditions.

“This project was subject to a rigorous environmental assessment made significantly stronger by our government’s new interim principles for environmental assessment,” McKenna told a press conference.

“Our assessment is based on the best available science and on indigenous traditional knowledge.”

The announcement was applauded by the Canadian Association of Petroleum Producers (CAPP).

“The government’s commitment to LNG shows that they are interested in balancing both Canada’s sustained environmental leadership and its prosperity,” CAPP president Tim McMillan said in a statement.

“Canada is seizing its opportunity to be an energy supplier for the future.”

Meanwhile, environmental groups are criticizing the decision because of the project's expect GHG impacts.

"With today's decision on the Pacific NorthWest LNG project, Minister McKenna made it much more difficult for Canada to meet its climate targets and signaled that it's OK for provinces to miss their own emissions targets," read a statement from Matt Horne, Pembina's associate B.C. director.

"If built, Pacific NorthWest LNG will be one of the largest carbon polluters in the country and a serious obstacle to Canada living up to its climate commitments."

GHG cap

The approval comes with a catch.

McKenna says there will be a hard cap on the project that will require it to reduce emissions by 20%.

“I've always said this: When you have major projects, they have to fit in with our national climate plan and part of that is addressing emissions through a price on carbon,” McKenna said.

She added the B.C. government's commitment to eventually start raising its carbon tax in synch with whatever price the federal government eventually sets factored into her decision.

The project's carbon emissions will be capped at 4.3 million tonnes of CO2. That's 900,000 lower than what the project, as initially proposed, would produce.

It's not clear whether that means Petronas will have to scale the project back.

Sanction uncertain

But even with an environmental certificate in place, a number of industry analysts and observers expect Petronas will wait until mid-2017 now to approve the additional spending needed to build the LNG plant itself ($11 billion) and two new pipelines to feed it ($7 billion).

Nor is it just Petronas’ board of directors who need to vote on moving forward. Petronas is the majority owner of PNW LNG, but other partners hold 38%:

  • China Petrochemical Corp. (SINOPEC) (15%);
  • Japan Petroleum Exploration Co. Ltd. (10%);
  • Indian Oil Corporation Ltd. (10%); and
  • Petroleum BRUNEI (3%).

Those partners aren’t just investors; they’re also buyers with gas offtake agreements.

Provincial and federal government delays have resulted in LNG projects like PNW LNG already missing one window of opportunity, so they must now time projects for the next window.

Asian utilities have typically bought LNG under long-term contracts. Some of those contracts have been locked down by other LNG producers, and there is now a glut of LNG on the market.

Worse, a sustained oil price plunge has eroded profits, forcing big oil and gas companies to defer spending on large capital-intensive projects.

Spot prices for LNG in Japan have dropped from US$15.21 per MMBtu (million British thermal units) in July 2014 to just US$6.32, as of last week. Asian LNG prices are expected to recover in four or five years as demand and supply balance out. Petronas’ proposed LNG plant in Prince Rupert, and the pipelines to bring the gas there from northeastern B.C., will take an estimated four years to build.

Industry experts therefore expect Petronas will wait until 2017 before making a final investment decision, which would mean the new plant would start producing LNG around 2021 – when the current LNG glut is expected to balance out with the longer term gradual increase in demand in Asia.

“The window of opportunity earlier on was missed because there was far too much discussion around counting your chickens before they hatched,” said Jihad Traya, manager of Natural Gas Consulting, Solomon Associates in Calgary. “Petronas is looking at the next phase. They’re not looking at prices today – they’re looking at prices tomorrow.”

One of those unhatched chickens is the tax and royalty scheme the B.C. government took so long to finalize and wanted in place to start filling up its promised $100 billion Prosperity Fund.

Traya thinks it was a mistake to even come up with such a scheme before an industry had developed. He said the Alberta government waited until an oilsands industry had developed before it came up with a tax and royalty scheme to fund its Heritage Fund.

“[B.C. was] taxing a non-existent industry,” Traya said. “The B.C. government was a rent-seeking agent, when it should have been a partner and was trying to facilitate an industry.”

PNW LNG is one of only two major LNG projects considered to have serious prospects of being built in B.C. The other is Shell’s LNG Canada project in Kitimat.

But Petronas’ site in Prince Rupert has been problematic because it has raised concerns about impact on salmon habitat. That has resulted in pushback from First Nations that otherwise have been generally supportive of an LNG industry.

Petronas has already invested billions in PNW LNG. It acquired Alberta’s Progress Energy in for $5.5 billion and spent billions more acquiring and building natural gas assets in northeastern B.C.

Last year, former Progress Energy and PNW LNG president Michael Culbert said the company had been spending roughly $2 billion a year. Petronas’ 2015 annual financial report cites its Canadian project as still “underway.” Its most recent financial statements show a 23% revenue drop in 2016’s first half compared with 2015’s first half and a 26% decrease in cash flows.

-- With files from Business in Vancouver