Michael Culbert and Christy Clark sign the MoU. Behind them, from left to right: Mike De Jong, Canada's Industry Minister James Moore and Rich Coleman

Michael Culbert and Christy Clark sign the MoU. Behind them, from left to right: Mike De Jong, Canada’s Industry Minister James Moore and Rich Coleman. Photo by OnePacificNews.


Opinion: Uncertainty grows over LNG deal

‘Conditional’ final investment decision expected from Petronas by June


In signing a much-awaited memorandum of understanding and two major agreements with Pacific NorthWest LNG on May 20, the British Columbia government made good its promised support for the company’s proposed project to produce liquefied natural gas in northern B.C. for export to Asia.

The documents also sent an important secondary message that the provincial government has bent over backwards to accommodate the company’s demands after a public bout of complaints and threats. Amid critics’ outcry of a sellout, Premier Christy Clark boldly locked in provincial royalties, taxes, regulations and carbon terms to entice PNW to invest another $30 billion to launch the LNG project that includes an export terminal near Prince Rupert. Malaysian state energy firm Petronas, which owns a 62 per cent stake in PNW, has already invested $6 billion through its 2012 acquisition of Progress Energy’s upstream assets.

Despite the media hype, the memorandum Clark and PNW president Michael Culbert signed makes no promise of an impending investment. Instead, it “sets the steps leading toward ratification of a project development agreement” between the B.C. government and the company. Finance Minister Michael de Jong inked the agreement to “initiate a ratification process” by the company and the B.C. legislature while Minister of Energy and Mines Rich Coleman signed the province’s long-term royalty agreement.

Michael Coleman delivering his speech before the signing of the MOU
Michael Coleman delivering his speech before the signing of the MOU. Photo by OnePacificNews.

“Today reflects the beginning of the company’s final decision path toward an investment decision,” Clark said, sounding convinced the company will soon clear environmental, First Nations and commercial obstacles to move to the project’s final investment decision. Thousands of high-paying jobs will follow as the province transforms into a major LNG producer, she again predicted.

Responding two days later at a press conference in Kuala Lumpur, Petronas CEO and president Wan Zulkiflee Wan Ariffin said he was ready to make a “conditional” final investment decision in June, which may look like progress but could also be more fancy footwork to kick the proverbial can down the road owing to increasingly difficult challenges requiring aboriginal consent, environmental clearance and shareholder approval. Zulkiflee made his conditional promise after announcing a 39 per cent year-on-year drop in the company’s first quarter net profit and a 21 per cent decline in its revenue.

The sobering reality is the project faces greater barriers and more uncertainties than a year ago when Zulkiflee’s predecessor, Shamsul Azhar Abbas, began to grasp the magnitude of his over-reach to develop natural gas reserves, pipelines and a large LNG terminal in B.C. all within five years. Company insiders confirmed they had underestimated the extent of environmental and First Nations opposition to fracking, and oil and gas pipeline projects in B.C. Also, like most in the industry, they had not anticipated the crippling effects of the oil price collapse. Political developments in Malaysia and China could add a few more black swans to halt the project’s progress.

Shamsul’s nerves showed in his May 21, 2014, speech to 1,000 energy executives at the Vancouver Convention Centre when he warned B.C. not to slaughter the LNG goose. Four months later, he was quoted by the Financial Times as saying Canada had to “buck up” if it wanted to be taken seriously as “a credible global LNG player.” Or else, he threatened, Petronas would pull out altogether. If that happened, it would all be Canada’s fault.

The B.C. and federal governments wisely avoided a public retaliation. Instead, they quietly worked on building from scratch the framework and details for tax, regulatory and cost certainty demanded by the Malaysian firm that culminated in the recent memo of understanding.

“Today’s event was all about PNW LNG because we want to tick off the checklist of items mentioned last year to satisfy Petronas’ demands,” Coleman said in a brief interview after the signing ceremony. If Petronas decides not to trigger the final investment decision, it would have a near-impossible task pinning the blame on the B.C. government. Indeed, the detailed package covering royalty, tax and carbon costs firmly puts the onus on the Malaysian firm and its partners — China’s Sinopec (15 per cent), Indian Oil Corp. (10 per cent), Japan Petroleum Exploration Company (Japex 10 per cent) and Petroleum Brunei (three per cent) — to decide if they really want to proceed.

Michael Culbert speaking on behalf of PNW LNG and Petronas
Michael Culbert speaking on behalf of PNW LNG and Petronas. Photo by OnePacificNews.

The prospects of building a greenfield LNG project around the world have worsened over the past year. Oil and gas prices are likely to stay low after crashing by half to force Petronas to slash capital expenditures by 10-15 per cent over the next two years. The hydrocarbon-dependent Malaysian economy is at risk of a credit downgrade while its current account surplus may yet slip into deficit and the local currency could further weaken from its recent six-year low against the U.S. dollar.

Shamsul’s term was not renewed in March following clashes with his boss and PNW’s biggest supporter, Malaysian Prime Minister Najib Abdul Razak, who is now fighting for political survival over allegations of financial mismanagement of billions of dollars in state funds. It was Najib who announced the project’s massive $36-billion price tag, the equivalent of 10 per cent of Malaysia’s GDP, to a surprised Prime Minister Stephen Harper during a visit to Southeast Asia in 2013. Will Petronas or the Malaysian government continue to support PNW’s high-risk project if Najib is no longer prime minister?

Starting his term on April 1 with a shrunken budget, Zulkiflee is under pressure to cut down or delay projects deemed too costly and troublesome for the company’s stretched management. Zulkiflee made his first move by approving PNW’s offer to pay $1.15 billion to the 3,700-member Lax Kw’alaams First Nations group over 40 years for the right to build the LNG project over their property and ancient fishing grounds. Despite some calling it a generous “game changer,” the sum offered was insignificant as it amounts to less than $8,000 per person per year. Furthermore, with no allowance for increases to reflect future inflation and population growth over the 40 years, the offer was likely doomed from the start. In the end, Lax Kw’alaams members unanimously rejected it on the grounds the project would destroy their way of life and the environment, dealing the Petronas chief a stinging public rebuke after just over a month in office.

Zulkiflee has delayed the start of Petronas’ $16-billion-US investment in a prized refining and petrochemical complex in Johor state by at least six months. As he reduces the company’s dividend payments to Malaysia’s cash-strapped government and squeezes well-connected local contractors for discounts, he will be hard-pressed to defend spending billions of dollars on a difficult, possibly unviable, project in a faraway land.

If he needs further reason to conditionally approve — effectively delay — the final investment decision, he could cite two recent separate independent studies casting doubts on the viability of Canada’s LNG export ambitions. A report jointly funded by the Vancouver Foundation and the Canadian Centre for Policy Alternatives said the B.C. government has exaggerated the size of the province’s natural gas deposits to support large-scale LNG exports. The report, written by one of Canada’s leading energy analysts, David Hughes, said the country’s gas production is declining, and LNG exports could threaten its energy security and water supply.

In her report for the Oxford Institute for Energy Studies, senior visiting research fellow Ieda Gomes said she does not expect Canada to launch any major LNG project before the middle of the next decade.

“Industry analysts expect only one to three B.C. LNG projects to be operating by 2025. The market outlook for Asia is still uncertain,” she wrote. Also, Canadian projects, requiring the equivalent of crude oil prices at $76 to $90 US a barrel, are expensive when compared with their rivals in the U.S.

Another likely source of concern, not widely discussed, is the commitment of two of PNW’s cornerstone shareholders, Sinopec and IOC, who have each agreed to buy LNG from the proposed 12-million-tonne-per-year plant for 20 years. As part of their agreement to invest in PNW LNG in 2014, Sinopec committed to buying 1.8 million tonnes per year while IOC will import 1.2 million tonnes, but the deals are contingent on Petronas making the final investment decision. The companies are in no hurry to invest in Canada as they have the luxury to pick up easier and possibly cheaper deals from other parts of the world.

Sinopec on May 4 appointed a new chairman to reform the company amid talks it might be split or merged with parts of China’s other two state-owned oil giants, CNPC and CNOOC. Apart from turning in poor performances since the oil price collapse, the Big Three have been targeted in Beijing’s crackdown on corruption that has led to the arrest of scores of industry officials. China is also losing interest in Canada’s resource sector as it looks to Russia, Central Asia, Africa and Latin America, where it enjoys better political ties.

In IOC’s case, LNG was conspicuously missing or underplayed during Indian Prime Minister Narendra Modi’s high-profile visit to Canada in April. Amid the LNG price collapse, India is spoiled for choice to increase import volumes through existing channels with Qatar, Nigeria, Egypt and Australia while it pursues talks to develop new overland supply lines with Russia, Turkmenistan and even Iran, which could soon be free of trade sanctions imposed by the West.

These developments are leaving Petronas looking increasingly quixotic in its quest to launch B.C.’s LNG industry. The company’s attempts to sell down its 62 per cent stake in PNW LNG to 50 per cent have stalled since the last deal was concluded with Sinopec in April 2014. Rather than clarify the situation, Petronas’ offer to make a conditional final investment decision could set the stage for further negotiations and uncertainty. As the company continues to struggle with the stalled project, Clark’s seeming generosity becomes understandable. It might help shield her government from blame when Petronas decides to further delay — “conditionally” approve — the project.

Ng Weng Hoong is a Vancouver journalist who writes about energy issues in Asia and the Middle East.

One Pacific News Editor