Petronas faces US$27b dilemma after Canada LNG approval

[SINGAPORE] After more than three years of regulatory review, the energy companies behind a proposed US$27 billion liquefied natural gas plant on Canada's Pacific Coast received conditional government approval on on Tuesday.

Now they have to decide whether to build it.

The LNG world has flipped upside down since Malaysia's Petroliam Nasional Bhd first submitted its Pacific NorthWest LNG project for environmental approval in 2013.

Spot prices for the fuel have fallen by more than two-thirds as a host of new projects have boosted supply faster than demand has grown. The industry hasn't approved a new onshore greenfield project like this since December 2013, said Chong Zhi Xin, principal LNG analyst for Wood Mackenzie.

"It is a very tough environment. We are entering a period of over supply and prices for both oil and LNG are low," Mr Chong said by e-mail from Singapore. "To commit to additional capital expenditure for Petronas and its partners over the next few years will be very challenging, especially as budgets are being cut."

Petronas is the majority owner of the Canadian project, along with China Petrochemical Corp, Japan Petroleum Exploration, Indian Oil Corp and Brunei National Petroleum Co.

Petronas's Chief Executive Officer Wan Zulkiflee Wan Ariffin told reporters in Kuala Lumpur that the company would have to review more than 190 conditions attached to the environmental approval before deciding whether to move forward with the project.

The development includes a liquefaction facility on Lelu Island near Canada's border with Alaska, and a related gas pipeline and upstream components. It would ultimately produce as much as 19.2 million tons a year of LNG, about 8 per cent of last year's global trade.

EXCEEDING DEMAND

When Petronas conceived the project, LNG was in sharp demand after Japan shut its nuclear plants following the 2011 Fukushima meltdown and needed alternative power supplies. Spot LNG prices in Asia rose to near US$20 per million British thermal units.

The high prices spurred new production projects and at the same time damped demand growth by pushing consumers to cheaper sources of fuel. Global supply capacity is expected to grow by almost half through 2020, at which point it will exceed demand by 29 per cent, according to Bloomberg New Energy Finance.

Spot LNG prices have fallen to US$6 per million British thermal units, and buyers are shunning long-term contracts in favour of shorter terms or spot cargoes. Producers have historically used long-term contracts to underpin financing for the multi billion-dollar projects.

BMI Research said it expects few investment decisions in liquefaction projects over the next year or two.

'CAPITAL CONSTRAINTS'

"In part this is due to capital constraints on the oil and gas sector," BMI said in a Sept 29 report. "It is also our view that companies will struggle to lock in sufficient long-term offtake to secure project financing for large-scale export projects."

So far only about a quarter of Pacific NorthWest LNG's total planned capacity is taken. China Petrochemical Corp is due 1.8 million tons a year for its 15 per cent equity stake in the project, and has signed a binding agreement to buy an additional 3 million tons a year of the plant's production from Petronas.

"I don't know when the market conditions might improve enough for these projects to go ahead," British Columbia Premier Christy Clark said at a briefing to announce the government's approval.

China Petrochemical declined to comment. Indian Oil Chairman B. Ashok, speaking about the project in an Aug 29 interview, said the consortium would only make a final decision on building the project after all clearances are obtained.

BLOOMBERG