Petronas threatens 15-year delay of Canada LNG plant if no tax deal

[VANCOUVER] Malaysian state-owned energy company Petronas said on Monday it could delay its planned US$11 billion liquefied natural gas plant on Canada's Pacific Coast by up to 15 years unless it can reach a favorable tax deal by month's end.

Petronas said in a statement that the economics of the plant are marginal and without a favorable tax arrangement with the province of British Columbia and Canada's federal government, it could shelve the project for a decade or more.

The company set a deadline of the end of October to reach a deal. "Missing this date will have the impact of having to defer our investments until the next LNG marketing window, anticipated in 10-15 years," it said.

With companies such as Petronas facing fierce competition from rapidly advancing LNG projects in the United States and Australia, the threat should be taken seriously, said Peter Tertzakian, chief energy economist at ARC Financial Corp. "There is a trend for large multinational oil and gas companies to walk away from mega projects that are marginal and uncertain, so I don't view it as a bluff," he said.

More than a dozen LNG projects have been proposed for British Columbia's Pacific coast, with companies such as Petronas, Royal Dutch Shell and Chevron Corp leading the race to build Canada's first LNG export facility.

Chevron's project hit a bump earlier this year, after partner Apache Corp said it would sell its stake in the Kitimat LNG project to focus on domestic oil production.

British Columbia is drafting tax rules for its nascent LNG-export industry and negotiating the details with the companies looking to supply the Asian market. Final legislation is expected later this month.

Christy Clark, the province's premier, told reporters on Monday that while negotiations with Petronas are complex, she remains hopeful a deal will be made. She added that her government is doing "everything we can to make sure this one works." Petronas, which has proposed an export terminal near the northern city of Prince Rupert, said both parties had agreed on clear milestones and actions to meet its mid-December target for a final investment decision.

However, it warned that the current proposed fiscal package and slow regulatory pace in Canada threaten the future of its Pacific NorthWest LNG plant, especially given high construction costs in northern British Columbia.

The Malaysian company must also reach complex impact benefit deals with aboriginal communities near the proposed terminal and along a related pipeline route.

If Petronas does end up postponing its project, other companies could benefit, said Tertzakian, as less competition will mean more certainty on costs and could increase the sense of urgency to get other deals done. "Petronas is only one player of half-a-dozen serious players. If they decide to shelve it, that doesn't mean nothing will get built," he said. "The more that drop out, the greater the probability that something will get built." - Reuters