Petronas warns of LNG delay if government doesn't clarify rules by month's end

CALGARY – The B.C. and federal governments could miss out on billions in liquefied natural gas investment for at least a decade unless, by the end of this month, they can help reassure Petronas that its plan to export gas from the West Coast will be economically viable, the CEO of the Malaysian-state-owned energy giant said Monday.

“In order to remain competitive, Petronas needs to secure consensus on key principles vital to the success of this project by the end of October,” Shamsul Abbas said in a written statement that coincided with the start of B.C.’s new legislative session.

“Missing this date will have the impact of having to defer our investments until the next LNG marketing window, anticipated in 10-to 15 years. At this juncture, Petronas firmly believes in the urgent need for stakeholders to collaborate and come to an agreement, rather than act as opposing parties at the negotiation table.”

There are more than a dozen projects proposed for the West Coast that would chill natural gas piped from northeastern B.C. into a liquid state, enabling the resource to be shipped to customers across the Pacific by tanker. It’s unlikely more than a handful will be built, but Petronas’ Pacific Northwest LNG proposal, near Prince Rupert, B.C., has been perceived as one of the front-runners.

Canadian LNG players are vying with projects in Australia, the United States and elsewhere for a share of the market. While Canada has an edge when it comes to the shipping distance to Asia, it is at a disadvantage when it comes to the cost of doing business in such a harsh and remote environment.

When Petronas last reviewed its global portfolio, it found the economics of Pacific Northwest LNG appeared “marginal” and that it would have a “tough time” deciding by the end of this year to build it.

“The proposed fiscal package and regulatory pace in Canada threatens the global competitiveness of the PNW LNG project,” said Abbas. Weaker commodity prices and a higher cost for contractors relative to global competitors are further squeezing the economics.

The deadline announced Monday isn’t necessarily to have firm agreements with government sealed up, said Pacific Northwest LNG president Greg Kist. Rather, Petronas and its partners need to be in a position to be able to accurately crunch the numbers if they are to make a decision on whether to proceed by the end of 2014.

“I think the important part is that we have clarity at that point in time,” he said in an interview. “Do we need all of the boxes ticked? I think the important part is to know what we’re dealing with and be able to, with certainty, run all of those things in our economic models.”

The reason Petronas is warning of such lengthy delays has to do with broader cycles in the global LNG market, said Kist.

The first cargoes of LNG from the Petronas-led project are expected to be shipped around 2019, when customers are expecting to receive the gas, he said.

But the longer it takes to get those shipments moving, the more likely it is that the gas will sent into a market where other projects are up and running and supply outstrips demand. The pendulum wouldn’t swing back to more favourable conditions for another several years, he said.

B.C. Premier Christy Clark’s Liberal government has been banking on LNG becoming an economic bonanza for the province, with details of a new tax regime for the nascent industry expected to be revealed in the coming weeks. The provincial government is also expected to introduce legislation on LNG emissions reporting.

Abbas told the Financial Times last month that Petronas may call off its B.C. LNG plans because of the proposed LNG tax and sluggish regulatory pace. At the time, Clark chalked Abbas’ remarks as being part of the negotiating process and that she was confident a deal would be reached.

His most recent remarks take aim at Ottawa, too. Kist said outstanding issues at the federal level include a review under the Canadian Environmental Assessment Agency, which he doubts will be completed by year-end, as well as the tax treatment of the project’s capital costs.

On Monday, Abbas said he was “encouraged” by discussions it had recently with Clark and Natural Gas Development Minister Rich Coleman and that Petronas will continue to work with Ottawa and federal agencies on ways to advance the regulatory process and clarify the fiscal framework.

The next few weeks, he said, would be “critical” in ensuring B.C. follows through with commitments it made during the most recent meeting to create “a tangible environment which stimulates competitiveness and investor’s confidence in British Columbia,” he added.

Petronas leads the Pacific Northwest LNG project with a 62 per cent stake. Other partners are players from China, India, Japan and Brunei.

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