Petronas likely to take a hit, may make provisions

PETALING JAYA: Petroliam Nasional Bhd (Petronas) could incur an impairment charge of about C$632mil (RM2.16bil) following its decision to abort the proposed C$36bil (RM124bil) Pacific NorthWest liquefied natural gas (LNG) project in western Canada.

The impairment, which would have an effect on the profitability of the national oil company but not its cash-flow situation, is estimated based on the provisions made by one of the joint-venture (JV) partners in the LNG project. According to wire reports, Japan Petroleum Exploration Co (Japex) that has a 10% stake in the Pacific NorthWest LNG project consortium would take a loss of about C$102mil (RM349mil) in the year to end-March following Petronas’ decision to abort its Canadian LNG project.

“Based on what Japex will provide, Petronas’ portion would be about six times the amount considering its 62% stake in the consortium,” said an industry analyst.

Petronas, however, told StarBiz that it would continue with its long-term strategy of developing its oil and gas asset in Canada through wholly owned subsidiary Progress Energy Canada Ltd, which was acquired in 2012 for C$5.5bil. Progress Energy is the largest holder of contiguous land in the North Montney area which has rich resources of natural gas.

In its reply to StarBiz, Petronas said production from the North Montney area had increased from about 200 million standard cubic feet per day (MMscfd) in 2012 to about 540 MMscfd in 2017 to supply gas to Canada’s domestic market.

“Moving forward, Petronas will continue our long-term investment strategy in Canada through our wholly owned subsidiary, Progress Energy.

“In view of the decision on Pacific NorthWest LNG, Progress Energy will be re-aligning its strategic approach to developing the world-class North Montney gas assets with its North Montney JV partner,” it said in an e-mail reply.

Petronas also said there was no single cause or event that had resulted in the decision to scrap the project.

The Pacific NorthWest LNG project is a consortium consisting of Petronas with a 62% stake, Japex holding 10%, Petroleum Brunei 3%, Indian Oil 10% and China Petrochemical (Sinopec) 15%.

The amount expected to be impaired is far less than the RM20bil figure that a local investment house had estimated following the news that Petronas made public through a statement issued early yesterday morning.

According to a report by AmInvestment Bank, in a worst-case scenario, it estimated that the provision could go up to C$6bil (RM20bil), assuming Petronas’ interest in the entire project, including Progress Energy, is taken into account.

The research house added that TransCanada Corp, which was contracted to build the pipeline connecting gas wells to the LNG terminal, will also be reimbursed up to C$500mil (RM1.7bil) in costs already spent on the project.

The research house, however, does not expect any significant impact on the group’s capital expenditure (capex), which has been spent largely in Malaysia.

AmInvestment Bank pointed out that Petronas’ 2016 capex dropped 22% year-on-year to RM50bil, of which 80% was spent domestically.

Petronas said in the statement early yesterday that it was scrapping the western Canada LNG project due to weak global prices.

The national oil company said the decision was made after a careful and total review of the project amid changes in market conditions.

Meanwhile, in a statement, Petronas’ executive vice president/chief executive officer upstream, Anuar Taib, said: “We are disappointed that the extremely challenging environment brought about by the prolonged depressed prices and shifts in the energy industry has led us to this decision.

“We, along with our North Montney JV partners, remain committed to developing our significant natural gas assets in Canada and will continue to explore all options as part of our long-term investment strategy moving forward.”

In a report yesterday, Bloomberg said Petronas’ cancellation follows a string of exits from Canada’s oil patch as global producers focus on lower-cost areas.

“So far this year, ConocoPhillips and Royal Dutch Shell Plc have sold more than US$20bil (RM86bil) in oil-sands assets to local producers Cenovus Energy Inc and Canadian Natural Resources Ltd.”

It said Canadian energy projects faced tightening regulations, years-long approval processes, environmental opposition and legal uncertainty, particularly around the rights of indigenous people.

Commenting on the Petronas project specifically, Bloomberg, citing experts, said the challenge was the project’s “bloated cost” and that the “economics just did not seem to justify bringing that into the market”.

“In the long run, only a fraction of proposed North American LNG terminals will be built, mostly in the United States, which has more LNG infrastructure than Canada.

“There is simply too much LNG export capacity planned in North America and cancellations, especially of Canadian projects, are likely to continue.”

Progress Energy, which is undertaking the Pacific NorthWest LNG project, was acquired by the national oil company for C$5.5bil (RM19bil) in 2012 - during the tenure of former Petronas president and chief executive officer, Tan Sri Shamsul Azhar Abbas.

The acquisition, which was made when oil prices were around US$100 a barrel, raised eyebrows on whether it was ill-timed and if the investment was worth all that money.

Late last year, it was reported that Petronas was reviewing options to sell a major stake in Progress Energy, as the slide in crude oil prices had hit the group’s profits and prompted cuts to capex and jobs.

AmInvestment Bank said it does not expect any significant change in Petronas’ cautious approach to upstream exploration and development expenditures.