PETALING JAYA: Petroliam Nasional Bhd (Petronas) is set to become the second-largest partner in LNG Canada after striking a deal to buy 25% in the liquefied natural gas (LNG) project in Kitimat, British Columbia, Canada.
This is an about-turn of event for the national oil and gas company, which in July 2017 scrapped plans to invest in the C$36bil (RM111.5bil) Pacific NorthWest LNG gas pipeline project in British Columbia, Canada, due to prolonged depressed prices and unfavourable market conditions for the energy industry then.
Petronas’ announcement yesterday that its wholly-owned entity, the North Montney LNG Ltd Partnership (NMLLP), had entered into a sales and purchase agreement for an equity position in the LNG Canada project came amid improving energy prices and an increasingly healthier market outlook for the oil and gas sector.
“It is anticipated that the transaction will achieve completion in the next few months,” Petronas said in a statement.
It noted that the transaction remained subject to international regulatory approvals and the completion of other associated agreements.
The LNG Canada project, which reportedly costs of up to C$40bil (RM123.9bil) for the construction of an export terminal and related infrastructure, is led by Royal Dutch Shell plc (Shell) as the largest partner.
Petronas said that upon completion of the deal, it would be the second-largest partner in LNG Canada project with a 25% stake through NMLLP after Shell.
Shell, through its subsidiary Shell Canada Energy, would have a 40% stake in the project.
Other stakeholders – PetroChina Canada Ltd; Diamond LNG Canada Ltd, a subsidiary of Mitsubishi Corp; and Kogas Canada LNG Ltd would each have a 15% stake in the project.
Petronas president and group chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin said the group, in seeking to build a long-term presence in Canada, would continue to explore other opportunities in the country.
“Petronas is in Canada for the long term and we are exploring a number of opportunities that will allow us to increase our production and accelerate the monetisation of our world-class resources in North Montney. LNG is just one of those opportunities,” he said.
On Petronas’ proposed investment in the LNG Canada project, Wan Zulkiflee said: “As one of the world’s largest LNG producers, Petronas looks forward to adding value to this venture through our long-term expertise and experience across the LNG value chain.
“We are committed to deliver LNG and natural gas, the cleanest fossil fuel in the world, to the growing global energy market.”
Petronas pointed out that the proposed LNG Canada project would include the design, construction and operation of a gas liquefaction plant and facilities for the storage and export of LNG, including marine facilities.
The plant would initially consist of two world-scale LNG processing units referred to as “trains”, with an option to expand the project in the future to four trains.
Petronas said having an equity position in the project would enhance its business intent to develop its world-class natural gas resources in the North Montney, northeast British Columbia, through its wholly-owned subsidiary, Progress Energy Canada Ltd.
A report by Bloomberg noted that after Petronas cancelled its plan to invest in the Pacific NorthWest LNG project last July, the group was left without a plan to export gas produced by Progress Energy Canada unit to Asia as originally intended. Buying into the LNG Canada project would therefore help revive that prospect.
Canada is Petronas’ second-largest resource holder after Malaysia, with vast unconventional gas and oil resources in the North Montney.
Petronas and its North Montney joint-venture partners are one of the largest natural gas resource owners in Canada with over 52 trillion cu ft of reserves and contingent resources.
According to Bloomberg, LNG Canada plans to build an export facility at Kitimat near Prince Rupert – North America’s closest port to Asia – that could eventually reach 26 million tonnes a year in capacity.
The newswire noted that Petronas’ involvement would help bring financing and gas supplies to LNG Canada, as the group nears a final investment decision, expected this year.
Quoting National Bank of Canada analyst Greg Colman, Bloomberg said Petronas’ Progress unit could contribute an additional 560 million cu ft a day of production to the project. This would ensure that the project would have all the gas it needs to meet its initial export target.
Shell and its partners have twice delayed a final investment decision on the LNG Canada project amid a global supply glut. But in recent months, Shell has indicated the window for competitive projects may be reopening, saying that global LNG demand exceeded expectations last year and that the market may again face a supply shortage by mid-2020s.
“It is looking very, very positive for this project,” Karl Johannson, head of Canada and Mexico natural gas pipelines for TransCanada Corp, which is set to build the pipeline to deliver gas to the export facility, said on an investor call in April.
Wood Mackenzie senior analyst Prasanth Kakaraparthi said the development marked “an interesting turn of events.”
With nearly 52 trillion cu ft of reserves and contingent resources, Canada is the second largest resource holder in Petronas’ portfolio after Malaysia. Consequently, monetisation through LNG is inevitable given the weak outlook for domestic prices, Prasanth said in a statement sent to StarBiz.
However, he said costs would be a major concern for the project.
“Shell has announced its intent to make a decision by the end of this year. But before LNG Canada can take FID (final investment decision), it will need to lower costs and take advantage of the latest tax breaks announced by the British Columbia government,” he added.
Prasanth noted that Petronas has signalled its intent to become a portfolio player and has taken steps to diversify its supply sources.
Once both phases are executed, LNG Canada could add up to 7 tonnes of equity LNG into the national oil corporation portfolio – nearly 20% of its 2023 supply.
“In the event, we believe this to be a positive development for Petronas. We expect the global LNG market to tighten post-2022 and this bodes well for the project. But activity has returned to the LNG space with a number of projects expecting to take FID ahead of 2019.
“A new wave of project sanctions and rising oil prices could push up project costs and dampen the economics,” he said.