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A series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy

AIM - Assets In Market

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Iran negotiations - is the end nigh?

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Yemen: The Islamic Chessboard?

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Acquisition Criteria

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Valuation Series

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Showing posts with label Progress Energy. Talisman. Show all posts
Showing posts with label Progress Energy. Talisman. Show all posts

Wednesday 10 January 2018

Canadian LNG: Wrong place wrong time for Petronas


Petronas entered Canada in 2011 to build a full upstream gas and LNG business. It did this in the face of declining domestic production and need to source international gas for both domestic consumption and its LNG trading portfolio. It made a move in June 2011 to partner with Progress Energy for CAD1.1 billion by agreeing to fund the majority of future drilling and capital expenditure on the company’s vast acreage position in the Montney play. In 2012, Petronas decided to acquire the whole of Progress Energy for CAD5.3 billion.

Petronas had a fully-fledged plan – consolidate acreage in the Montney (which it did by acquiring Talisman’s portfolio in 2013 for CAD1.5 billion), work up a plan to develop the gas in the ground and send it to an LNG plant, and bring in partners to help fund the hefty project once the plan was in place. In 2013, it appeared that Petronas was making good progress going out to award FEED contracts for the project. Between 2013 and 2015, Petronas brought in a string of Asian partners who were all hungry for more gas to satisfy their domestic appetites and keen to develop a gas and LNG project with Petronas. By the end of 2014, the ownership of the so called Pacific Northwest LNG project was Petronas 62%, Indian Oil 10%, Sinopec 10%, Japex 10%, China Huadian 5% and Petroleum Brunei 3%. However, the project then began hitting a series of roadblocks.

LNG was a completely new industry to Canada and the country did not have the regulatory framework in place – environmental policies and new taxes were being made up as Petronas progressed its project. There was much bickering and negotiations with the provincial and federal governments – with so many moving parts outside of its control, Petronas and its partners could not finalise its investment decision.

There was also strong opposition from environmental groups and the First Nations. Although their agendas overlapped on environmental protection and land preservation, the two groups did have opposing objectives. Some environmental groups wanted the project shelved altogether, whereas the First Nations wanted to share in the economic benefits with suitable protections for their lands.

The straw that broke the camel’s back came in September 2016 when the federal government granted environmental approval, but attached 190 conditions that would require the advanced project to be re-engineered and relocated to meet new onerous environmental requirements. The Pacific Northwest partners went back to the drawing board and even considered moving the liquefaction facility to another island and sourcing power from an hydroelectric plant rather than self-generate from gas. By July 2017, the partnership announced that it was pulling the plug on Pacific Northwest LNG and began looking for buyers for its Montney acreage.

Pacific Northwest LNG had become too expensive and uncompetitive compared to US Gulf Coast LNG projects. While Pacific Northwest was struggling to progress things along, the US had clearly overtaken Canada on LNG exports and were able to do things more cheaply. The US had extensive pipeline infrastructure to carry gas to the coast for export, existing LNG import terminals which could be flipped for exports by adding liquefaction facilities and moved quickly on the regulatory front to give companies and investors certainty on their LNG projects.

Cost stack for pre-FID LNG projects delivered to Asia
Source: Wood Mackenzie
Petronas took a brave step in opening up a new LNG industry in Canada, a developed country it thought would be business friendly with the protection of the law. Clearly the advent of LNG overwhelmed Canada and it was not yet ready to handle such complex projects. Petronas was the unlucky company that found itself in the wrong place at the wrong time.