Petronas assets may be a hard sell: analyst

CALGARY• The Malaysian company rumoured to be seeking buyers for its Pacific NorthWest LNG project could struggle to offload its upstream natural gas assets due to a lack investment in recent years, one analyst says.

Rumours have been circulating that Petroliam Nasional Berhad, or Petronas, is looking for a way out of its massive investment in Canada’s nascent LNG space following a Reuters report that cited anonymous sources. As the Financial Post went to press, Petronas had not verified those claims, and was expected to release a statement addressing the matter. The B.C. Ministry of Natural Gas Development said in a statement it had contacted the company and was “reassured” the claims were untrue.

However, speculation around a potential deal puts focus on the company’s upstream assets, which could be central to a sale. Those assets would require significant new investment in order to prove the economics of the resource — a snag that could dampen interest from buyers, according to data compiled by RS Energy Group analyst Brook Papau.

Petronas came to Canada in 2012 following its purchase of a substantial swath of natural gas assets in the Montney formation of northeast British Columbia. Since then, companies operating in the region have invested heavily to improve the efficiency of their wells, as low natural gas prices have pressured producers to slash costs.

Meanwhile, Petron as has focused its upstream expenditures on determining the size of its reservoir — rather than on boosting efficiency or growing production — in order to prove to potential buyers that the company has a sufficient resource base to fulfil longterm supply contracts. As a result, the efficiency of its wells has fallen behind that of its peers.

“They’re not going sell this asset, I wouldn’t think, using 2012 capital efficiencies of these wells,” Papau said.

Operators in the region have drastically improved the economics of their wells in that short four-year win- dow. Advantage Oil & Gas Ltd., another Montney producer, brought its per-well costs from between $6 million and $6.5 million in 2012 down to around $4.5 million in 2016, Papau said. Other operators have managed similar cuts as costs for materials and labour drop.

Montney producers have lowered costs while also wringing more production from each well, typically by extending the length of wells and using larger volumes of sand, water and chemicals during fracking. Encana Corp., another regional player, has nearly doubled the volume of fracking materials it uses per well, and has extended the lengths of wells themselves.

“We haven’t seen the same improvement in Petronas’s type curve as we’ve seen in almost every other operator in the basin,” Papau said.

Anonymous sources in the Reuters story cited worsening market conditions for LNG as reason for Petronas’s interest in a sale. On Tuesday federal authorities granted final approval to build the Pacific NorthWest facility, which was first put forward by a consortium of companies led by Petronas in 2012.

It is also unclear what the value of such a deal would be. The project’s $36-billion price tag comes from an assumed value after construction, and includes $6.7 billion in new pipelines to transport gas to the facility, $12.5 billion to develop the gas and $11.4 billion for the project itself.

Petronas bought its upstream assets from Calgarybased Progress Energy Canada Ltd. in 2012. It is among the largest natural gas assets held by a single company in North America, Papau said.

“We think there’s a massive amount of resource,” he said. “What we don’t know is what those economics look like under a modern completion using current well costs.”

Highly expensive proposals to build LNG export terminals along Canada’s West Coast have been brought into question as near-term demand for LNG in Asian markets wanes. However, some analysts argue that falling costs due to lower oil prices and a stagnant global economy could improve the economics of such projects in the long term.