‘They faced head­winds in a way that sur­prised them’

National Post (National Edition) - - FINANCIAL POST - PETRONAS Fi­nan­cial Post

Con­tin­ued from FP1

In keep­ing with for­eign oil com­pa­nies’ cus­tom to stay out of lo­cal pol­i­tics, the Shell­trained me­chan­i­cal en­gi­neer took the high road in ex­plain­ing the com­pany’s mon­u­men­tal de­ci­sion, even ac­knowl­edg­ing that the elec­tion of a new NDP/Green coali­tion govern­ment in Bri­tish Columbia was not a fac­tor.

Yet sources close to the com­pany, who agreed to share in­for­ma­tion on con­di­tion of anonymity due to con­fi­den­tial­ity com­mit­ments, said the Malaysian sta­te­owned com­pany and its part­ners — Ja­pan’s Japex, China’s Sinopec, In­dian Oil Corp., and PetroleumBrunei — had been los­ing hope for months and were dis­tressed about the con­tin­u­ing le­gal chal­lenges, lo­cal op­po­si­tion that would have re­quired po­lice pro­tec­tion to pro­ceed with any work, com­ing pol­icy changes and a sense that they were just not wel­come.

Petronas is Malaysia’s only For­tune 500 com­pany and one of the pre­dom­i­nantly Mus­lim coun­try’s largest em­ploy­ers.

“It’s like a no win,” said one source with di­rect knowl­edge. “Petronas would love to be a long-term player and they would love to have LNG work in Canada, but they faced head­winds, eco­nom­i­cally and reg­u­la­tory, and they con­tinue to, in a way that sur­prised them.”

Wor­ries about the vi­a­bil­ity of the project es­ca­lated de­spite re­ceiv­ing a per­mit from fed­eral En­vi­ron­ment Min­is­ter Cather­ine McKenna on Sept. 27, 2016. Nat­u­ral gas prices in Asia had col­lapsed along with oil prices and the global busi­ness was in tur­moil. Mean­while, sim­i­lar projects in the U.S. Gulf Coast were near­ing com­ple­tion, steal­ing mar­ket share from projects planned for Bri­tish Columbia that were mired in de­lays.

The com­pany went back to the draw­ing board af­ter re­ceiv­ing its per­mit and tried to re-con­fig­ure the project to avoid ju­ve­nile salmon habi­tat at the mouth of the Skeena River, adding fur­ther costs. It also dou­bled down on ef­forts to win Abo­rig­i­nal ap­provals, af­ter one band re­jected an of­fer of $1.2 bil­lion in long term ben­e­fits.

Yet its ef­forts were met with con­tin­ued pushback.

Pro­test­ers camped on Lelu Is­land, where the project was to be sited, mak­ing it dif­fi­cult to do pre­lim­i­nary work.

A pro­posed pipe­line to carry nat­u­ral gas from the Mont­ney gas fields to the plant was fac­ing new reg­u­la­tory hur­dles af­ter en­vi­ron­men­tal­ists, funded by SkeenaWild Con­ser­va­tion Trust, won a case be­fore the Fed­eral Court of Ap­peal July 20 that the provin­cially ap­proved pipe­line needed to be re­con­sid­ered by the Na­tional En­ergy Board be­cause it in­volved gas ex­ports over­seas.

In ad­di­tion, the project’s fed­eral per­mit was fac­ing a ju­di­cial re­view af­ter Abo­rig­i­nal lead­ers ques­tioned whether Ot­tawa acted prop­erly in ap­prov­ing the project.

Still more trou­ble loomed on the po­lit­i­cal front. Project pro­po­nents closely fol­lowed the elec­tion in B.C. of the NDP/Green coali­tion and were wor­ried about hos­tile com­ments made dur­ing the elec­tion cam­paign by NDP leader John Hor­gan and his Green Party al­lies.

It’s as if the NDP was us­ing two song­books — one to get elected, the other af­ter it gained power, said a per­son close to the com­pany, adding the new govern­ment’s op­po­si­tion was toned down af­ter the elec­tion, partly be­cause the project was gain­ing sup­port from Abo­rig­i­nal com­mu­ni­ties like the Lax Kw’alaams and the Met­lakatla that stood to gain sub­stan­tial ben­e­fits.

In­deed, af­ter Petronas made the an­nounce­ment, B.C. En­ergy Min­is­ter Michelle Mun­gall got on the phone with other LNG pro­po­nents to “en­sure that we are ready to work with them go­ing for­ward and have a road map for full re­al­iza­tion of their projects,” she told reporters.

But an­other source fa­mil­iar with LNG pro­po­nents’ think­ing said the pres­ence of a new govern­ment — and with the Green Party key to keep­ing them in of­fice — “cer­tainly didn’t help.”

A big worry was the prospect of re-lo­cat­ing the fa­cil­ity to ap­pease en­vi­ron­men­tal and Abo­rig­i­nal op­po­nents, which would have in­volved more en­vi­ron­men­tal re­views.

There were also con­cerns about es­ca­lat­ing car­bon prices, which fur­ther un­der­mined the project’s eco­nom­ics, as prices for the com­mod­ity had col­lapsed and as the new govern­ment wanted the car­bon tax to be ap­plied to meth­ane emis­sions from gas pro­duc­tion.

“With the Pan-Cana­dian frame­work (which B.C. agreed to) call­ing for a min­i­mum car­bon price, na­tion­ally, of $50 a tonne by 2022, oil and gas pro­duc­ers, down­stream man­u­fac­tur­ers, and other en­ergy-in­ten­sive in­dus­tries across Canada face the prospect of steadily ris­ing tax-in­clu­sive fos­sil fuel en­ergy costs,” the source said. “This is a big deal for LNG projects that will be fed by gas ex­tracted from the Mont­ney basin, and where the pro­posed liq­ue­fac­tion plants would be largely pow­ered with on-site elec­tric­ity gen­er­ated us­ing nat­u­ral gas.”

Car­bon prices are a con­cern for other B.C. LNG projects too that are re­struc­tur­ing to re­duce costs, one ex­ec­u­tive said. The B.C. projects have to be com­pet­i­tive with those un­der con­struc­tion in the U.S. Gulf, so any in­crease in car­bon taxes need to be off­set by other tax re­duc­tions, the ex­ec­u­tive said.

The con­tin­u­ing and es­ca­lat­ing de­mands were as­sessed by Pa­cific North­West part­ners, who re­viewed the sit­u­a­tion at the high­est lev­els of their com­pa­nies and re­cently ex­pressed their de­sire to get out, a per­son with di­rect knowl­edge said.

In­ter­ac­tion with sup­pli­ers and ser­vice providers ended by the end of June, said one with large in­ter­ests in the Prince Ru­pert area. “They just went si­lent, and that was it,” said one.

Cameron Gin­grich, di­rec­tor of gas ser­vices at Solomon As­so­ciates, said govern­ment de­lays af­fected the net present value of the project. “In­stead of nur­tur­ing an in­dus­try, they put a lot of ad­di­tional risk on them,” he said.

The project’s can­cel­la­tion will have a neg­a­tive ef­fect on nat­u­ral gas ac­tiv­ity and prices. Gin­grich said Progress En­ergy, the com­pany taken over by Petronas in 2012 to sup­ply the gas for its in­te­grated LNG op­er­a­tion, is cur­rently pro­duc­ing 700 mil­lion cu­bic feet of nat­u­ral gas per day and have 50 tril­lion cu­bic feet of gas re­serves.

“That gas is now headed into the AECO mar­ket, rather than the off­shore mar­ket,” he said. But Gin­grich also said the project’s col­lapse also pro­vides an op­por­tu­nity to the NDP for a fresh start so other projects don’t come to the same con­clu­sion.

It’s es­ti­mated Petronas will take an $800-mil­lion write­down on the de­ci­sion. Petronas said 44 peo­ple will be laid off in Canada. The com­pany is now ex­pected to pri­or­i­tize a US$27 bil­lion re­fin­ery and petro­chem­i­cal plant in Malaysia and a sec­ond float­ing LNG ves­sel in off­shore East Malaysia, ac­cord­ing to Reuters. In Canada, it will con­tinue to pro­duce gas from the Mont­ney and sell it in ex­ist­ing mar­kets. The costly project be­came con­tro­ver­sial in Malaysia, where Petronas an­nounced wide­spread job cuts and had to cut spend­ing by $50 bil­lion over four years to cope with the oil down­turn.

As daunt­ing as the re­main­ing chal­lenges looked, Petronas and its part­ners had al­ready been dealt a se­ries of blows from pro­vin­cial and fed­eral gov­ern­ments.

Petronas made its leap into Canada in late June 2012 when it of­fered $5.5-bil­lion, or $20.45 a share in cash — a 77 per cent pre­mium over the shares pre­vi­ous clos­ing price — build­ing on a $1.07-bil­lion joint ven­ture be­tween the two com­pa­nies to de­velop Progress’s Mont­ney shale as­sets in Bri­tish Columbia.

At the time, the com­pany said it picked Canada be­cause Petronas, Malaysia’s only For­tune 500 com­pany, ex­pects to lay off more than 40 peo­ple in Canada af­ter the de­ci­sion to pull out of the Pa­cific North­West LNG project in B.C. of its po­lit­i­cal sta­bil­ity and its es­tab­lished reg­u­la­tory and fis­cal frame­work.

Soon af­ter mak­ing the of­fer, the fed­eral govern­ment re­jected it. It was be­lieved at the time that then-Prime Min­is­ter Stephen Harper had a hand in it. The deal had been swept up in the de­bate over state owned en­ter­prises pur­chas­ing Cana­dian en­ergy as­sets, mostly due to CNOOC Ltd.’s bid for Nexen Inc. around the same time, and Harper wanted tighter rules.

Petronas mod­i­fied its bid to pass the net ben­e­fit test in Novem­ber 2012. The deal was even­tu­ally ap­proved a month later.

Petronas then ear­marked Lelu Is­land near Prince Ru­pert to site its LNG ter­mi­nal at the rec­om­men­da­tion of the fed­eral govern­ment, with­out real­iz­ing it would re­sult in such fierce op­po­si­tion and con­cerns about salmon habi­tat. The Port of Prince Ru­pert, a fed­eral govern­ment agency, had leased Petronas the lo­ca­tion af­ter iden­ti­fy­ing it as suit­able for in­dus­trial de­vel­op­ment.

Then there was the fed­eral en­vi­ron­men­tal as­sess­ment process, which dragged on for three years. Among the many set­backs, in March 2016, af­ter the Lib­er­als gained power, McKenna agreed to give the Cana­dian En­vi­ron­men­tal As­sess­ment Agency three more months to fin­ish an im­pact study, in­clud­ing the im­pact of up­stream pro­duc­tion on green­house gas emis­sions.

The pre­vi­ous B.C. Lib­eral govern­ment caused de­lays of its own by drag­ging out the process to de­velop fis­cal terms for the new in­dus­try. By the time the terms were an­nounced in Oc­to­ber 2014 the out­look for the global LNG busi­ness had de­te­ri­o­rated as oil-linked prices were col­laps­ing. Be­tween July 2014 and De­cem­ber 2014 oil prices fell from over US$100 a barrel to US$50.

“I met with the of­fi­cials at Petronas when they came to Al­berta and they, at that time, in­di­cated that the pur­chase of Progress was a $6-bil­lion down-pay­ment on an in­vest­ment of some $70 bil­lion or $80 bil­lion that they wanted to make in Canada,” said Ken Hughes, Al­berta’s for­mer en­ergy min­is­ter. “That clearly now is not go­ing to hap­pen. Why is it not go­ing to hap­pen? Be­cause we as Cana­di­ans have to get our act to­gether on a lot of stuff re­lated to our projects and re­sources in this coun­try.”

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