Could Petronas abort RM100 bil Canadian project?

By Khairul Khalid

Petronas’ LNG project in British Columbia – one of its biggest-ever investments overseas – is in danger of being derailed due to fierce resistance by Canadian aboriginal communities. Could Petronas be forced to pull the plug on the RM100 billion project? And what about falling energy prices which may make the venture unviable?

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Will Petronas proceed with its controversial RM100 billion liquefied natural gas (LNG) project in Canada, with or without the consent of aboriginal natives in British Columbia? And even if it does, will it still be viable under current market conditions?

“There are just two key factors pending before Petronas makes a conditional final investment decision (FID) on the project in the second quarter of 2015 (2Q15),” said Petronas president and chief executive officer (CEO) Wan Zulkiflee Wan Ariffin when posed the tricky question at the company’s first quarter of financial year 2015 (1Q15) results announcement on May 22.

Wan Zulkiflee cited environmental and regulatory approvals by the Canadian government, but not the aboriginal natives’ issue, as the final obstacles for the project.

“We will still engage with the aboriginals to reach a solution,” said Wan Zulkiflee who was coy about the matter and declined to give further details.

Petronas has not responded to KINIBIZ requests for an interview.

Regardless, it looks increasingly likely that Petronas will be waging a battle — possibly a legal one — with the dissenting British Columbia aboriginal communities, adding more headaches for Petronas in the long-troubled project.

Fierce resistance from aboriginals

The RM100 billion LNG project is facing stiff opposition from aboriginals in British Columbia citing serious environmental concerns. On May 13, Petronas’ offer of C$1 billion (RM2.9 billion) was rejected by the Lax Kw’alaams First Nation, a band of about 3,600 Canadian aboriginal members.

The offer was part of a compensation package by Petronas-led joint venture Pacific NorthWest LNG to greenlight the construction of a pivotal LNG export terminal on the natives’ land.

It includes the government’s offer of a portion of British Columbia coastal land worth C$108 million in exchange for the Lax Kw’alaams agreement.

Will Petronas be able to brush aside the demands of the aboriginals and fast track the delayed project?

It would seem that Petronas will have to face more fierce resistance before the LNG project takes full flight. Contrary to what Petronas is saying, the aboriginals will be a key factor in getting the project off the ground. The Lax Kw’alaams are standing firm in their stance. They claim that their rights to the land will be violated if Petronas ignores their demands and goes ahead without their consent.

“The terminal is planned to be located in the traditional territory of the Lax Kw’alaams. Only Lax Kw’alaams have a valid claim to aboriginal title in the relevant area – their consent is required for this project to proceed.

“There are suggestions governments and the proponent may try to proceed with the project without consent of the Lax Kw’alaams. That would be unfortunate. While the benefits agreements concluded by other First Nations with Pacific NorthWest are a fact, they are not remotely determinative in this matter and do not affect the aboriginal rights and title of Lax Kw’alaams,” said Lax Kw’alaams in a media statement on May 13.

Hardball tactics

The LNG project has had its fair share of troubles in the past, causing Petronas’ FID to be delayed several times.

Last year, Petronas’ former CEO Shamsul Azhar Abbas spoke out against the British Columbia government’s delays in speeding Petronas’ requests for better incentives related to the project.

Then, Shamsul hinted that Petronas might even consider suspending the project for 10 to 15 years until tax and regulatory issues were resolved.

The British Columbia government dismissed this as just a hardball negotiating tactic by Petronas. Subsequently, after a few conciliatory gestures and remarks by both parties, the deal was back on track again.

The Lax Kw’alaams are not the only aboriginal community that Petronas has to contend with for the British Columbia project. Last December, Petronas reached agreements with two other aboriginal communities – the Metlakatla and the Kitselas First Nation – for undisclosed amounts.

The deal package includes employment, training, financing for cultural support, and annual lump sum payments based on the number of LNG trains in operation and participation in environmental monitoring.

‘Not a money issue’

It is a delicate situation, but not all aboriginal communities are against the LNG projects in British Columbia. Some welcome the economic benefits that these massive projects confer, including job creation and business opportunities.

But the location of Petronas’ proposed export terminal at Lelu Island has touched a nerve among many who fear that it would harm the salmon fisheries, which are seen as a vital economic resource for the communities in that area.

Aboriginal opposition and environmental concerns have already delayed other energy projects in Canada, such as the rejection of the Northern Gateway oil sands bitumen pipeline project last April.

Some critics claim that the Lax Kw’alaams rejection of Petronas C$1 billion offer is just a bargaining tactic to extract more money from Petronas, one of the most profitable companies in the world.

Not true, said the Lax Kw’alaams.

“Hopefully, the public will recognise that unanimous consensus in communities (and where unanimity is the exception) against a project where those communities are offered in excess of a billion dollars sends an unequivocal message this is not a money issue: this is environmental and cultural,” said Lax Kw’alaams.

‘Tell Petronas the truth’

The aboriginal community also said that their resistance to building the export terminal at Lelu Island, on the basis of protecting the environment, has a precedent.

“The government of Canada recognised the importance of this specific site in 1977. An LNG project proposed by Dome Petroleum was rejected then for the same reason that makes this site unsuitable now – major fisheries values. This finding confirmed then – 50 years ago – what First Nations have known for generations,” said Lax Kw’alaams in a statement.

Another local aboriginal leader is more scathing of the Petronas project.

“If the federal and provincial governments cannot protect our interests, and choose to work more closely with foreign-owned multinational energy companies than their own citizens, then we will be forced to represent ourselves abroad and tell Petronas the truth about their prospects,” said chief Na’Moks of the Wet’suwet’en Tsayu Clan.

Final nail in the coffin?

Will Petronas be able to overcome these negative local sentiments to push the project through? And is it still now economically feasible and worth Petronas’ troubles to persist with it?

Even before the oil price started its sharp slide last year, the project had hit major stumbling blocks, such as the impasse between Shamsul and the British Columbia government.

Its initial investment in British Columbia is approximately RM29 billion and the project is estimated to eventually cost Petronas US$30 billion (RM109 billion) over its entire duration of 25 years.

Some analysts had previously stated that the oil price slump, which would also commonly lead to a drop in LNG prices after an estimated three-month lag, was already a major impediment to Pacific NorthWest LNG.

Could the aboriginal resistance prove to be the final nail in the coffin for the troubled Canadian project?

The Pacific NorthWest project includes an LNG terminal with a pipeline to deliver gas supplies from fields in northeast British Columbia to Lelu Island, near Prince Rupert, British Columbia, 770km northwest of Vancouver and would produce as much as 19.68 million metric tonnes of LNG a year, for 25 years starting in 2018.

Marginal profits, price overhang

A big part of Petronas’ dilemma on whether to abort the problematic project is the fact that it has already sunk US$6 billion into the venture when it acquired Canada’s Progress Energy Resources in 2012, giving it ownership of shale gas properties in northeastern British Columbia.

The additional US$30 billion investment in the disputed terminal in Lelu Island is a crucial component to its Progress Energy purchase to export the LNG to lucrative Asian markets. Without the terminal, Petronas will just be limited to selling its Canadian LNG to the local market, thus restricting its potential revenue.

Even former Petronas CEO Shamsul had admitted that although the project could be monetised and would add value to the Canadian economy, Petronas’ profits in the Canadian venture are marginal and much dependent on tax breaks as well as other incentives from the Canadian government.

“The reality of the global LNG market is that we are facing potential overhang and decreasing demand that creates downward pressure on LNG prices. In this market environment, the ability to secure market and customers is paramount,” said Shamsul in October last year in an official statement.

“Coupled with softening crude prices, there is a need for international energy companies such as Petronas to seriously prioritise and reassess our investments. The proposed fiscal package and regulatory pace in Canada threatens the global competitiveness of the Pacific NorthWest LNG project. This is further exacerbated by preliminary project costs, which indicates cost of local contractors to be higher and not benchmarked to global contractor’s cost,” he added.

According to Shamsul, the additional tax and high-cost environment will negatively impact the project’s economic viability and competitiveness.

“In fact, in its last portfolio review exercise, the current project economics appeared marginal. Without material cost reduction efforts across the project, the company will have a tough time reaching a positive FID by December 2014,” said Shamsul then.

‘Many years until US$100 oil’

Petronas has sold off some of its stake in the Pacific NorthWest LNG and now has a 62% stake in a joint venture with four other oil and gas companies – China Petrochemical Corp (Sinopec) with 15%, Japan Petroleum Exploration Co (Japex) with 10%, PetroleumBRUNEI (3%), and Indian Oil Corp Ltd (10%).

Petronas says that if a suitable offer materialises, it can further reduce its stake in Pacific NorthWest and may opt to retain just 50%.

Although the oil price may spike back up in the long run, the volatility of energy prices currently casts serious doubts on the project’s overall viability.

As the new Petronas CEO Wan Zulkiflee himself admitted at a recent oil and gas conference in Kuala Lumpur on May 17: “It will take many years until we see oil prices anywhere near the US$100 mark.”

Even if Petronas manages to win over the aboriginal sceptics, CEO Wan Zulkiflee has a tough challenge on his hands to make the Canadian project sustainable in the long run.

Yesterday: Will falling profits make Petronas more prudent?

Tomorrow: TigerTalk – Canadian mess should be Petronas’ wake-up call