By P. Gunasegaram
Petronas’s big boss, ahead of a visit to Canada, is threatening to pull out of a US$15 billion (RM48 billion) LNG project there. But what will happen to Petronas’ investments of some US$5 billion (RM16.3 billion) already made in shale gas there if it indeed does pull out?
Tiger believes posturing is a dangerous game akin to juggling a two-sided blade which can cut both ways. When he read that Petronas was contemplating pulling out of a US$15 billion LNG deal in British Columbia, Canada, he was completely aghast.
“Canada has to buck up real fast to be a credible global LNG player if it wants to be taken seriously by potential investors,” Petronas CEO Shamsul Abbas was quoted as saying in the Financial Times ahead of a visit to Canada. He added that Petronas may pull out.
This follows upon an earlier story that Petronas will make a decision by the end of the year on the project.
Let’s remember that Petronas has already invested a substantial amount on shale gas in Canada, starting in 2012 with a RM16.3 billion investment in Progress Energy Resources. The development of these reserves and the eventual sales of gas to Asian nations would involve substantial further investments, with one report, quoting no less than the prime minister, putting this figure at RM110 billion.
Now, that’s a huge sum of money to be investing, even for Petronas. And the other point to note is that this is an outflow of a considerable amount of money out of the country, even if it is over a period of many years.
Also, there is great risk in such undertakings. There is no way to predict what the market for LNG will be like in the years to come. If shale gas is being produced in large quantities around the world, there may well be a surplus of such gas.
What would such a scenario do to Petronas’ future prospects? Is it conceivable, if gas surplus arises, that Petronas can lose a considerable amount of money? Some of these risks are more fully examined in an article here.
After all, when Petronas was formed in 1974, its primary aim was to develop local resources of oil and gas for the benefit of the country. But the Petroleum Development Act of 1974, also gave it powers to virtually do anything else if directed to do so by the prime minister.
Thus it was that Petronas expanded overseas and invested billions in developing countries such as Iraq and Sudan. While it may have lost money in such ventures, it is not possible to ascertain how much because Petronas does not break down profit according to region.
It was clear that losses were made in these areas, masked by the enormous profitability of its domestic operations. While Petronas owns Malaysian oil and gas reserves, it is merely a concessionaire overseas like any other oil company and therefore competes with the oil majors. It is questionable if it is well-equipped to do so.
Back to the Canadian venture. When it bought Progress Energy for RM16.3 billion in 2012, it was the single largest investment it made. Examining its plans, these depended on it making much larger LNG investments to deliver the liquefied shale gas to Asian markets via shipments.
Thus, it would seem that without the LNG facilities, it would be foolhardy for Petronas to have committed the investments in shale gas in the first place. Now, if Petronas were to pull out of the LNG project, it would not be without costs. What happens to its RM16.3 billion investment in Progress Energy?
If this is just posturing, surely it is a waste of time for it is quite obvious that Petronas is just making a show for better incentives. Would it not be better for Petronas to just continue negotiating behind closed doors and get a good deal? Should it not have sorted these matters out before investing its money in Canada?
Increasingly it looks like Petronas’ Canadian ventures have a considerable amount of inherent risk which Petronas does not seem to have fully taken into account. And considering that it has already invested RM16 billion in Canada and stands to lose billions if it exits now, its bargaining position in Canada is really not good.
It may even be quite bad.
GRRRRR!!!
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