By P. Gunasegaram
Tiger thinks when you leave too much money with a company, it does nasty things with it because it does not know what else to do. That’s a case in point with Petronas’ RM120 billion Canadian shale gas venture. Read on to find out more.
Tiger has always viewed Petronas’ very expensive venture into shale gas in British Columbia as highly risky and ill-considered. First it paid a massive US$5 billion (RM16 billion) in 2012 to buy Progress Energy Resources which owned the gas reserves.
That’s just the start. 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 closer to RM120 billion, over a period of 30 years.
The first stage of this massive investment is building a liquefied natural gas (LNG) terminal and associated facilities for US$11 billion (RM38 billion), which is already more than twice the original investment in Progress Energy!
Finally, its clear. After a number of back and forths, Petronas has now delayed giving the go ahead for this particular project, citing high costs and other outstanding issues. It was said to be reviewing the impact of declining oil prices on the economic viability of the remote development.
“Costs associated with the pipeline and LNG facility remain challenging and must be reduced further before a positive final investment decision (FID) can be undertaken,” the company said in a statement, Reuters reported.
Petronas said despite the delay, it is working with regulators on the necessary permission and will continue to invest in natural gas development in British Columbia. Really, but how long will it take before it continues with its investments?
Reuters reported that Petronas warned back in October that the economics of the project were marginal and said it could delay an investment by up to 15 years if outstanding issues around taxation and regulation were not resolved.
15 years? Does that mean that Petronas will have to sit on its Progress Energy gas reserves for 15 years before it makes a decision? Does that mean that the RM16 billion sits there doing nothing until Petronas decides to do something with it, as long as 15 years later?
Petronas delayed its decision despite British Columbia finalising an LNG tax package and approved both the terminal and pipeline. What remained outstanding, however, was a federal environmental assessment of the terminal, with that decision not expected until mid-2015 at the earliest.
TigerTalk had already warned earlier that Petronas could be in trouble in Canada and reports coming out of there are confirming this.
Even for Petronas, that RM120 billion is a huge sum of money to be investing, not in Malaysia but in a foreign country. There is outflow of a considerable amount of money out of the country, not into prime blue chip investments but for a highly risky venture where much money can be lost, even if it is over a period of many years.
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 (and oil) is being produced in large quantities around the world, there may well be an energy surplus. That’s one of the reasons the oil price is tanking.
One must remember too that there are more than a dozen LNG projects on Canada’s coast awaiting approval and two in the US already under construction. If each one is the size of Petronas’ LNG project, one is looking towards half a trillion ringgit worth of investments in the region for LNG. What would that do to energy prices?
What would such a scenario do to Petronas’ future prospects? Is it conceivable, if gas and oil surplus arises and prices are depressed, that Petronas can lose a considerable amount of money? Some of these risks are more fully examined in an article here.
Despite its better financial reporting these days, Petronas is quite opaque in some areas. It does not have geographical breakdown of profits for instance. Thus wrong decisions made around the world can be easily masked by ultra high profitability in Malaysia where it owns the oil. In other places, Petronas is a concessionaire, same as the oil majors with whom it will be hard put to compete.
That leaves Petronas between a rock and hard place, not the best place to rest the rear in trying circumstances. But sometimes, as all good investors know, its better to cut losses than to aggravate it.
Alright, Petronas paid RM16 billion for Progress Energy, but it would have recovered some by selling stakes to Chinese and Indian interests. Now it is time to sell the entire stake in Canada and get out of Canadian shale gas.
Petronas should then start winding down its global efforts. It is time to focus on its primary purpose when it was formed in 1974 — to develop local resources of oil and gas for the benefit of the country and its people instead of risking our money overseas.
Petronas has some RM120 billion in cash and near cash items at last count. It is this cash sitting and doing nothing which makes it itch to get into big ventures. But it should focus on local projects instead.
Developing oil-and-gas-based industries in Malaysia, setting up an oil trading market, and putting its money into ventures in Malaysia are far better than acting as large venture capital providers for risky projects in far off places. The latter is most definitely not one of Petronas’ goals.
GRRRRR!!!
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