By Khairul Khalid
With the crude oil prices falling to record lows after record lows, Petronas’ mammoth RM130 billion LNG project in Canada looks doomed, although it still insists on proceeding with the high-risk venture.
Will the free-falling crude oil prices – now at below US$30 – be the final nail in the coffin for Petronas’ troubled RM130 billion liquefied natural gas (LNG) project in Canada?
Not many in the industry expect the oil market to get better anytime soon. Make no mistake. What some initially thought was a going to be a temporary dip in oil prices has turned into a virtual bloodbath. The oil and gas industry has been forced to lay off workers by the hundreds of thousands worldwide.
Echoing this was Petronas chief executive officer (CEO) Wan Zulkiflee Wan Ariffin who recently told Bloomberg in an interview that a price recovery is many years away.
Wan Zulkiflee Wan Ariffin
“The reversal in the price will happen. It’s only whether it will happen in three years, five years or in seven years’ time. But it will happen,” said Wan Zulkiflee in the interview.
Wan Zulkiflee is obviously betting that the oil prices will eventually correct to an equilibrium that’s more favourable to oil producers like Petronas.
But what if it drags on longer than that? Not even a 30-year oil and gas veteran like Wan Zulkiflee has a crystal ball to see when the good times might return.
When the oil prices started crashing from its US$100 per barrel threshold in October 2014 to levels below US$50 in early 2015, many experts were confidently predicting a price rebound to at least between US$70 and US$80 by the end of 2015.
Alas, it has tanked even further.
The supply glut has not receded. World demand has not caught up due to economic slowdown in several major countries. To make things worst, long-term sanctions on Iran, including oil exports, have just been lifted.
Iran’s reemergence into the oil market is expected to trigger further downward pressure on price. Already, analysts say that the oil prices might tumble to US$20 this year.
Which brings us to the RM130 billion question – Petronas’ behemoth project in British Columbia, Canada, its biggest-ever overseas investment.
Wan Zulkiflee has insisted that Petronas will continue the project regardless, citing the fact that it is a long-term play that could last 20 to 25 years.
Other than the tumble of crude oil prices, LNG volume and prices that have also fallen in tandem are also blamed for Petronas’ sinking profits. Last year, the company conceded that it had a cash flow problem and was forced to dip into its RM126 billion reserves.
Pacific NorthWest (PNW) LNG, the Canadian joint-venture company that is majority owned by Petronas, is waiting for regulatory approval.
Petronas had begun the Canadian project when prospects were rosier.
In 2012, Petronas purchased Canadian based oil and gas company Progress Energy for US$5 billion, giving it shale gas assets in northeastern British Columbia.
But Petronas’ entry into the then much-coveted Canadian LNG market seemed ill-advised from the start.
Although the Progress Energy purchase provided Petronas a footing into the Canadian market, an LNG terminal that is a pivotal component for the entire project was less than secure.
Without the terminal, Petronas’ potential returns in its Canadian venture would be significantly diminished in value.
The bulk of the terminal is being built on aboriginal land and is critical to the long-term commercial viability of the project by facilitating exports of LNG to lucrative markets in Asia, but its construction has been hampered by domestic opposition and environmental concerns.
Petronas also had to play hard ball to extract better tax rates and other incentives from the British Columbia government to make the project viable before the oil prices crashed.
But would Petronas’ Canadian LNG project still make financial sense at the current oil prices?
There are 20 proposed LNG projects inclusive of Petronas’ PNW and deep uncertainties over depressed oil and gas markets have thrown them into doubt. The LNG market is currently oversupplied and the situation may sustain for several years.
According to a study by London-based Carbon Tracker Initiative, given prevailing market conditions, Petronas’ PNW project will not be needed in the 2015 to 2035 period.
Shamsul Azhar Abbas
Even previous Petronas CEO Shamsul Azhar Abbas, under whose watch the Canadian venture began, had admitted before he left that the Canadian project was increasingly difficult for Petronas to profit from.
On the other hand, Wan Zulkiflee is betting that if Petronas pulls out of Canada, it might miss out on a potential bonanza when the market turns around.
“If investments are held back, when demand picks up, the whole industry may not be ready to meet the demand,” he reportedly said in the Bloomberg interview.
But how much losses will Petronas have to bear before it becomes profitable in Canada? Wouldn’t resources spent in these high-risk projects overseas be better spent elsewhere, especially in the domestic markets?
The oil and gas market has taken such a beating in the last 18 months that it is inconceivable that Petronas has not at least considered making a U-turn in Canada.
And it should.
GRRRRR!!!
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