Pacific NorthWest LNG, 2012-2017: How to kill an LNG project in Canada

CALGARY • Five years after Petronas entered Canada with big plans to build a liquefied natural gas project on the British Columbia coast, Anuar Taib, the Kuala Lumpur-based executive vice-president and CEO of the Malaysian oil giant’s upstream business, flew back to Canada for a final meeting of the project’s leadership.

Years of gruelling permitting reviews had passed and $10 billion had been spent, yet the $36-billion Pacific NorthWest LNG project seemed no closer to construction.

The group made the final call to stop the bleeding on Tuesday morning and quickly communicated the decision to governments and other interested parties.

“Today is a very difficult day for Pacific NorthWest LNG and Petronas,” Taib told a somber conference call later that day with the media.

“As you can imagine, a decision of this magnitude is only made after detailed and comprehensive evaluation of the information available to us,” Taib said. “We are disappointed that the extremely challenging environment brought about by the prolonged depressed prices and shift in the energy industry have led to this decision.”

In keeping with foreign oil companies’ custom to stay out of local politics, the Shell-trained 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.

The board made the final call to stop the bleeding on Tuesday morning

Yet sources close to the company, who agreed to share information on condition of anonymity due to confidentiality commitments, said the Malaysian state-owned 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 re-considered 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.

The First Nations village of Metlakatla is seen in this aerial photograph taken above Prince Rupert, British Columbia.

Ben Nelms/Bloomberg

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.

Petronas and its partners had already been dealt a series of blows from provincial and federal governments

The project 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 has 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% 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 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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