Industry Trend Analysis - Canada LNG Exit Makes Sense For Petronas - OCT 2017

BMI View : Petronas ' decision to cancel its long-delayed USD36.0bn Pacific Northwest LNG in Canada makes sense given myriad environmental and legal complexities, amid low LNG prices and adverse market conditions , and will free-up funds to advance higher-priority projects, such as RAPID. The decision further affirms the difficulty of realising greenfield LNG projects in Canada, and supports our view for the sector to see little progress over our 10-year forecast period.

Malaysia's Petronas finally pulled the plug on its long-delayed USD36.0bn Pacific Northwest LNG (PNW LNG) project on Lelu Island in British Columbia, Canada, citing low oil prices and an extremely challenging environment. The project has continued to face significant hurdles since its inception in 2014. Despite securing government approval in 2016, various environmental concerns and legal complexity, particularly surrounding First Nations rights, have limited progress. In January 2017, Petronas was forced to contemplate moving the project to an alternative location due to stiff opposition on the ground.

Petronas To Priortise RAPID

Petronas has already invested about USD11.0bn out of the estimated required outlay of USD36.0bn, though for fear of further losses, the firm decided to pull out. PNW LNG would have shipped 19.0mn tonnes of LNG annually to Asian buyers. However, with the region already awash with LNG due to a wave of new supplies from post-FID projects in Australia, the US and Russia, it made little economic sense for Petronas to push through another mega-export project.

Moreover, our long-term outlook on Asia's spot LNG prices remains heavily bearish, with significant growth in the supply-side set to keep prices under USD6.0/mnBTU over the next five years ( see ' Singapore SLInG: Low Prices Driving Rapid Demand Growth ' , June 27). This is far below the USD12.0-14.0/mnBTU typical LNG projects in Canada reportedly require to breakeven.

Stepping back from its Canadian LNG venture will allow Petronas to focus its capital spending on higher-priority projects, notably the USD27.0bn Pengerang Integrated Petroleum Complex (PIPC), a massive downstream hub in Johor, which consists of the 300,000b/d capacity Refinery & Petrochemical Integrated Development (RAPID), slated for completion by 2019-2020. These projects are closely aligned with Petronas' long-term strategy to move up the downstream value-chain and will significantly improve Malaysia's self-sufficiency in refined fuels and petrochemicals over coming years.

RAPID To Boost Fuels Output Beyond 2019
Malaysia - Refined Fuels Production & % chg y-o-y
e/f = BMI estimate/forecast. Source: EIA, JODI, BMI

Conditions Will Remain Challenging For LNG Projects In Canada

For Canada, Petronas' cancellation represents a blow for investment sentiment in the Canadian energy sector, especially when viewed together with other recent exits announced by IOCs such as ConocoPhillips and Shell from their respective oil sands ventures.

Despite having one of the best risk scores in the world, according to our upstream risk/reward index (RRI), realising greenfield LNG investment in Canada remains challenging. Rising equipment and labour costs, amid sustained weakness of commodity prices, drag on the competitiveness of new LNG export projects. Moreover, development costs at an average LNG terminal in Canada are as much as twice that of similar facilities in the US due to limited existing infrastructure and inadequate midstream capacity.

The municipal government of BC passed a consolidated tax framework for LNG producers in October 2014, coupled with increased regional coordination through the Western Regulators Forum to encourage pipeline development, though we see little scope for improvements in this space over the next several years.

As such, of the more than 30 LNG terminals that have received export approval from the National Energy Board, we believe the vast majority will fail to come online. Regulatory delays on the part of the more environmentally-conscious British Columbia (BC) government have long-hindered the development of the industry in Canada. The appointment of John Horgan, whose stance towards extending support for the LNG industry is divided, as the new British Columbia premier, suggests that this will remain the case in the years ahead.