B.C. LNG plans at crossroads after Petronas-Progress deal blocked

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The government's decision to block the foreign takeover of a mid-sized Canadian natural gas company adds another note of uncertainty to ambitious plans for natural gas exports to Asia that in recent weeks have been thrown into doubt.

The pursuit of a liquefied natural gas export terminal on the British Columbia coast was one of the key features of the proposed Petronas takeover of Progress Energy Resources Corp. When the deal was first announced in June, Petronas emphasized its "significant global expertise and leadership in developing LNG infrastructure" and said it had signed a feasibility assessment agreement with the Port of Prince Rupert.

That agreement gave the company time to suss out a large new facility that could load gas for export to Asian markets, where it could fetch a higher price and, in the process, deliver a huge economic boost to B.C.

Petronas plans had stoked especially strong hope on the B.C. coast, where the Lax Kw'alaams First Nation had begun socio-economic negotiations with the company even before the Progress takeover was announced in June. The possibility that the takeover could be blocked – and with, it potentially, the Petronas LNG plans – prompted disbelief.

"I don't understand" the federal rationale, said Wayne Drury, chief executive of the Lax Kw'alaams corporate group. "Right from the start a foreign company has engaged first nations to look at how can we develop a socially and economically and environmentally responsible project that's a benefit to the region."

He added that "we only have so many things we can do in the northwest to have a sustainable future. And LNG is one of them."

Though Petronas has never disclosed details of its plans, people familiar with them say it has pursued an 18 million tonne-a-year export terminal, which would be constructed in three trains that could move a total of 2.4 billion cubic feet per day onto ships.

That's larger than the initial plans by Royal Dutch Shell PLC, which intends to build a 12 million tonne terminal at nearby Kitimat, although Shell and its partners have applied for a 24 million tonne licence. Kitimat LNG, a consortium led by Apache Corp., has already been awarded a 10 million tonne export approval, while BG Group PLC, according to sources, is pursuing an 18 million tonne project similar to Petronas, and also in Prince Rupert.

Failure of the Petronas terminal could have broader ramifications, since the Malaysian company is expected to share the cost of a $6-billion to $8-billion pipeline to the coast with BG; Spectra Energy Corp. has agreed to build that line.

What's not clear is whether Petronas will proceed with LNG plans outside of a takeover. It first voiced its LNG ambitions when it launched a joint venture with Progress – that corporate arrangement could continue even if a takeover is blocked.

What is more clear is the scale of loss if Petronas does abandon its plans. An LNG terminal of that size would cost $20-billion to $25-billion to build, based on current global construction estimates. One analyst suggested the costs will be so high that Petronas and others may not proceed on that basis alone : "I don't think LNG makes sense, and they probably figured that out themselves," the analyst said.

Troubles with Canadian LNG projects have already started to surface: Japanese research suggests far more gas exports are being proposed than the world will need. Kitimat LNG, meanwhile, acknowledged earlier this month it is having difficulty securing oil-indexed sales contracts, which would provide better pricing and stability than contracts indexed to feeble North American gas prices. Those troubles generated recent Internet rumours that Kitimat LNG has been postponed. In a statement, spokesman Paul Wyke said those rumours are false: the project has completed final engineering, and continues to prepare for construction, he said.

Analysts say projects like those proposed by Shell and Petronas have the best prospects, since their ownership structure includes companies that both produce and consume gas, limiting their vulnerability to how contracts are indexed.

On the B.C. coast, there remains a broad expectation that LNG will proceed – and a genuine sense of confusion as to why the federal government has supported plans to export oil from the coast, through the Northern Gateway project that many there oppose, but is then stepping in to block the Petronas deal.

The Petronas terminal alone could bring 200 to 300 jobs, Mr. Drury said. And while the Lax Kw'alaams will neither support nor oppose it until they have completed negotiations, "we are concerned if these projects are significantly reduced in scope," he said.

He added: "This is a huge opportunity for first nations to really be engaged in building an economy which is sustainable."