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Federal approval buoys Pacific NorthWest LNG, but FID not a given

With government approvalin hand, developers of the PacificNorthWest LNG project still face the tough decision of whether tomove forward with it.

A glutted LNG market, a thick list of required environmentalconditions and a price tag last estimated at C$36 billion are all pointsMalaysian state energy company PetroliamNasional Bhd., or Petronas, must weigh in determining how toproceed with its effort to build the liquefaction and export facility onBritish Columbia's Lelu Island.

"The project has been quite drawn out and verydifficult, but the announcement made yesterday is hugely significant,"Alex Munton, an analyst at Wood Mackenzie Ltd, said. "The big question nowis does it indeed move forward. … This is not a good time to be embarking on amega-project running into the tens of billions of dollars."

The list of more than 190 conditions meant to mitigatethe environmental impact of the project will be difficult to navigate, Muntonsaid, and he expects some conditions will likely result in project redesign.Capping direct greenhouse gas emissions, for instance, would be difficult forthe project. "The overall cost and consideration of the project take placeagainst a generally unfavorable market context," Munton said.

The venture received a tentative final investment decisionin June 2015, but a binding FID has dragged out as developers awaitedgovernment approval and the project faced opposition from First Nations andenvironmental groups who say the facility will add carbon pollution and harmwildlife. The Lax Kw'alaams First Nation, which claims Lelu Island as partof its traditional land, rejected in May 2015 a C$1 billion offer for supportof the project.

"No matter what, they have a long road ahead of them,"according to Katie Bays, an energy analyst at Height Securities LLC. "It'spossible that we'll see an FID by the end of the year, but I'm not totallyconvinced that Petronas is really going to kick off this investment in 2017."

Even if the company decides to move forward, it will be "severalyears" before a Canadian LNG project is operational, Canadian EnergyResearch Institute CEO Allan Fogwill said. "Currently we're well outof the competitive realm," Fogwill said. "So it's difficult to saywhether it'll be competitive once it's up and operating."

That uncertainty makes going forward with the project risky,said Rick Smead, managing director at RBN Energy LLC. "Three yearsago there was more than a home for a project like this in the world LNG market,"Smead said. "Now there's about a $5 per MMBtu gap between Henry Hub andthe world LNG price."

The liquefaction and export facility would be capable ofproducing 20.5 million tonnes per annum of LNG from three trains. It wouldreceive natural gas produced in the Montney Shale by Petronas'Progress Energy Canada Ltd. via a TransCanadaCorp. pipeline. Sinopec,JAPEX, Indian Oil Corp. and PetroleumBRUNEI are minority shareholders in theproject.