Petroliam Nasional Berhad's deal for 25% of a planned LNG export megaproject in British Columbia will provide an outlet for displaced western Canadian shale supplies while supporting a potential expansion of liquefaction facilities, according to experts.
If the Royal Dutch Shell PLC-led project moves forward it would be a boon to natural gas producers in Canada's Montney and Duvernay shales, including Petronas subsidiary Progress Energy Canada Ltd., which owns substantial acreage in the region straddling the Alberta/British Columbia border. Output from the prolific shales has been stifled by competition from Appalachian production in the U.S., which has displaced Canadian gas in many of its traditional markets.
"Severely depressed prices in western Canada mean that their alternative price for this gas is very low," energy consultant Colin Coe said in an email. "In a sense they have a stranded asset. This is an opportunity for them to improve the economics of their upstream investment."
Malaysia's Petronas struck the agreement to buy an equity stake in the LNG Canada terminal nearly a year after shelving its own C$36 billion Pacific NorthWest LNG facility in British Columbia amid low prices and local opposition. Low prices fueled by a global oversupply that also forced LNG Canada to delay green-lighting the project and ask federal regulators to extend its export license's start date. CEO Andy Calitz said at a recent conference that the company intends to begin construction in 2018 on the project, which would have an initial production capacity of 13 million tonnes of LNG per year and an estimated price tag of C$40 billion.
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Once the deal closes in the next few months, Shell's Shell Canada Energy Ltd. would own a 40% stake in LNG Canada, Petronas' North Montney LNG would own 25%, PetroChina Co. Ltd.'s PetroChina Canada Ltd. and Mitsubishi Corp.'s Diamond LNG Canada Ltd. would each hold 15% ownership, and Korea Gas Corp.'s KOGAS Canada LNG Ltd. would hold 5%.
Shell currently owns a 50% equity share of the project, which according to LNG consultant Nikos Tsafos could have deterred its partners from moving forward.
"You've gotten all the partners closer to what they’re comfortable with," he said in an interview. "My sense is that at some point Shell took a slightly bigger bite of the project and everyone else had to reduce their shares, and with Petronas coming in I think it's a bit more balanced now."
Bringing on a partner with deep pockets like Petronas, he continued, also "bodes well" for LNG Canada's option to expand capacity to 26 million tonnes of LNG per year through building two additional liquefaction trains.
British Columbia's government, which has mounted intense opposition to Kinder Morgan Inc.'s Trans Mountain pipeline, has embraced LNG development on its north coast as a means to reduce emissions in Asia as it replaces coal as a fuel. The province is also one of the biggest exporters of coal on North America's west coast. It has expanded handling facilities to ship more U.S.-mined coal as similar projects in the Pacific Northwest have foundered amid environmental opposition.
British Columbia has offered tax and other incentives to LNG Canada to help move its project forward, but Woodfibre LNG Ltd., which postponed the start of construction for its $1.3 billion LNG terminal in British Columbia to 2018 due to challenging market conditions, is expected to be the first company to export liquefied gas from the region.
Even though projects in western Canada are geographically closer to key markets in Asia compared to others in North America, the need for expensive pipeline and terminal infrastructure, opposition from environmental and aboriginal groups, and a global LNG market that favors buyers has pushed several developers to drop their plans. Steelhead LNG's Malahat project, Shell's Prince Rupert and China National Offshore Oil Corp. (CNOOC)-backed Aurora LNG were each canceled in 2017.
Still, Raymond James & Associates Inc. energy analyst Pavel Molchanov does not think that Petronas' decision to become a junior partner in LNG Canada will necessarily spur the remaining British Columbia LNG export hopefuls to consolidate.
"I wouldn't expect this news, in and of itself, to change any other developer's strategy," he said in an email.

