Malaysia's Petronas to purchase equity stake in LNG Canada project

CALGARY -- Canada's stalled West Coast LNG export industry received a shot in the arm Thursday with news that Malaysian state-owned energy company Petronas will take a 25 per cent equity interest in LNG Canada.

The Shell Canada-led project, with an estimated cost of $40 billion including a natural gas pipeline, is considered one of the most likely of some 20 proposed West Coast liquefied natural gas projects to proceed, with a final investment decision widely expected this year.

Petronas, meanwhile, is one of the largest natural gas explorers in the North Montney region of northeastern B.C. A year ago, it and its partners cancelled their $36-billion Pacific NorthWest LNG project near Port Edward, B.C., due to prolonged low LNG prices.

"If there were any lingering doubts that the LNG Canada partners might not green light the project this year, they have probably been erased," CIBC analysts said in a research note on Thursday.

"It's hard to believe Petronas would be inclined to participate in another false start."

The addition of Petronas helps answer the question of where LNG Canada will obtain the gas -- up to four billion cubic feet per day -- it will require, the CIBC analysts added.

Petronas has 52 trillion cubic feet of natural gas reserves and contingent resources in Canada, second only to Malaysia in Petronas' portfolio, Wood Mackenzie senior analyst Prasanth Kakaraparthi said in a report.

"We believe this to be a positive development for Petronas," the report says. "We expect the global LNG market to tighten post 2022 and this bodes well for the project."

The analyst said activity is starting to ramp up again in the global LNG market with a number of new project approvals expected by next year, resulting in more competition and possibly rising project costs.

Neither Petronas nor Shell revealed how much the former is paying to enter the LNG Canada consortium.

"Petronas is in Canada for the long-term and we are exploring a number of business opportunities that will allow us to increase our production and accelerate the monetization of our world-class resources in the North Montney. LNG is just one of those opportunities," Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin said in a release.

LNG Canada last month awarded Texas-based Fluor Corp. and Japan's JGC Corp. the joint contract for engineering, procurement and construction of the LNG export facility in Kitimat, conditional on project approval.

The final investment decision (FID) was delayed indefinitely by the consortium in 2016 because of a skid in global LNG prices.

"The transaction announced today does not amount to an FID which remains pending," Shell cautioned in its release, adding timing depends on "competitiveness and affordability of the project."

After the deal is closed in the next few months, the partnership will include Shell with 40 per cent; Petronas-owned North Montney LNG Limited Partnership, 25 per cent; PetroChina Canada Ltd., 15 per cent; Mitsubishi Corp. subsidiary Diamond LNG Canada Ltd., 15 per cent; and Kogas Canada LNG Ltd., five per cent.

The Shell-operated project will initially consist of two LNG processing units, each with the capacity to produce about 6.5 million tonnes per year of LNG, with an option to double the project in the future.

Each partner in the project is responsible for sourcing its own gas supply, either from their own wells or by buying it on the market, Shell Canada spokeswoman Tara Lemay said in an email.

TransCanada Corp. has proposed building the $4.7-billion Coastal GasLink pipeline to help transport natural gas from the Dawson Creek area in northern B.C. to the LNG facility.

The company's $1.4-billion North Montney Mainline project, which is to start construction later this year, will also bolster its overall B.C. gas gathering system and increase the potential flow of feedstock to LNG Canada, spokesman Shawn Howard said.

The line had been designed to connect Petronas and other North Montney gas producers with the Pacific NorthWest LNG project. But the National Energy Board recently approved a revised plan to build a shorter pipeline that will bring the trapped natural gas to TransCanada's existing Nova gas pipeline system in B.C.

In March, B.C.'s New Democrat government offered new conditions and tax incentives for the province's LNG projects, including relief from provincial sales taxes, subject to repayment in the form of an equivalent operational payment.

LNG projects would also be subject to new greenhouse gas emission standards and would have to pay general industrial electricity rates consistent with other industrial users in B.C., but the framework would repeal an LNG income tax introduced under the B.C. Liberals.