Bluff or bargaining — BC not sure

With final decision only months away, Petronas CEO has second thoughts about LNG investment; Clark calls it negotiating tactics

Gary Park

For Petroleum News

Petronas, Malaysia’s giant global energy player, spent C$5.8 billion acquiring Calgary-based Progress Energy to lock up the natural gas resources needed for its C$16 billion Pacific NorthWest LNG project and recently reported it had proven half the 15 trillion cubic feet goal it has set for making a final investment decision either this year or early in 2015.

It has been running 25 to 30 rigs in its British Columbia and Alberta holdings and is well advanced in planning the construction of a C$11 billion gas liquefaction and LNG export facility at Prince Rupert and C$5 billion for a planned pipeline to be built by TransCanada.

Petronas, while retaining a 62 percent stake in the venture, has assembled a stable of Asian-based buyers - China’s Sinopec, Indian Oil Corp., Japan Petroleum Exploration and Petroleum Brunei - as partners.

Providing a satisfactory agreement can be reached with the British Columbia government on fiscal terms for Pacific NorthWest, initial exports are targeted for 2018, starting at 12 million metric tons a year and growing to 18 million metric tons a year.

Although Petronas has not disclosed how many millions of dollars it has spent so far on arranging debt financing, negotiating with communities and First Nations, working on front end engineering and design work and gaining an export permit from the National Energy Board, everything points to a strong commitment and nothing suggests the company has any intention of bailing out.

But Shamsul Abbas, the outspoken chief executive officer of Petronas, set off a frenzy in late September, starting with comments to the Financial Times of London that he was “ready to call off” the project because of delays in the regulatory process, the British Columbia government’s proposed two-tier LNG tax - to collect an initial 1.2 percent of LNG profits, rising to 7 percent once capital costs had been recovered - and a “lack of appropriate incentives.”

“Rather than ensuring the development of the LNG industry through appropriate incentives and assurance of legal and fiscal stability, the Canadian landscape of LNG development is now one of uncertainty, delay and short vision,” Abbas said.

Pacific NorthWest is considered to be the closest of 17 LNG plans on the table in British Columbia to corporate sanctioning.

Withdrawal would be a calamity for the British Columbia government of Premier Christy Clark, who predicted during a provincial election campaign 15 months ago that LNG could be a major economic driver in coming decades, creating a fund of C$100 billion over 30 years.

She viewed Abbas’ comments as more bluff and bluster than a threat to be taken seriously.

“We’re negotiating and this is part of negotiations,” she said at a meeting of delegates from China’s Guangdong province.

“What Petronas is doing is ... trying to get the absolute best deal they can for their shareholders ... and we’re trying to get the best deal for British Columbians.

“I’m very hopeful the Petronas deal will go ahead. But, ultimately, the decision is in their hands,” Clark said.

Natural Gas Development Minister Rich Coleman, the government’s point man on LNG, said he does not believe Pacific NorthWest is at risk, given how much Petronas has already spent on the project.

“I know what’s going on at the table,” he said. “And I know there’s good progress. (Abbas) knows there’s a balance to be struck for competitiveness.”

Coleman said he spoken with a Petronas executive after Abbas made his comments and determined that “negotiations are going fine.”

Michael Moore, a professor of energy economics at the University of Calgary, said that even if Abbas is posturing he should still be taken seriously, noting that British Columbia is lagging behind other jurisdictions vying for a spot in LNG markets.

David Watt, HSBC’s chief economist and an expert on Canada-Asia trade matters, said there is pressure on the British Columbia government to settle its LNG fiscal regime, given that the United States is close to converting its LNG import facilities into export outlets, gaining an infrastructure advantage in the process.

“For companies that want to start exporting LNG from B.C. they are going to have large capital needs over the next few years and so they will want to start as soon as possible,” he said.

What makes many observers edgy is the announcement by Apache that it is pulling out of the Chevron-operated Kitimat LNG project, after being the first to receive an LNG export permit from the National Energy Board.

Clark has promised to finalize all government-imposed LNG conditions by Nov. 30, including taxes, the cost of meeting environmental standards and compensation for First Nations.

Faced with these uncertainties, Abbas fired his first warning shot in May when he urged the British Columbia government not to “slaughter the goose before it has a chance to hatch the golden egg. This is a once-in-a-lifetime opportunity for British Columbia. We must be careful not to squander it by banking on unrealistic expectations and misconceived perception.”

Hydro dam or LNG, but not both

A power struggle between Canadian governments and First Nations over natural resource projects has moved up a notch, posing an added challenge to proponents of LNG schemes.

A delegation of aboriginal leaders from British Columbia delivered a message to the Canadian government on Sept. 24 telling the Canadian and B.C. governments that they will agree to either a hydroelectric dam or LNG development in the province’s north, but not both.

The ultimatum gained clout in June when the Supreme Court of Canada ruled that infringements on aboriginal land or treaty rights can only take place if they meet a test aimed at reconciling those rights with the broader public interest.

The court verdict has already triggered lawsuits by First Nations challenging a number of proposed economic development projects.

Chief Roland Willson of the West Moberly First Nation said his community has title to land in the Peace River region of northeastern British Columbia under a century-old treaty, which has been bolstered by the Supreme Court.

At stake is British Columbia’s planned-for C$8 billion Site C hydro dam that would flood 13,800 acres over a 50-mile stretch of valley and generate 1,100 megawatts of electricity, capable of serving 450,000 homes and the development of natural gas to support LNG operations.

If the British Columbia government wants to “push Site C we’re not going to be in favor of any LNG projects, or any of the pipeline projects,” Willson said.

He said the West Moberly people are not opposed to resource development, but multiple ventures would be too much.

British Columbia Energy Minister Bill Bennett said announcements are expected in October on environmental certificates for Site C from the Canadian government and the province’s Environmental Assessment Office.

If Site C receives a go-ahead, a final decision from the province could come in November, he said.

Bennett has previously said his government wants as many First Nations as possible involved with Site C through business contracts and employment.

The government-owned British Columbia Hydro said the dam is needed to help meet the province’s clean energy targets.

Tensions between aboriginal people and the Canadian government increased in late September when Prime Minister Stephen Harper told reporters at the United Nations on Sept. 24 that aboriginal people do not have a “veto” over resource development in Canada.

The same day, the United Nations General Assembly essentially reiterated a 2007 declaration, starting that governments must obtain “free, prior and informed consent” before adopting administrative or legislative actions that might affect indigenous peoples.

The Canadian government, in a separate caveat, said the UN declaration should not be seen as giving veto power to First Nations, an interpretation which the aboriginal leaders said was “inflammatory” and misinterpreted the UN document as well as disregarding the Supreme Court of Canada decision.

—Gary Park