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Big bet on Canadian LNG: Petronas offers 77% premium for Progress
Malaysia’s Petronas has offered big dollars to secure the Canadian natural gas assets it wants to take full control of a proposed LNG export project.
If the C$5.5 billion bid for mid-size producer Progress Energy Resources is ratified by shareholders and regulators by Sept. 25, the Asian giant will become the largest state-owned enterprise in the Canadian oil patch and will intensify the race to start LNG shipments from the British Columbia coast.
Although Petronas is not yet ready to lay out the details of its project it joins a crowded field of other contenders eager to profit from an opportunity to sell LNG into an Asian markets, where prices are currently up to $18 per million British thermal units.
So far, two proposals have 20-year export permits from Canada’s National Energy Board — the Apache-operated Kitimat LNG, with Encana and EOG Resources each holding a 30 percent stake, at 5 million metric tons, mt, a year and BC LNG Export Cooperative, a 50-50 venture by Houston-based LNG Partners and the Haisla First Nation, for 1.8 million mt per year.
Shell latest in running The latest entry is LNG Canada, operated by Royal Dutch Shell, tentatively scheduled for start up late this decade with initial capacity of 12 million mt per year. That consortium includes Korea Gas Corp., Mitsubishi and PetroChina, each with a 20 percent interest.
The Petronas-Progress deal came a year after they formed a joint venture to develop three shale gas fields in British Columbia’s Montney play and study the feasibility of an LNG operation, three months after Petronas made the unusual move of announcing it wanted to make a C$5 billion acquisition of a Canadian company and two weeks after Petronas said the takeover effort had stalled.
In the end, the two sides admitted they “burned the midnight oil” to pull the transaction together, with Datuk Anuar Ahmad, executive vice president of the Petronas, conceding that Progress had been the only gas target his company had set its sights on.
Study goal is August While they await final approvals, Petronas and Progress hope to complete their LNG feasibility study in August, make a final investment decision on an LNG facility in late 2014 and begin exports to Asia by late 2017 or early 2018.
“We will work to shorten that time frame, through engineering work and site selection, so that we can get the natural gas to market as quickly as possible,” Progress Chief Executive Officer Mike Culbert said.
The two companies also disclosed they have signed a feasibility assessment agreement with the Prince Rupert Port Authority, gaining exclusive rights to conduct further studies for a terminal on Lelu Island off the northern British Columbia coast, rating that as their “primary preferred site.”
Ahmad said an LNG project will look for long-term customer contracts of 15 to 20 years, indexing the LNG prices to oil. He listed Japan, Korea and Taiwan as prospective sales markets.
Chris Theal, CEO of Kootenay Capital Management, said in a note that if Petronas controls equity reserves and thus the value chain it is strongly placed to negotiate 20-year contracts with LNG customers.
Ottawa welcomed deal Canada’s Natural Resources Minister Joe Oliver said Ottawa welcomed the Petronas/Progress deal because there was not enough capital in Canada to develop its resources.
“It does not bother us that a state-owned company like Petronas will be buying directly into Canadian natural resources,” he said, noting that the government has been holding “extensive conversations” with China on investment in Canada and expects to see some from India and Korea.
Petronas and Progress need to clear Canadian government foreign investment regulations, which give priority to a net economic benefit to Canada and demonstrate they are prepared to act in a commercial, rather than politically driven manner.
“We certainly welcome companies that are acting like good corporate citizens,” Oliver said. “But we’re looking at each investment on a case by case basis.”
The Petronas offer of C$20.45 a share represents a 77 percent premium to Progress’s closing price of C$11.55 on July 27 and is near the mid-point of the Progress trading range over the past 52 weeks.
Last year, Petronas committed C$1.07 billion for a 50 percent interest in Progress’s Altares, Lily and Kahta fields in the North Montney shale gas play of northeastern British Columbia.
Asset base requires capital Culbert said in a statement that his company’s asset base “requires extensive capital to develop its large potential and ultimately access international LNG markets.”
He said Petronas offers the size and scale to free Progress from “the same cash flow challenges faced by many producers in the North American natural gas market today.”
Culbert said the majority of gas reserves under the joint venture need gas prices of C$3 per thousand cubic feet at Alberta’s AECO hub for a 10 percent rate of return.
He said the North Montney is a “very prolific play,” noting that Petronas estimated the contingent resources at 15 trillion cubic feet a year ago, of which 20 percent were assigned to the joint-venture.
Ahmad was not concerned about the ability of Petronas to compete for materials and labor against other LNG projects in British Columbia.
He said “there are many ways of technically handling” the requirements, including fabricating components “somewhere (other than Canada) if necessary.”
—Gary Park
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