A major Canadian natural gas export project could be put on ice indefinitely if British Columbia doesn’t change its tax policies.
That’s the threat from CEO of Petronas, the Malaysian government-owned oil company. Shamsul Azhar Abbas said that a multibillion dollar liquefied natural gas (LNG) export terminal on Canada’s west coast would be put on hold if it didn’t get its way. Petronas is considering whether or not to build the US$ 32 billion Pacific Northwest LNG (PNW LNG) export facility in British Columbia, but is unhappy with what it sees an unwelcoming provincial government.
British Columbia has proposed a two-tier tax system, which includes a relatively small tax burden upfront that escalates as the project begins to pay dividends. The government has focused on a tax regime that ensures that taxpayers receive a big payday from the LNG project. Politicians have touted the potential billions of dollars western Canada could receive from a robust LNG export industry.
At the same time, the B.C. government has tried to balance industry concerns by ensuring that high taxes don’t cause Petronas to bail out.
The problem is that the project’s economics have always been “marginal,” as even Petronas has admitted. But in recent months, the global appetite for LNG has dimmed a bit, which has put further pressure on the project’s profitability. That has diminished the provincial government’s leverage, and absent revisions to the tax proposal, Petronas has threatened to walk away. Even worse, Petronas said that the opportunity to build a terminal would not present itself again for another 10 to 15 years.
“The proposed fiscal package and regulatory pace in Canada threatens the global competitiveness of the PNW LNG project,” Petronas’ CEO Abbas said in a statement. British Columbia Premier Christy Clark has thus far dismissed the threats from Petronas to scrap the plans. Clark said she is “very confident” Petronas will move forward with the project.
The provincial government is convening this month to debate and consider the tax and regulatory package.
But LNG projects are facing stiff competition worldwide because of weakening economic conditions. Goldman Sachs recently downgraded their projection for demand growth from 6 percent to 5 percent per year through 2020.
Canada will have to compete with Qatar, Australia and the United States for a market that is suddenly growing much slower than previously expected. Petronas’ pending decision on whether or not to move forward with a final investment decision is a warning sign for the prospects of LNG exports from Canada.
This past summer, the future of a separate LNG project was thrown into doubt when Apache Corporation pulled out. The Kitimat LNG project, which is owned 50-50 by Chevron and Apache, is now on hold. Apache said that it was withdrawing from the LNG business and would try to sell its stake. The episode highlighted the hesitation of major companies to pour billions of dollars into LNG projects amid a flurry of construction around the world.
The Petronas terminal remains the last best hope for western Canada. After all, there were at least 17 energy companies that have considered investing in LNG export terminals in British Columbia, but Petronas’ project was the one considered to be the most viable.
Should the Petronas terminal not move forward, it would have a chilling effect on natural gas production in western Canada.Petronas also purchased a Canadian company in 2012 for C$5 billion, enabling the Malaysian oil giant to pick up significant acreage in British Columbia. That has allowed it to begin drilling for natural gas. The final piece of the puzzle was the export terminal.
With access to Asian markets cut off without the terminal, natural gas prices will surely slump in Canada over the long-term, making drilling projects less profitable.
But such an outcome isn’t inevitable. B.C. Premier Clark has so aggressively talked up the potential for LNG revenues that she may have a hard time holding her ground if Petronas starts heading for the exit. As a result, the pressure to follow through may force her to capitulate on Petronas’ demands. CEO Abbas has called the next few weeks “critical.”
By Nick Cunningham of Oilprice.com
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