While environment, energy, and First Nations communities erupted in online anger at the Canadian government’s decision to approve the controversial, C$36-billion Pacific NorthWest liquefied natural gas (LNG) megaproject, industry analysts raised serious questions about whether the project will ever be built.
“The LNG world has flipped upside down,” Bloomberg reports, since Malaysian state oil and gas company Petronas first submitted the project for approval in 2013. “Spot prices for the fuel have fallen by more than two-thirds as a host of new projects have boosted supply faster than demand has grown.”
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Petronas, meanwhile, saw its second-quarter profits plummet 96% this year compared to last, and has been making noises for some time about cancelling Pacific NorthWest altogether. In the week before the federal Cabinet decided to green-light the project, Bloomberg reported the government had not sought any guarantee from Petronas that the project would proceed.
“It is a very tough environment. We are entering a period of over-supply, and prices for both oil and LNG are low,” Chong Zhi Xin, principal LNG analyst for Wood Mackenzie Ltd., told Bloomberg this week. “To commit to additional capital expenditure for Petronas and its partners over the next few years will be very challenging, especially as budgets are being cut.”
Bloomberg’s Dan Murtaugh discusses just how far LNG markets have fallen while Pacific NorthWest has been going through review. “When Petronas conceived the project, LNG was in sharp demand, after Japan shut its nuclear plants following the 2011 Fukushima meltdown and needed alternative power supplies,” he explains. Since then, gas prices have fallen from US$20 to US$6 per million British Thermal Units (MBTU). That happened after “high prices spurred new production projects and at the same time damped demand growth by pushing consumers to cheaper sources of fuel. Global supply capacity is expected to grow by almost half through 2020, at which point it will exceed demand by 29%.”
JWN Energy reports that Petronas will likely wait until mid-2017 before deciding whether to approve spending on the project. Decisions will also have to be made by four companies in China, Japan, India, and Brunei that collectively own 38% of the project.
“Those partners aren’t just investors,” JWN notes. “They’re also buyers with gas offtake agreements,” and the timing may not be right for them to commit to this LNG provider.
“Asian utilities have typically bought LNG under long-term contracts. Some of those contracts have been locked down by other LNG producers, and there is now a glut of LNG on the market,” the industry news outlet notes. “Worse, a sustained oil price plunge has eroded profits, forcing big oil and gas companies to defer spending on large, capital-intensive projects.”
“The window of opportunity earlier on was missed because there was far too much discussion around counting your chickens before they hatched,” said Jihad Traya of Solomon Associates in Calgary. “Petronas is looking at the next phase. They’re not looking at prices today—they’re looking at prices tomorrow.”
JWN also points to an aspect of the federal Cabinet announcement that is a basic bottom line for climate and energy hawks, but might be anathema to Petronas and its project partners.
“The approval comes with a catch,” the outlet states. “[Environment and Climate Minister Catherine] McKenna says there will be a hard cap on the project that will require it to reduce emissions by 20%,” and the B.C. government’s commitment to increase its carbon tax in sync with an eventual federal plan factored into the federal decision on Pacific NorthWest.
To JWN, that might be a problem. “The project’s carbon emissions will be capped at 4.3 million tonnes of CO2. That’s 900,000 lower than what the project, as initially proposed, would produce. It’s not clear whether that means Petronas will have to scale the project back.”
The Globe and Mail’s day-after coverage, meanwhile, talked about the project being “stalled” by more than 190 conditions the federal Cabinet had attached to approval. The net result: the Pacific NorthWest consortium “is hesitant about forging ahead even after investing billions of dollars in British Columbia.” Petronas said Wednesday that it would study the government’s conditions, in what the Globe described as a “muted response” to the approval.
Analyst Divya Reddy of New York-based Eurasia Group said the conditions are “fairly onerous” compared to other projects world-wide, the paper states. “Petronas is definitely unhappy with the difficulty of the permitting process,” Reddy said. But “we still think there is political motivation on the part of the Malaysians to move forward. The government wants to make Petronas a global national champion and is taking a longer-term view of the market.”
JWN followed up Thursday with an overview of the 190 conditions, covering consultation and traditional Indigenous knowledge, air quality and greenhouse gas emissions, freshwater fish and their habitat, wetlands, marine fish and mammals, and a series of other categories.
