Malaysian state-owned energy company Petronas's liquefied natural gas investment in B.C. faces hurdles

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      At their joint news conference in Putrajaya in October, Malaysia’s prime minister, Najib Abdul Razak, surprised his visiting Canadian counterpart by announcing that state-owned Petronas would be making a “gargantuan” $36-billion investment to develop an export-oriented liquefied-natural-gas (LNG) project in British Columbia.

      Probably surprised by the announcement, Prime Minister Stephen Harper gave a diplomatic response that his government was “very excited” and would “positively” view further investments by the Malaysian energy firm.

      Never mind that details and hard facts were missing and that the project’s numerous parts must first grind through Canada’s tough approval process: the $36-billion figure became the headline-grabbing story for the first visit to Malaysia by a Canadian prime minister in 55 years.

      The pumped-up LNG investment sum, more than twice the amount of the last estimate given by Petronas in June, was likely not in the script as Harper was officially in Malaysia to sign less exciting bilateral agreements on security cooperation and tax issues. Until the news conference, his October 5 to 6 stopover en route to the Asia-Pacific Economic Cooperation summit in Indonesia had been largely overshadowed by the simultaneous presence of Chinese president Xi Jinping in the Malaysia's largest city, Kuala Lumpur.

      The Canadian delegation, together with its media, was also caught off-guard by Najib’s impromptu announcement as it scrambled for details of what would amount to the largest single foreign direct investment project in its country.

      The Canadian media immediately turned to Greg Kist, president of Pacific NorthWest LNG, the Petronas-owned company that will operate the LNG terminal, who tried to explain that the total sum included new spending on gas wells and “other facilities” through 2018.

      The reported $36-billion figure counted Petronas’s $5.9-billion takeover of Calgary-based Progress Energy as well as planned and proposed investments related to the project that had already been announced.

      The “other facilities” include the $9-billion to $11-billion liquefaction plant and export terminal, a $5-billion gas pipeline to Prince Rupert, and $14 billion in additional resource-development work that counts new wells, processing facilities, and an extension of the Nova Gas Transmission Limited system. The fate of these additional investments has yet to be decided, as Petronas and whoever it partners with are only expected to make a final investment decision on the project by the end of 2014.

      But why let the lack of details and the numerous uncertainties ahead spoil an opportunity for harmless political gain?

      The $36-billion figure provided both a sweet moment for the Harper government to boost Canada’s otherwise invisible profile in Asia and further justification for the British Columbia government to trumpet its new LNG–led economic-development strategy.

      Petronas’s growing urgency

      But for Petronas, the details are critical to the success—or failure—of the biggest and most ambitious project in its 39-year history.

      A proven producer and exporter of conventional hydrocarbons on its home turf, Petronas has a mixed record in its ventures abroad. It is making a bold move into the risky unconventional-gas terrain with no previous exposure to North America. In Australia, it owns a 27.5-percent stake in a consortium that has been struggling against rising costs and environmental opposition since 2007 to develop LNG from coal-bed methane gas.

      The Malaysian state firm’s push into Canada took off last December with its bold capture of Toronto-listed Progress Energy, which is said to hold vast natural-gas reserves in B.C.’s Montney area. Faced with a rapid decline in its hydrocarbon reserves, Petronas is counting on the acquisition to almost triple its unconventional-gas reserves, to one billion barrels of oil equivalent.

      The Malaysian company, previously unknown to most Canadians, passed tough grilling from Ottawa and negative public reaction just five months after launching the surprise bid for the midsized Calgary-based company. These early hurdles have proved to be the easy part.

      To realize the full potential of Progress Energy’s assets, Petronas, which provides 45 percent of the Malaysian government’s revenue, will have to make long-term massive investments in Canada that will stretch both its financial and managerial resources.

      In June this year, a Petronas official gave the first indication of the money needed when he told an industry conference that it plans to invest between $9 billion and $11 billion to build two liquefaction plants on Lelu Island near Prince Rupert’s port on the B.C. coast, and another $5 billion in a 750-kilometre gas pipeline. This brings the company’s additional projected spending in Canada to between $14 billion and $16 billion.

      With Najib giving the total sum of $36 billion, Canada could end up absorbing a sizable portion of Petronas’s planned 300-billion-ringgit ($94-billion) capital expenditure over the 2012–2017 period set by company president and CEO Shamsul Azhar Abbas.

      Clearly, this would carry too much risk for a company that reported a profit of just 59 billion ringgit ($18.6 billion) last year and whose cash flow is under increasing pressure from rising costs, declining oil exports, and weak commodity prices. The $36-billion sum is equal to about 12 percent of Malaysia’s GDP of $305 billion for 2012.

      Shamsul, who was appointed in 2010 to reform Petronas into a more efficient profit-making organization, is worried, and rightly so.

      Between 2002 and last year, Malaysia’s crude-oil reserves fell from 4.5 billion barrels to 3.7 billion barrels while its production declined from 740,000 barrels per day (b/d) to 657,000 b/d, according to BP. At the same time, domestic consumption has surged from 561,000 b/d to 697,000 b/d per day, sharply reducing the country’s oil exports, which are a key source of national income as Malaysia’s manufacturing and services sectors are not competitive with their Asian rivals.

      Over the same period, the country’s natural-gas reserves plunged by nearly half, from around 2.5 trillion cubic metres (tcm) to 1.3 tcm, depleted by a 35-percent surge in production from 48.3 billion cubic metres (bcm) to 65.2 bcm and a 27-percent rise in domestic consumption from 26.2 bcm to 33.3 bcm.

      In response, Petronas has begun actively exploring deep-water and marginal fields at home, and is continuing with risky ventures in Africa, the Middle East, and Latin America. But, under Shamsul, the company is increasingly focused on investing in the more stable First World environments of hydrocarbon-rich Australia and Canada for long-term growth.

      After years of enduring poor returns and high risk, it is losing appetite for energy deals with developing countries. These were largely driven by former prime minister Mahathir Mohamad, who stepped down in 2003 but remains influential in the country’s affairs.

      In Africa, the company’s upstream ventures into as many as 15 countries over the last two decades have yielded marginal successes at best, while efforts to sell off its 80-percent stake in South African refining and retail company Engen Petroleum Ltd. are progressing slowly.

      In Latin America, Petronas is trying to back off a proposed Venezuelan project to jointly produce 200,000 b/d of heavy crude after falling out with state-owned partner PDVSA. It is also expected to pull out of a proposed $850-million purchase of a 40-percent share in an offshore oil field held by Brazil’s OGX Petróleo e Gas Participações, which filed for bankruptcy protection in late October.

      In Sudan and Iraq, the two countries where Petronas has experienced significant upstream success, political instability and military conflicts are taking a toll on operations. Over the past year, Petronas has cited the conflict in Sudan as having hurt its bottom line. Talks toward investing in Iran have largely dissipated amid the West’s tightened trade sanctions against the Islamic regime.

      Petronas faces a difficult balancing act

      Despite all these external difficulties, Petronas probably faces its biggest challenge at home, where it must balance the government’s growing demands for cash with its own need to re-invest profits to replenish Malaysia’s rapidly depleting oil and gas reserves.

      Malaysia is bracing for tougher economic conditions ahead, with growth expected to drop from 5.1 percent last year to 4.7 percent this year and 4.9 percent in 2014, while inflation is picking up as a result of rising fuel and food prices. Fitch Ratings recently cut the country’s credit outlook to negative from stable as government debt has surged to 53.3 percent of GDP, the highest level of any country in Southeast Asia. The pressure on Petronas to fund Malaysia’s welfare programs amid growing tensions between its ethnic groups is set to intensify.

      In protecting the company’s 300-billion-ringgit investment budget, CEO Shamsul has had to resist pressure from powerful politicians to sponsor pet projects and fight calls to raise Petronas’s dividend payments to the government. Since its formation in 1974, the company has been called upon numerous times to bail out expensive failed projects as well as fund welfare programs, in addition to the 30-billion-ringgit ($9.4-billion) dividend that it pays the government every year.

      The company’s thinly stretched top management is also being tasked by the government to develop an ambitious 60-billion-ringgit ($19-billion) integrated oil refinery and petrochemicals project in Johor state that analysts doubt will take off, as it competes directly with nearby Singapore’s well-established energy hub on Jurong Island. The Johor project’s start-up has already been delayed by a year to late 2017 owing to implementation problems on the ground and poor support from local state agencies.

      As recently as last year, Shamsul has hinted in an interview with the Financial Times that he was prepared to resign if his attempts to reform the company, dubbed Malaysia’s unofficial national bank, continued to meet political resistance.

      The way forward

      In balancing the demands of its political masters with the company’s imperatives—financial prudence and access to new oil and gas reserves—Petronas’s most viable option would be to sell off a significant portion of its expensive Canadian project to new partners. Even before it had completed the acquisition of Progress Energy, Petronas’s dealmakers were already trying to sell off part of their Canadian LNG project to potential investors.

      In March, three months after Ottawa approved the takeover, Petronas announced it had succeeded in selling a 10-percent stake in the project to Japan’s second-largest upstream company, Japex.

      But its attempts to sell off shares to other Asian companies are expected to run into headwinds that could slow down the project’s progress. Suddenly, buyers, especially those from Asia, have become harder to find.

      India’s state-owned companies are strapped for cash amid the financial crisis back home, while Chinese interest has waned after the Harper government warned it might block new investment from state-owned enterprises in Canada’s resource sector. China is also aware that most Canadians deeply opposed CNOOC’s controversial acquisition of Nexen Inc.

      Further dampening interest in Canada, CNOOC has been criticized by its own shareholders and Chinese officials for supposedly overpaying for the acquisition. Another state-owned giant, Sinopec, has added to the impression of China’s waning interest by announcing that it is looking to sell off half of its two biggest shale-gas assets in Western Canada’s Montney and Duvernay areas, according to a Reuters report.

      Beijing’s current crackdown on corruption in the country’s oil and gas industry will also put the brakes on new merger-and-acquisition activities abroad.

      More importantly, the Xi Jinping administration has decided to focus China’s attention on the hydrocarbon resources in nearby Central Asia and Russia. In March, China and Russia wrapped up a number of energy agreements, worth more than $600 billion, to mark a successful first international trip for the newly installed President Xi.

      South Korea, another potential partner, is unlikely to join the Petronas bandwagon, as its state-owned gas giant Korea Gas Corp. (Kogas) itself is seeking to pare down its LNG investment exposure in Canada and Australia.

      At the recent World Energy Congress in South Korea, Kogas CEO Jang Seok-hyo said the company is looking to sell up to 10 percent of its stake in a Shell-led consortium to develop an export-oriented LNG project in Kitimat. The proposed sale will put Kogas in direct competition with Petronas for buyers.

      Like their Chinese counterparts, Korean state-owned companies are also coming under pressure from their government to sell off assets and exit projects on account of poor performance. Another state firm, Korea National Oil Corporation, is hoping to sell off parts of its loss-making Canadian energy subsidiary Harvest Operations Corp.

      A year ago, the Harper government and Canadians were fending off cash-rich Asians buying up their country’s oil and gas resources.

      Today, concerns have swung in the opposite direction—that Asia’s interest might just be fleeting and unreliable. It might explain why the Harper government has refused to be overly excited about the prospect of landing a “gargantuan” $36-billion investment prize.

      Ng Weng Hoong is a Vancouver-based energy journalist with over three decades of experience covering the industry in Asia and the Middle East.



      Michael Puttonen

      Nov 6, 2013 at 3:54pm

      Fascinating article. Thanks.

      "...the country’s natural-gas reserves plunged by nearly half, from around 2.5 trillion cubic metres (tcm) to 1.3 tcm, depleted by a 35-percent surge in production from 48.3 billion cubic metres (bcm) to 65.2 bcm and a 27-percent rise in domestic consumption from 26.2 bcm to 33.3 bcm."

      Just finished reading "Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth" by Bill Powers. These startling depletion rates are characteristic of the alternative gas play fad, and continue to cause the same failure of supply problems, in the same way, worldwide.

      Elizabeth James

      Nov 9, 2013 at 1:08pm

      Congratulations! This has to be the best, most straightforward analysis of the 'games in play' on LNG. When one looks at the rate of increase in Malaysia's domestic demand from 2003-2011, the article also illustrates an unspoken counterbalance to Premier C-C's claim that we have enough gas to last 150 years...let alone her earlier prediction that we were sitting on a trillion-dollar export industry to Asia. We need more writers like Ng Weng Hoong to keep on giving British Columbians 'the Straight goods'.


      Jan 18, 2014 at 7:33am

      "...the country’s natural-gas reserves plunged by nearly half, from around 2.5 trillion cubic metres (tcm) to 1.3 tcm, depleted by a 35-percent surge in production from 48.3 billion cubic metres (bcm) to 65.2 bcm and a 27-percent rise in domestic consumption from 26.2 bcm to 33.3 bcm."

      This statistics is grossly inaccurate. According to US Energy Information Administration, as of January 2013 Malaysia had 83 trillion cubic feet (Tcf) of proven natural gas reserves, and it was the third largest natural gas reserves holder in the Asia-Pacific region. The current proven reserves are at its highest level despite producing over 2 Tcf annually since 2007.

      "Clearly, this would carry too much risk for a company that reported a profit of just 59 billion ringgit ($18.6 billion) last year and whose cash flow is under increasing pressure from rising costs, declining oil exports, and weak commodity prices."

      According to GLOBAL 500 reported by, Petronas reported a NET profit of USD21,915.3m for FY2012. It is the 12th most profitable company in the world. The company is cash-rich, and is potentially at its best financial position ever. It had just completed CND1.5B cash transaction buying Talisman shares in the Farrell Creek and Cypress areas of British Columbia. That is not a sign of a company struggling financially.

      I could point out several other statistical inaccuracies in the article, but I will leave it at these two for the time being.