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December 3, 2014

Petronas delays decision on Pacific NorthWest LNG project
By BRENT JANG
Malaysian energy giant warns construction costs make B.C. Pacific NorthWest project uneconomical


Petronas has delayed making a final investment decision on plans to export liquefied natural gas from British Columbia, warning that estimated construction costs are too high.

The Petronas-led Pacific NorthWest LNG terminal proposed for Lelu Island has been budgeted to cost $11.4-billion, part of a $36-billion undertaking to ship LNG from the West Coast to energy-thirsty customers in Asia.

But Pacific NorthWest LNG warned Wednesday that pipeline and terminal engineering costs estimated so far make the Canadian LNG project uneconomic, especially against a backdrop where the Malaysian energy giant needs to scrutinize capital spending because it is being hurt by plunging oil prices.

In postponing the project decision, Petronas may be seeking to squeeze prospective suppliers' bids on the project in hopes of nudging the project closer to being launched. Still, the delay raises the possibility that another major resource project in Canada could be sidelined, following a string of planned oil pipelines that have run into political and environmental opposition.

The window of opportunity for LNG exports from Lelu Island is closing, Pacific NorthWest LNG president Michael Culbert said in an interview. "We have LNG cargoes that are committed for early 2019 and it is important to keep them on track," he said. "Canada has to be competitive with U.S. supplies."

Mr. Culbert declined to specify a new target date for a final investment decision, which had been set for mid-December. Industry observers say it could take until the early spring of 2015 for a decision, though any further delays will place the project at risk of being suspended.

Despite the challenges, Mr. Culbert said the project located near Prince Rupert could still get the go-ahead. "We need every piece of the cost component nailed down," he said.

Pacific NorthWest LNG selected three global engineering contractors in May, 2013, to take part in a competitive process for the LNG project's front-end engineering and design, or FEED.

The bidders are San Francisco-based Bechtel Group Inc., and two joint ventures – the KBR Inc. and JGC Corp. team and a group comprising Paris-based Technip, Samsung Engineering Co. Ltd. of South Korea and China Huanqiu Contracting & Engineering Corp.

The Technip-led group, calling themselves the West Coast LNG Partnership, even has a storefront in Prince Rupert on the same street as Pacific NorthWest LNG's office in the northwest B.C. community. KBR is based in Houston and JGC has its head office in Yokohama, Japan.

An estimated $3.4-billion of the project's construction costs are to be spent in Canada, mostly in British Columbia, while the remaining $8-billion would be imported goods and services, according to regulatory filings.

The FEED selection process over the past 18 months had been slated to produce a winning bid as early as Sept. 30, but Petronas doesn't like what it sees so far in a project that would produce 12.8 million tonnes annually of LNG. The project is to be split into two "trains," or the liquefaction stage that turns natural gas into a liquid through super-cooling technology.

Pacific NorthWest LNG risks missing out in the global race, especially with U.S. LNG export projects looming, Petronas chief executive officer Shamsul Azhar Abbas said.

Mr. Shamsul credited the B.C. government for introducing an LNG income-tax regime that is competitive and also praised new rules for buying carbon offsets and welcomed support from key aboriginal groups, but he noted that construction costs are a major concern.

To transport natural gas from northeast B.C. to Lelu Island, TransCanada Corp. is proposing to build a $5-billion, 900-kilometre pipeline project named Prince Rupert Gas Transmission. "PRGT continues to work with all of our contractors to refine capital cost estimates and to reflect changes we have made to the PRGT route," TransCanada spokesman Trevor Halford said in a statement.

The Canadian Environmental Assessment Agency is slated to rule on Pacific NorthWest LNG in mid-2015.

Pacific NorthWest LNG estimates that $36-billion will need to be spent in order to make its planned exports a reality in 2019. The massive budget includes roughly $6.7-billion in pipeline projects and $11.4-billion for the export plant at Lelu Island. The overall figure factors in Petronas's $5.2-billion acquisition of Progress Energy Canada in 2012, and accounts for at least another $12-billion related to drilling and natural gas production in northeastern B.C.

State-owned Petronas holds a 62-per-cent interest in Pacific NorthWest LNG. The four partners are China's state-owned Sinopec, whose formal name is China Petroleum & Chemical Corp. (15 per cent), India's state-run Indian Oil Corp. Ltd. (10 per cent), Japan Petroleum Exploration (10 per cent) and Petroleum Brunei (3 per cent).

Globe and Mail