Why Petronas is out of step with Premier Clark's LNG dream

Last week, the CEO of Malaysian LNG mega-producer Petronas warned that the company would likely not proceed with its proposed $11B LNG plant in Prince Rupert.  It's total hoped for investment in B.C., including gas plants and pipelines, exceeds $36-billion.

Mr. Abbas chided the B.C. government for the “lack of incentives” supporting his company’s project and hinted that BC’s glacial pace of regulatory approvals had lost it the race to supply Asian LNG markets.

Similarly, Apache Corp. jettisoned its stake in a large-scale LNG plant in Kitimat, leaving Chevron looking for a replacement partner and threatening to exit if it doesn’t find one.  Gas-driller Encana announced it is selling its gas plays in the Barnett shale formation.

In the almost three years since Premier Clark declared B.C.’s LNG industry “the opportunity of a lifetime” - not a single LNG project has reached the “Final Investment Decision” commitment point.  It leaves the B.C. government looking silly, as both the Canada West Foundation and the Canadian Centre for Policy Alternatives warned last year.

You may well ask why this widespread reluctance to commit to LNG. Bargaining tactics may be one reason, but look no further than the landed price of LNG in Asia for a more pressing reason. 

The Asian spot market price has plummeted from the dizzy heights of $18.50 per million British Thermal Units (mmBtu) in 2012 to its current level below $11/mmBtu - a level which, if sustained, would yield very slim pickings indeed for these companies, that have far richer veins of opportunity to tap with their scarce capital.

Industry experts think that $10/mmBtu is the break-even pricing for Asian LNG i.e. no profits!  Though longer-term contract prices are higher, customers are reluctant to sign these in a marketplace with rapidly declining prices.

It should be no surprise to any BCer that commodity prices fluctuate, sometimes very rapidly, and that investment decisions in commodity industries usually reflect a longer-term view of the prospects of a favourable average price over the lifetime of an investment decision.

But here’s the rub!  For several reasons, the market expects an LNG over-supply situation to persist in the Asian market for the next 10-15 years, until some of those older LNG plants wear out.

These reasons include:

• the rash of new LNG export facilities coming onstream.

• Russia’s 30-year, $10/mmBtu pipelined gas deal with China (no liquefaction required);
• the prospect that Japan will turn its nuclear reactors back online, and;
• a general slowing of China’s growth;

This is why Petronas’ CEO also talked of BC needing to park its plans for 10-15 years to await better market conditions.

Because Petronas owns large slices of gas drilling rights in BC’s Montney shale formation  - thanks to its NEB-approved acquisitions of Progress Energy and Talisman – there’s little the BC Government can do to force Petronas to “rip it and ship it” anytime soon. 

The consequences of all this for BC’s economy are indeed significant:

• No $100 Billion heritage fund.  This bonanza was to be derived from the LNG Income tax – a skinny 7% on the profits of the five (or so) large LNG plants expected to export roughly 82 million tonnes of LNG annually for the next 25 years.  The tax on profits was to commence after the five projects had written off their huge capital costs – estimated by BC at an optimistic $1,200 per tonne of LNG capacity (a total capital investment of about $100 billion or roughly  $1/ mmBtu produced).  Doing the math on the BC budget numbers of a predicted annual $240 million tax haul on the profits of a notional 12 million tonnes per annum (MTPA) plant, that haul implied a profit margin of around $6/ mmBtu. That number seems wholly unattainable in the current virtually-breakeven Asian market. The tax-haul number was in any case very optimistic, as these companies typically use transfer pricing to offshore tax-havens to minimize local taxes

• No 100,000 jobs in the “generational opportunity” LNG industry.  That number, concocted in the heat of the 2013 provincial election campaign, was always suspect, as it somehow contrived to convert 2,400 direct LNG jobs in the five (or so) LNG plants into 100,000 direct, indirect and “induced” jobs for British Columbians.  Respectable economists would blush at such multipliers. Even 2,400 direct jobs is 36% higher than Australia’s actual employment experience in that country’s LNG plants;

Judging by this week’s throne speech, Mr. Abbas’ considered economic judgment - that BC’s window of opportunity for LNG will be 10-15 years from now - has yet to fully register with Victoria.

As soon as Victoria finally gets the message, it does seem that BC will just have to park its LNG pipe-dream for now, leave the gas in the ground, abandon boom and bust and frame a 21^st-century industrial vision.

Then, a much-improved education system and the ingenuity of its citizens to create new business opportunities will propel BC toward a thriving, diversified, sustainable economy. 

Given a great deal more foresight, business-savvy and support from government than it has shown in this LNG debacle, BC business leaders are perfectly capable of delivering on that vision.

Eoin Finn is a Bowyer Island resident with a PhD in chemistry, and an MBA.

Bowyer Island resident Eoin Finn at Squamish Council in July - photo by Mychaylo Prystupa