(EnergyAsia, October 22 2013, Tuesday) — At their recent joint press conference in Kuala Lumpur, Malaysia’s Prime Minister Najib Razak surprised his visiting Canadian counterpart by announcing that state-owned Petronas would be making a “gargantuan” C$36 billion investment to develop an export-oriented liquefied natural gas (LNG) project in British Columbia province. (US$1=C$1.03).

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 the project’s numerous parts must grind through Canada’s tough approval process, the C$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 size of the last estimate given by Petronas in June, was likely not in the script as Mr Harper was officially in Kuala Lumpur to sign less exciting bilateral agreements on security cooperation and tax issues. Until the press conference, his two-day stopover trip while en route to the Asia Pacific Economic Cooperation (APEC) summit in Indonesia had been largely overshadowed by the simultaneous presence of Chinese President Xi Jinping in the Malaysian capital.

The Canadian delegation together with its media too were caught off-guard by Mr Najib’s impromptu announcement as they scrambled for details of what would amount to the largest single foreign direct investment project in their 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.

In an email reply to EnergyAsia last week, a Pacific NorthWest LNG spokesman said the C$36 billion figure counted Petronas’s C$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 C$9 and $11 billion liquefaction plant and export terminal, a C$5 billion gas pipeline to Prince Rupert, and C$14 billion in additional resource development work that counts new wells, processing facilities and an extension of the Nova Gas Transmission Limited (NGTL) system. The fate of these C$30 billion worth of additional investments has yet to be decided as Petronas and whoever it partners are only expected to make a final investment decision on the project by end-2014.

But why let the lack of details spoil an opportunity for harmless political gain?

The C$36 billion figure provided the sweetest moment for the Harper government to announce 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 been much less successful venturing 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% stake in a consortium that has been struggling against rising cost and environmental opposition since 2007 to develop LNG from coalbed methane gas.

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

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

To realise the full potential of Progress Energy’s assets, Petronas, which provides 45% 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 US$9 billion and US$11 billion to build two liquefaction plants on Lelu Island near Prince Rupert port on the British Columbia coast, and another US$5 billion in a 750-km-long gas pipeline. This brings the company’s additional projected spending in Canada to between US$14 billion and US$16 billion.

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

Clearly, this would carry too much risk for a company which reported a profit of just 59-billion ringgit (US$18.6 billion) last year and whose cash-flow is under increasing pressure from rising cost, declining oil exports and weak commodity prices. The most viable option would be for it to sell off a significant portion of its Canadian project that would at once reduce the financial risk while at the same time ensuring the company still has access to a new source of gas supply.

Mr Shamsul, who was appointed in 2010 to reform Petronas, 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 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, sharply reducing the country’s oil exports.
Over the same period, the country’s natural gas reserves plunged nearly by half from around 2.5 trillion cubic metres (tcm) to 1.3 tcm, depleted by a 35% surge in production from 48.3 billion cubic metres to 65.2 bcm and a 27% rise in domestic consumption from 26.2 bcm to 33.3 bcm.

While it is actively exploring deepwater and marginal fields at home and making deals in Africa, the Middle East and Latin America, Petronas is increasingly looking to the First World environment of hydrocarbon-rich Australia and Canada for stable long-term growth.

After years of enduring poor returns and high risk, it appears to be losing appetite for energy deals with developing countries that were largely driven by former Prime Minister Mahathir Mohamed who stepped down in 2003 but remains influential in the country’s affairs.

In Africa, the company’s upstream ventures into Mozambique and Mauritania have yielded marginal successes at best while attempts to sell off its 80% stake in South Africa’s troubled refining and retail company Engen Petroleum Ltd have met with lukewarm response.

In Latin America, Petronas is trying to back off from a proposed Venezuelan project to jointly produce 200,000 b/d of heavy crude after falling out with local partner state PDVSA. It is also delaying the completion of a proposed US$850-million purchase of a 40% share in Brazil’s OGX Petroleo e Gas Participacoes, which is in desperate need of cash.

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 bottomline. Talks to invest in Iran have largely dissipated amid the West’s tightened trade sanctions against the Islamic regime.

Petronas’s 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 depleting oil and gas reserves.

Malaysia is bracing for tougher economic conditions ahead, with growth expected to drop from 5.1% last year to 4.7% this year and 4.9% 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% of GDP, the highest level of any country in Southeast Asia. The pressure on Petronas to fund Malaysia’s welfare programmes amid growing tensions between its ethnic groups is set to intensify.

In protecting the company’s RM300-billion investment budget, CEO Shamsul has had to resist pressure from powerful politicians to sponsor pet projects and raise Petronas’s dividend payments to the government. Since its formation in 1974, the company been called upon numerous times to bail out expensive failed projects as well as fund welfare programmes, in addition to the RM30 billion dividend that it now pays the government every year.

The company’s thinly stretched top management is also being tasked by the government to develop an ambitious RM60-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 end-2017 owing to implementation problems on the ground and poor support from local state agencies.

As recent as last year, Mr Shamsul threatened to resign in an interview with the Financial Times as his attempts to reform the company, dubbed Malaysia’s unofficial national bank, continue to meet political resistance.

As evidence of the pressure on Petronas’s resources, its dealmakers began trying to sell off part of the company’s Canadian LNG project to other investors even before it had completed the acquisition of Progress Energy.

In March, three months after Ottawa approved the takeover, Petronas succeeded in selling a 10% stake in the project to Japan’s second largest upstream company, JAPEX.

But its attempts to sell off shares to other Asian companies are likely to prove more difficult and could slow down the project’s progress.

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 into Canada’s resource sector. China is also aware that most Canadians deeply opposed CNOOC’s controversial acquisition of Nexen Inc last year.

Further dampening interest in Canada, CNOOC has been criticised by its shareholders and Chinese officials for supposedly overpaying for the acquisition. Beijing’s current crackdown on corruption in the country’s oil and gas industry will also put the brakes on new M&A activities abroad.

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 last week’s World Energy Congress in South Korea, CEO Jang Seok-hyo said the company could sell up to 10% of its stake in the 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 its 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 (KNOC), 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 from buying up their country’s oil and gas resources.

Today, the concerns have swung 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” C$36-billion investment prize.