(EnergyAsia, May 29 2015, Friday) — In signing a much-awaited memorandum of understanding (MOU) and two major agreements with Pacific NorthWest LNG (PNW) on May 20, the British Columbia government made good its promised support for the company’s proposed project to produce liquefied natural gas (LNG) in northern BC for export to Asia.

The documents also sent an important secondary message that the provincial government has bent over backwards to accommodate the company’s demands after a public bout of complaints and threats. Amid critics’ outcry of a sell-out, Premier Christy Clark boldly locked in provincial royalties, taxes, regulations and carbon terms for decades to entice PNW to invest another C$30 billion to launch the LNG project that includes an export terminal near Prince Rupert. Malaysian state energy firm Petronas, which owns a 62% stake in PNW, has already invested C$6 billion through its 2012 acquisition of the project’s upstream assets held by Progress Energy. (US$1=C$1.20).

Despite the media hype, the MOU that Clark and Michael Culbert, PNW’s President, signed at the Fairmont Waterfront Hotel in Vancouver makes no promise of an impending investment. Instead, it “sets the steps leading toward ratification of a project development agreement (PDA)” between the BC government and the company. Finance Minister Michael de Jong inked the PDA to “initiate a ratification process” by the company and the BC Legislature while natural gas minister Rich Coleman signed the province’s long-term royalty agreement.

“Today reflects the beginning of the company’s final decision path toward an investment decision,” said Clark, sounding convinced that the company will soon clear environmental, First Nations and commercial obstacles to greenlight the project’s final investment decision (FID). Thousands of high-paying jobs will follow as the province transforms into a major LNG producer, she predicted.

Two days later at a press conference in Kuala Lumpur, Petronas CEO and President Wan Zulkiflee Wan Ariffin responded with a brief comment that he was ready to make a “conditional” FID in June. The company has already missed two deadlines for last December and March this year to decide on the investment.

A “conditional” FID may look like progress but could also be more fancy footwork to kick the proverbial can down the road owing to increasingly difficult challenges requiring aboriginal consent, environmental clearance and shareholder approval. Zulkiflee made his “conditional FID” promise after announcing a 39% year-on-year drop in the company’s first quarter net profit and a 21% decline in its revenue.

The sobering reality is the PNW LNG project today faces greater barriers and uncertainties than a year ago when Zulkiflee’s predecessor, Shamsul Azhar Abbas, began to grasp the magnitude of his overreach to develop natural gas reserves, pipelines and a large LNG terminal in BC all within five years. Company insiders confirmed to this reporter that they had under-estimated the extent of environmental and First Nations opposition to fracking, and oil and gas pipeline projects in BC. Also, like most in the industry, they had not anticipated the crippling effects of the oil price collapse of 2014. Political developments in Malaysia and China could add a few more black swans to halt the project’s progress.

Shamsul’s nerves showed in his May 21 2014 speech to 1,000 energy executives at the Vancouver Convention Centre when he warned BC not to “slaughter” the LNG goose. Four months later in an angry interview with the Financial Times, he told Canada to “buck up” if it wanted to be taken seriously as “a credible global LNG player”. Or else, he threatened, Petronas would pull out altogether. If that happened, it would all be Canada’s fault.

The BC and Federal governments wisely avoided a public retaliation. Instead, they quietly worked on building from scratch the framework and details for tax, regulatory and cost certainty demanded by the Malaysian firm that led to last week’s MOU.

“Today’s event was all about PNW LNG because we want to tick off the checklist of items mentioned last year to satisfy Petronas’s demands,” said Coleman in a brief interview after the signing ceremony. If Petronas decides not to trigger the FID, it would have a near impossible task pinning the blame on the BC government. Indeed, the detailed package covering royalty, tax and carbon costs firmly puts the onus on the Malaysian firm and its partners — China’s Sinopec (15%), Indian Oil Corp (10%), Japan Petroleum Exploration Company (10%) and Petroleum Brunei (3%) — to decide if they really want to proceed.

The prospects of building a greenfield LNG project around the world have worsened over the past year. Oil and gas prices are likely to stay low after crashing by half to force Petronas to slash capital expenditures by 10-15% over the next two years. The hydrocarbon-dependent Malaysian economy is at risk of a costly credit downgrade while its current account surplus threatens to slip into deficit and the local currency could further weaken from its recent six-year low against the US dollar.

Shamsul’s term was not renewed in March following embarrassing open clashes with his boss and PNW’s biggest supporter, Malaysian Prime Minister Najib Abdul Razak, who himself is now fighting for political survival over allegations of financial mismanagement of billions of dollars in state funds. It was Najib who announced the project’s massive C$36 billion price tag, the equivalent of 10% of Malaysia’s GDP, to a surprised Prime Minister Stephen Harper who was visiting Southeast Asia in 2013. Will Petronas or the Malaysian government continue to support PNW’s high-risk project if Najib is no longer the Prime Minister?

Starting his term on April 1 with a shrunken budget, Zulkiflee is under pressure to cut down or delay projects deemed too costly and troublesome for the company’s stretched management. Zulkiflee made his first move by approving PNW’s offer to pay US$1.15 billion to the 3,700-member Lax Kw’alaams First Nations group over 40 years for the right to build the LNG project over their property and ancient fishing grounds. Despite some calling it a generous “game changer”, the sum offered was insignificant as it amounts to less than C$8,000 per person per year. Furthermore, with no allowance for increases to reflect future inflation and population growth over the 40 years, the offer was likely doomed from the start. In the end, Lax Kw’alaams members unanimously rejected it on the grounds that the project would destroy their way of life and the environment, dealing the Petronas chief a stinging public rebuke after just over a month in office.

Meanwhile, back in Malaysia, Zulkiflee has delayed the start-up of Petronas’s prized US$16-billion investment in a refining and petrochemical complex in Johor state by at least six months. As he reduces the company’s dividend payments to Malaysia’s cash-strapped government and squeezes well-connected local contractors for discounts, he will be hard-pressed to defend spending billions of dollars on a difficult, possibly unviable project in a faraway land.

Indeed, if he needs further reason to conditionally approve — effectively delay — the FID, he could cite two separate independent studies released this month casting doubts on the viability of Canada’s LNG export ambitions. A report jointly funded by the Vancouver Foundation and the Canadian Centre for Policy Alternatives said the BC government has exaggerated the size of the province’s natural gas deposits to support large-scale LNG exports. The report, written by one of Canada’s leading energy analysts, David Hughes, said the country’s gas production is declining, and LNG exports could threaten its energy security and water supply.

In her report for the Oxford Institute for Energy Studies, Senior Visiting Research Fellow Ieda Gomes said she does not expect Canada to launch any major LNG project before the middle of the next decade.

“Industry analysts expect only one to three BC LNG projects to be operating by 2025. The market outlook for Asia is still uncertain,” she wrote. Also, Canadian projects, requiring the equivalent of crude oil prices at US$76 to $90 a barrel, are expensive when compared to their rivals in the US.

Another likely source of concern, not widely discussed, is the commitment of two of PNW’s cornerstone shareholders, Sinopec and IOC, who have each agreed to buy LNG from the proposed 12-million tonne/year plant for 20 years. As part of their agreement to invest in PNW LNG in 2014, Sinopec committed to buy 1.8 million tonnes of the fuel per year while IOC will import 1.2 million tonnes, but the deals are contingent on Petronas making the FID call. The two companies are in no hurry to invest in Canada as they have the luxury to pick up easier and possibly cheaper deals in other parts of the world.

On May 4, Sinopec appointed a new chairman to reform the company amid talks that it might be broken up or merged with parts of China’s other two state-owned oil giants, CNPC and CNOOC. Apart from turning in poor performances since the oil price collapse, the Big Three have been targeted in Beijing’s crackdown on corruption that has led to the arrest of scores of industry officials. China is also losing interest in Canada’s resource sector as it looks to Russia, Central Asia, Africa and Latin America where it enjoys better political ties.

In IOC’s case, LNG was conspicuously missing or underplayed during Indian Prime Minister Narendra Modi’s high-profile visit to Canada in April. Amid the LNG price collapse, India is spoilt for choice to increase long-term import volumes through existing contracts with Qatar and Australia while it pursues talks to develop new overland supply lines with Russia, Turkmenistan and even Iran, which could soon be free of trade sanctions imposed by the West.

These developments are leaving Petronas increasingly isolated — and looking quixotic — in its quest to launch BC’s LNG industry. The company’s attempts to sell down its 62% stake in PNW LNG to 50% have stalled since the last deal was concluded with Sinopec in April 2014.

Rather than clarify the situation, Petronas’s offer to make a conditional FID could set the stage for further negotiations and uncertainty. As the company continues to struggle with the stalled project, Clark’s seeming generosity becomes understandable. It might help shield her government from blame if Petronas decides to “conditionally approve” — further delay — the project.