(EnergyAsia, December 4 2014, Thursday) — With oil prices at a five-year low and falling, Malaysia’s state energy firm Petronas is under financial and domestic political pressure to delay either the final investment decision (FID) or the project start-up date, or both, of its proposed liquefied natural gas (LNG) plant in Canada’s British Columbia (BC) province. Petronas had earlier set a mid-December deadline to announce its decision for the construction of a C$9-to-$11 billion LNG export terminal on Lelu Island near Prince Rupert. (US$1=C$1.13).
The Canadian authorities have largely ceded to the company’s needs for the project’s environmental approval, tax clarity and the support of a key aboriginal group in the construction of a major pipeline to deliver natural gas to the terminal, all located in a pristine wildlife-rich part of the country. Talks between the two parties have reached crunch stage with the burden of expectations now firmly on the shoulders of the Malaysians who only recently had threatened to cancel the project if their demands were not met.
Right after announcing a deflating set of third-quarter results on November 28, Petronas CEO and president Shamsul Azhar Abbas flew to Vancouver to meet with BC Premier Christy Clark and natural gas minister Rich Coleman with the stated intention to make progress on the proposed project. Mr Coleman was in Kuala Lumpur weeks earlier to meet Petronas for the same reason.
While Mr Shamsul told reporters that the company was “75%” ready to make the investment, the odds are lengthening against it making a quick decision that would allow it to start work next year in time for the LNG plant to begin operating in late 2018.
The 40-year company veteran faces growing pressure to delay the project’s FID right after he had told the Malaysian government to expect an unprecedented 37% cut in the company’s dividend pay-out next year if Brent crude oil price averaged US$75 a barrel.
After announcing a 12.4% drop in third-quarter net profit on the back of falling oil and LNG prices, he warned that Petronas, which contributes more than half the Malaysian government’s revenue, profits would continue to face financial pressure next year. (US$1=RM3.43).
The company said it may have to slash up to 20% of its capital expenditure next year, with proposed projects in Malaysia that have yet to receive final investment decision (FID) approval likely to be delayed or cancelled. The announcement, along with the collapse in oil prices, caused oil and gas share prices on the local stock exchange to crash.
Amid the global economic slowdown, local businesses are wondering if Petronas should focus more of its investments at home.
The Malaysian government announced last year that it expects Petronas and its 38% minority consortium partners to invest a total of C$36 billion to develop an integrated project in Canada comprising an LNG plant, natural gas fields and pipelines. (US$1=C$1.13). China’s Sinopec, Indian Oil Corp, Petroleum Brunei and Japan’s Japex are Petronas’s partners in the PacificNorthWest LNG project.
The company’s third quarter results briefing coincided with the general assembly of Malaysia’s powerful UMNO ruling party and OPEC’s meeting in Vienna. Both events held financial implications for Petronas, dubbed the unofficial national bank of Malaysia for its role in keeping the country’s economy afloat.
UMNO, which represents 3.2 million of the country’s estimated 18 million Malays in a multi-ethnic 30-million population, has led the ruling coalition since Malaysia’s independence in 1957. The party’s right-wing is demanding the government to step up aid and welfare spending on the nation’s Malay-Muslim population. Set up in 1974, Petronas has a long history of being tapped for funds to finance corporate bail-outs, large projects and social programmes championed by UMNO’s politicians.