Resource World Magazine

a u g u s t / s e p t e m b e r 2 0 1 5 www.resourceworld.com 55 the oil patch report B r u c e L a n t z "iF it sOunDs tOO GOOD to be true then it likely is." Those banking on British Columbia's ambition to become an LNG (liquefied natural gas) powerhouse would do well to keep this old adage in mind. To be sure, on paper, LNG sounded like a good bet when it was touted as the province's economic salvation a few years ago by BC Premier, Christy Clark, who has since bent her government over back- wards to accommodate LNG proponents with favorable taxes, royalty regimes and carbon terms. All that in search of what Clark originally said would be overseas contracts fetching $17 per million British thermal units (BTUs) and an industry that would create tens of thousands of jobs during construction and afterward as the plants became operational, with revenues flowing to government that would wipe out the province's debt, perhaps enable the elimination of the provincial sales tax and create a 'Prosperity Fund' to bankroll pub- lic projects. Many in the industry agreed with her optimism, leading to what are now 19 different proposals for construction of LNG facilities and pipeline infrastructure on the province's west coast and in its gas-rich northeastern corner, led by the Pacific NorthWest LNG venture of major- ity stakeholder Petronas [PTG-MK], the Malaysian energy giant and other Asian partners, with Royal Dutch shell [RDS.B- NYSE] and exxonMobil [XOM-NYSE] not far behind. But, as yet, none have made a Final Investment Decision (FID) although Pacific NorthWest LNG has made what they're calling a conditional investment decision to proceed. But dark clouds are peering out from this silver lining. The crude crash that started last year has pushed spot prices down to $7.60 per million BTU in Japan and $5 per million in China, countries considered to be major markets for LNG. Plus, Canadian LNG projects rank with Australia's as the most expensive in the world so why, one might ask, would investors continue to look here instead of elsewhere, where it's cheaper? And, with the best guess at startup for the first BC project being 2019, the timing couldn't be worse as experts are forecasting a glut on the market starting in 2020 and lasting until at least 2025. Several other factors may also come into play, for Petronas at least. Former Petronas CEO, Shamsul Azhar Abbas, ousted after confrontations with Malaysian Prime Minister, Najib Abdul Razak, said late last year that the project must begin shipping by 2019 or face a deferral of 10-15 years due to market conditions. And the prime minister, PNW LNG's biggest supporter, is fighting for his political life over allegations of financial mismanagement of billions in government funds. Would the government and Petronas, which suffered a 39% drop in first quarter net profits this year, continue to support the project if he is ousted? PNW LNG partner sinopec [SNP.N- NYSE], which holds a 15% stake in the project (along with indian Oil Corp.'s IOC-NSE], 10%, Japan Petroleum exploration's [JPTXF-NASDAQ], 10%, and Petroleum Brunei's 3%) and Indian Oil have agreed to buy from PNW LNG for 20 years, but those agreements are contingent upon Petronas making a FID and both are eyeing easier and cheaper deals elsewhere in the world. Additionally, Petronas admits they underestimated the extent of environmen- tal and First Nations opposition to their project, which they originally planned to ram through in five years. They couldn't entice support from the Lax Kw'alaams First Nation, whose 3,700 members unanimously rejected the PNW LNG's $1.15-billion offer for the right to build the project over their aboriginal lands and fishing grounds and are threatening legal action to protect the environment. And, after Petronas paid $6 billion to buy northeastern BC's Progress Energy, they encountered opposition to the construction of a pipeline to carry natural gas westward from the Blueberry First Nation. Also, West Moberly First Nation Chief, Roland Willson, has said the government can have either the Site C hydroelectric dam, which looks like a go, or LNG "but not both". It's difficult to see why, facing so much uncertainty, that everyone from those in the industry to real estate developers, retailers and more would bet their futures on LNG. It's hard to fathom why those who run multi-billion-dollar firms persist in play- ing long shots. But perhaps banking on the future, even when it seems uncertain, is just the nature of doing business in the turbu- lent oil and gas industry. Meanwhile, the province passed legisla- tion that allowed it to enter into an agreement with the consortium to build an export ter- minal near Prince Rupert. Michael de Jong, BC's finance minister, has been in Malaysia discussing ratification of the project agree- ment with Pacific NorthWest LNG. n British Columbia lnG development – no easy ride The Honourable Christy Clark, Premier of British Columbia.

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