By Ng Weng Hoong
New Canadian Media
Special to The Post

British Columbia Finance Minister Mike de Jong’s recent visit to Malaysia yielded a Facebook photo-op with Prime Minister Najib Abdul Razak and a misreported story that state energy firm Petronas and its five Asian partners would begin construction of their US$36 billion liquefied natural gas (LNG) project in northern BC this September.
In the reporting of de Jong’s press conference, Malaysian news agency Bernama did not make clear that the project must first receive Ottawa’s environmental approval, due sometime between September and December, before the Petronas-led Pacific NorthWest (PNW) LNG – not the British Columbia government – can make its final investment decision.
The BC finance minister’s comment, “may have been taken out of context,” in the Bernama story, said de Jong’s spokesperson, Jamie Edwardson, in an e-mail to New Canadian Media. Edwardson underlined the importance of the environmental assessment process before the project can go ahead.
Where the $7,900 trip delivered immediate value was in giving de Jong and his chief of staff a front-row feel of Malaysia’s increasingly turbulent politics and weakening economy, which analysts say could seriously delay, or even halt, Petronas’s proposed high-cost venture to process and liquefy natural gas in Canada for export to Asia.
De Jong left for Putrajaya on July 25, four days after the British Columbia legislature passed what Premier Christy Clark called a history-making Liquefied Natural Gas (LNG) Project Agreements Act to entice PNW to invest another $30 billion to build a gas processing plant near Prince Rupert – a network of pipelines, support infrastructure and field development work. In order to feed the proposed LNG plant on Lelu Island, Petronas – PNW’s 62 per cent owner – has already invested US$5.9 billion through its 2012 takeover of Calgary-based Progress Energy for its rich gas reserves.
After an eight-day debate, the BC Liberal government passed Bill 30 to give the consortium a 25-year guarantee on costs related to royalty rates, tax credits and carbon emissions.

A difficult decision for Petronas

While the opposition New Democrats, supported by the Green Party and other critics, denounced the new act as a ‘sell-out’, Kong Ho Meng, a senior oil and gas analyst at UOB Kay Hian Securities in Kuala Lumpur, says the terms may not fully reflect investor risk in such a high-risk greenfield project.
“The perception in Malaysia is that Canada is expensive for business,” Kong told New Canadian Media. “In addition to high tax rates, oil and gas companies face strong environmental and Aboriginal opposition. These hurdles are making it difficult for Petronas to make the final investment decision.”
Citing ExxonMobil, Shell and Chevron, Kong explains the oil and gas industry is in retreat now as it faces the prospects of low prices and high operating costs for the next few years. Shell and Chevron have announced large job cuts following a sharp plunge in the latest quarterly profits.
“Today’s oil price downturn could last for several years, and Shell’s planning assumptions reflect today’s market realities. The company has to be resilient in today’s oil price environment,” Shell’s CEO Ben van Beurden said last week.
Kong said Petronas faces the same predicament as the majors, but is under greater pressure as a state-owned firm to invest locally and to reduce capital expenditures for projects abroad.
He added that as the unofficial national bank for the commodities-dependent Malaysian economy, Petronas has the additional role of protecting the country’s financial stability. Most Malaysians have painful memories of how speculators destabilized their country by crashing the economy and currency during the Asian Financial Crisis of 1997-98.

History repeating itself

Memories of the crisis have returned to haunt the country in recent months as a major financial scandal involving Prime Minister Najib in an alleged theft of US$700 million of state funds has left his supporters and opponents digging in for a drawn out struggle.
Shortly after meeting the BC finance minister to discuss the LNG project and economic matters, Najib fired Deputy Prime Minister Muhyiddin Yassin, along with four cabinet ministers and the attorney general, for trying to investigate the alleged theft.
The bitter fall-out between the two top leaders mirrors the 1998 clash that led then Prime Minister Mahathir Mohamad to order the arrest of his former deputy, Anwar Ibrahim. Malaysia has not recovered from that clash.
Amid the latest power struggle, the Malaysian ringgit plunged to a 17-year low of 3.85 against the US dollar as investors took money out of the country (also referred to as capital flight).
The Islamic State’s entry into Malaysia is a new source of threat to the country’s political stability, as is the rising tension between the country’s Muslim majority and minorities of other religions.
As happened during the last two major financial crises in 1998 and 2008, Malaysia’s foreign exchange reserves quickly fell below the psychological US$100 billion level.
“Capital flight is a huge concern now,” said Kong. This could influence Petronas’s decision on the PNW project, as the investment will require a massive outflow of funds from Malaysia just when the ringgit needs to be defended.

Diminished prospects for BC LNG projects

If the LNG markets remain depressed, Kong said Petronas may have to shelve its Canadian venture to focus on its natural gas projects in the eastern Malaysian state of Sarawak and an oil refinery-petrochemical complex in Johor state.
On the Canadian front, BC’s proposed 20 LNG projects, including PNW, have diminished prospects as a result of the prolonged weakness in oil and gas prices, and the increase in supplies from other parts of the world, according to three separate studies by the London-based Carbon Tracker Initiative (CTI), the International Energy Agency and the Oxford Institute for Energy Studies.
CTI’s analyst, Andrew Grant, said he believes Petronas wants to press ahead with the PNW project, but faces increasing financial and economic constraints.
“We see the project as challenged given the economics and current oversupply in the LNG market, which may last for several years given the amount of new supply either recently built or currently under construction,” Grant told New Canadian Media.
According to CTI’s financial modeling, the PNW project will not be needed in the 2015-35 period, undermining BC’s hopes for building a future LNG economy.

This article first appeared on newcanadianmedia.ca.