Canada Dodges Australia’s Boom-and-Bust Disaster with Petronas Cancellation
Look no farther than Australia for evidence that Canada dodged an economic bullet when Malaysian state oil company Petronas pulled out of its C$36-billion liquefied natural gas (LNG) project in British Columbia, advises former Unifor economist Jim Stanford, now affiliated with the Australia Institute’s Centre for Future Work in Sydney.
While Australia moved quickly several years ago when natural gas markets appeared to be headed toward long-term growth, Canada’s more deliberate regulatory process provided an essential check and balance, Stanford states. “Those rules likely saved us from wasting tens of billions of dollars on the biggest white elephant in Canadian history,” he writes. “In effect, Canada’s regulatory and fiscal processes function as an opportunity for sober second thought—like an economic Senate. And in this case, sobriety was desperately needed.”
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With gas prices above $15 per million British Thermal Units (MMBTU) in 2009, then again in 2012, “gas producers everywhere salivated,” he recalls. “But in Australia’s case they could act on that greed quickly. Several massive LNG projects were built, virtually simultaneously, all aiming to cash in on premium Asian prices.” The result: A$200 billion spent on LNG projects, including three built simultaneously on the same island in Queensland.
“The impact of this mayhem on construction costs was both enormous, and predictable. The mother of all cost overruns was racked up at Chevron’s Gorgon plant offshore Western Australia. Its final price tag (a whopping $72 billion) was almost 50% over budget.”
That level of economic activity drove up inflation, interest rates, and currency values, leading to a “massive deindustrialization” that included the shutdown of Australia’s entire auto sector. And meanwhile, Asian gas prices fell by two-thirds, driven largely by the incredible amount of new capacity coming online.
“All the plants are bleeding red ink; writedowns already exceed $10 billion for the Queensland plants,” Stanford writes. “With construction work done, just a few hundred workers remain to operate the plants. One-time boomtowns have been left with a massive hangover, including collapsed housing prices.”
Meanwhile, domestic gas prices have more than doubled, and under the “sweet royalty deals” it negotiated with the companies, the Australian government isn’t entitled to a revenue share until the projects’ massive capital costs are paid off.
Last week, a Reuters dispatch from Kuala Lumpur detailed Petronas’ plan to “prioritize domestic projects, a pressing need for Malaysians frustrated with rising costs, unemployment, and a deflated currency.” Although Canadian fossil analysts and politicians were quick to blame domestic regulations and taxes—not to mention the previous week’s swearing-in of an NDP government in B.C.—for the Petronas cancellation, it’s clear from the Reuters account that the state-owned company has bigger problems closer to home.
“In 2016 Petronas announced widespread job cuts, its first ever of that scale, and also said it would cut spending by US$50 billion over a four-year period,” the news agency noted. “Dividends from the company, which accounted for about 12% of the Malaysian government’s revenue in 2015, have also shrunk. Petronas is expected to give a dividend of 13 billion ringgit (C$3.82 billion) this year, half of the 26 billion ringgit contributed just two years ago.”
But this week, Petronas was still looking to its holdings in B.C.’s Montney region to make it a leader in North American natural gas production, Business in Vancouver reports via industry news outlet JWN Energy.
“When Petronas acquired Alberta’s Progress Energy in 2013 for $5 billion, it acquired an asset that has value, even without access to an Asian export market via LNG,” notes reporter Nelson Bennett. “Through that acquisition, as well as the $1.5-billion acquisition of Talisman Energy’s Montney assets, Petronas now has the second-largest position in B.C.’s Montney formation, which is rich in propane and other natural gas liquids.”