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Petronas wants engineering work for B.C. LNG venture to be shifted offshore

A rendering of Pacific NorthWest LNG’s proposed export terminal on Lelu Island, near Prince Rupert in northwestern British Columbia.

Pacific NorthWest LNG

Petronas plans to push contractors to shift more engineering work for a proposed B.C. liquefied natural gas venture to lower-cost centres offshore as the Malaysian energy giant squeezes suppliers.

Of the total $11.4-billion in estimated construction costs for the Petronas-led Pacific NorthWest LNG export terminal at Lelu Island, there would be $8-billion worth of imported goods and services spread over a five-year period. It is in that international component where Petronas hopes to find the bulk of cost savings, but the state-owned company will cast a wide net abroad and in Canada, including having TransCanada Corp. re-examine ways to make its proposed $5-billion natural gas pipeline project more efficient.

Petronas announced Wednesday that it will delay its final investment decision for the LNG terminal near Prince Rupert, part of plans to invest $36-billion to transport natural gas from northeastern B.C. to Lelu Island for export to energy-thirsty customers in Asia. The LNG consortium originally aimed to make its decision in mid-December.

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Industry experts say Petronas will focus in 2015 on selecting the winning bid for a crucial phase called engineering, procurement, construction and commission. For the past 18 months, there have been three competing bidders in a process involving front-end engineering and design. Petronas has deemed the bids so far to be too expensive, rendering the project uneconomic based on construction costs. "Costs associated with the pipeline and LNG facility remain challenging and must be reduced further," Petronas says.

Engineering firms are expected to revise their plans with a view to greater input from "high-value engineering" offices in countries such as China and India, where labour costs for engineering work are lower than in North America and Europe. Firms wanting to do business with Petronas will be pressed to use their connections with Asian suppliers to get better deals for orders of raw materials.

Subcontractors will be asked to review their costs for an array of building plans, ranging from a work camp in Port Edward to a suspension bridge designed to avoid harming salmon habitat in Flora Bank. Drilling costs are being scrutinized at the Petronas-led North Montney Joint Venture, which has huge natural gas reserves in northeastern British Columbia.

An estimated 88 per cent of the $3.4-billion in project spending in Canada would originate from Canadian suppliers of engineering-related services, mostly from British Columbia.

"We believe that the deferral is more of a negotiating tool than a reassessment of the viability of the project," TD Securities Inc. analyst Scott Treadwell said in a research note Thursday. Another factor for Petronas to consider in 2015 is whether Ottawa will be granting any relief to Canada's fledgling LNG industry, notably through possible tax concessions related to asset depreciation rates, he said.

As Petronas combs through Pacific NorthWest LNG's plans, the Malaysian firm faces increased pressure to justify new capital spending during a period of weak oil prices. The project has been considered the front-runner among 18 B.C. LNG proposals so far, although a small-scale venture called Woodfibre is positioning itself to be the first to export LNG from Canada's West Coast.

Even though Pacific NorthWest LNG received clearance last month from the B.C. Environmental Assessment Office, the Canadian Environmental Assessment Agency is the lead regulator on the file, and the project might be waiting until mid-2015 for federal approval.

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A group of four First Nations has voiced opposition, citing the threat to salmon in the Skeena River, while other aboriginals want more information before making up their minds on whether to support the Petronas-led joint venture. Consultations with First Nations are ongoing.

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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