One $3b step forward for LNG, one $6b step back

Exxon Mobil enters Western Canada natural gas market while Petronas bid is rejected

Tankers like this one would be used to carry liquefied natural gas to Asia from LNG plants on British Columbia's coast

Canada welcomes foreign investment in Western Canada's natural gas industry – now go away.

That was the apparent mixed message the Stephen Harper government sent foreign investors last week with its rejection of a $5.5 billion bid by Malaysia's Petronas for Energy Resources Corp. (TSX:PRQ), which owns gas fields in B.C. and Alberta.

The announcement came just days after Exxon Mobil Corp. (NYSE:XOM) announced a $3 billion bid to acquire Alberta's Celtic Exploration Ltd. (TSX:PRQ) – a move viewed by some observers as a vote of confidence in B.C.'s nascent liquefied natural gas (LNG) industry.

"It clearly could be viewed as sending mixed messages, and I think that's one of the issues they're going to have to address in the next month or two," Hank Petranik, an energy consultant and president of Maxima Energy Services Inc., said of Ottawa's rejection of the Petronas bid.

"The fact that entities are looking at investing in Canada is positive. The apparent rejection by the feds [of the Petronas bid] is going to cause people to sit back and think."

Petronas is appealing the decision. However, if the deal stands, it could put a chill on foreign investment in the gas sector – something the feds have openly courted.

"That will give some buyers concern – probably [they will] have the view that it may not be as attractive as they had thought before," said Colin Coe, commercial adviser for Oregon LNG, which plans to have an LNG tolling plant built in Warrenton, Oregon, by 2018.

There are now four natural gas liquefaction plant proposals in B.C.: three in Kitimat and one in Prince George. That's more than the market is likely to bear, say some analysts.

Energy economist Peter Tzerzakian recently opined in the Globe and Mail that only two LNG plants are likely to be built in B.C. Those that proceed are the ones that are able to secure 20-year contracts with buyers in Asia.

Petranik said LNG projects that have partners that already have relationships with customers in Asia will have an edge – companies such as Shell (NYSE:RDS), BG Group PLC (LSE:BG), Petronas and Exxon. Shell owns 40% of the LNG Canada project in Kitimat. Korea Gas Corp., Mitsubishi Corp. and PetroChina Company Ltd. each own a 20% stake.

Exxon has not stated what its intentions are with respect to the Celtic Exploration acquisition. However, because Celtic's gas holdings are in the Montney basin straddling the B.C.–Alberta border, some view it as a vote of confidence in the Western Canadian gas sector.

"Exxon has announced a number of times that they are looking at LNG export opportunities," Coe said, "and I believe they're kicking tires at Kitimat."

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