by Randolph Mank

The Globe and Mail
September 28, 2016

The Canadian government’s decision to conditionally approve the Pacific NorthWest LNG project in British Columbia was especially poignant for me.

It recalled my arrival in Kuala Lumpur six years ago as Canada’s new high commissioner (ambassador) to Malaysia. Like every first visitor, I was struck by the sheer size of the Petronas twin towers, which dominate the city skyline. On Day 1, I asked my deputy the obvious question of whether Petronas, the giant state-owned energy company, had ever invested in Canada. The answer was a surprising no, even though Canada had globally significant energy resources and Petronas was well invested in more than 30 other countries. We agreed that our job from that day forward would be to try to change that.

And so began a long process of advocating the virtues of investing in the Canadian energy sector, of extolling the positive attributes of our governance and people, of working with companies and governments in both countries, which eventually led to a decision by Petronas to invest. Petronas established a joint venture (later to become an outright acquisition) with what was then a little-known Canadian firm, Progress Energy, and thus entered the controversial shale gas business.

Petronas did so, of course, because of its own strategic interests in garnering a secure long-term supply of natural gas for its customers in Asia. Malaysia is a liquefied natural gas superpower. It relies on revenue from supply contracts with other Asian countries to keep its own economy growing.

Canada has strategic interests too, despite never actually devising an explicit global energy strategy. Many Canadians are surprised to learn that, despite our massive energy resources, we have but one customer for our oil and gas. And when that customer possesses massive resources of its own, as does the United States, our business interests are at risk.

In the end, Petronas went all in. Not only would it invest in Canada; it would make it its largest investment anywhere, ever. The already impressive figure of $36-billion, usually cited in the news media, is actually only part of the cost of the massive 25-to-30-year project, which will include extracting the gas upstream, sending it by pipeline downstream to the west coast of British Columbia, converting it to LNG and finally shipping it across the Pacific to Asian markets.

Yet it is far from a done deal. Soon after Petronas went all in, global oil and gas markets took a nosedive. The fourth quarter of 2015 alone saw a $2-billion loss for Petronas. Its LNG sales volumes then shrank 9 per cent in the first quarter of 2016. Layoffs of about 1,000 of its 50,000-plus staff in Malaysia were announced.

With the revenues required to drive such a massive capital investment clearly diminished, Petronas must now make the difficult decision of whether it can actually afford to proceed in Canada. With global LNG prices still depressed, it isn’t automatic. In fact, the possibility exists that the project may not go forward at all, or at least not until energy markets rebound.

Complications have also arisen on the Canadian side. The environmental-impact assessment highlighted risks that need to be mitigated, especially significantly increased carbon emissions and potential serious impacts on fish stocks around the proposed Lelu Island LNG facility near Prince Rupert. Tied in with this, winning support from our First Nations, which are divided on the project, will also be a critical ongoing challenge to moving forward. So the government’s approval comes, quite rightly, with conditions.

On balance, though, faced with extremely unpopular choices, the federal government took the right decision. If and when it proceeds, the project will be among the largest investments ever in Canada, bringing Malaysian capital and know-how to our shores. For the first time, Canada will become a significant LNG producer and gain access to burgeoning Asian energy markets.

These are, in short, fortuitous elements of a global export diversification strategy that Canada should have developed across a range of sectors long ago.

Randolph Mank is a former Canadian ambassador and business executive who divides his time between Canada and Asia. He currently serves on the board of the Canadian Chamber of Commerce in Singapore and is a fellow of the Canadian Global Affairs Institute.

Image: Lonnie Wishart