PETRONAS’ Venture in Canada

YB Rafizi Ramli- arguably Malaysia’s whistle-blower icon has recently come up with a fantastic analysis on the recent venture by his former employer- Petronas in Canadian shale gas business. He claimed that Petronas’ investment worth RM16 billion is at risk because of the exorbitant acquisition of Progress Energy (77% more than the market price) at the time when other oil and gas companies suffered billions of dollars in losses from shale gas projects.

To summarize, YB Rafizi said ‘never in our history has so much money been committed to a single venture as risky as this’.

I respectfully disagree with him.

First, it is a normal practice to acquire valuable assets at such a premium price. China National Offshore Oil Corporation (CNOOC) paid close to RM50 billion for Nexen Inc stakes, representing a 61% premium. Exxon Mobil agreed to buy Celtic Exploration Ltd at a 45% premium. 5 years ago, Maybank has been criticised for acquiring Bank International Indonesia (BII) at four times the asset value of BII. Now its profit consistently grows at 15% per year.

Second, Canada is the most active market for oil & gas merger and acquisitions. Already more than RM170 billion worth of transactions has been made in 2013 accounting 20% of upstream segment. It means all the major players are craving for a slice of the deal in this country. Therefore, any offer being made must be very attractive to fend off other competitors.

Third, this is a deal that Petronas can’t afford to lose. As the world leader in LNG technology and one of the largest shippers of the fuel globally, Petronas needs to increase its reserve. With the acquisition of Progress Energy, Petronas’ gas reserve could last for 70 years. The asset will be passed on to future generations, thus making the deal justified for 77% more than the market price.

After all, where can you find such a huge reserve? China may have it. But it is located at undeveloped locations where the operational cost is high. Some rich-oil middle-east countries are not really a good choice, thanks to political uncertainties. In America, the market is saturated.

Admittedly, a few big oil companies were forced to write off billions of ringgit from their investments into shale gas extractions. But all of these losses were made in the US market where the gas price is too low because of oversupply.

Unlike these players, much of that gas in Petronas’ venture won’t end up in Canadian homes at all. The idea is to ship Canada gas via tanker to meet Northeast Asia’s soaring gas demand, particularly as Japan shifts away from nuclear power plants after the Fukushima accident. That fact underlines the rationale for the Petronas’ interest: Canadian gas is increasingly coveted as a fuel for Asian energy needs. This is where you can get $3 gas and sell it at $18 to North Asia countries.

Petronas has roped in Japan Petroleum Exploration (Japex) and PetroleumBRUNEI as partners and buyers in the Canadian venture. It has already secured two long-term buyers for its gas. As such, how then, it is a risky investment?

Finally, the decision made by Petronas to grow reserves through acquisition is already minimising the risk. While it is cheaper to discover a new area for oil and gas, it is a big gamble. Petronas may have to pay more. But they have the fruit ready on the trees.

Considering all the reasons listed above, I personally don’t think there is a hidden hand that has forced Petronas to enter into this venture.

Unless YB Rafizi thinks the government has cronies in Canada. Who knows? Maybe the whistle-blower can shed the light on this matter.


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2 thoughts on “PETRONAS’ Venture in Canada

  1. hairul says:

    The price of $3 gas that you mention is by producing gas the conventional method but this is unconventional gas and there is no certainty the price will be around that as the cost of investing in unproven technology sush as shale gas might bring up the cost of production to maybe upto $10 or higher.
    Depending on the cost of transportation, the margin that you make might be not as high as we think.

    We might want to study the similar investment made by Petronas in Australia. similar case study of unconventional gas field.

  2. James says:

    I can’t believe the other oil companies that write off their losses never considered selling to the Japanese for large profit. Is it that only the Malaysians has the Japanese ears?

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