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Petronas Plans Canadian Acquisition Topping $5 Billion

Petroliam Nasional Bhd., the Malaysian state-owned oil company, is studying a Canadian acquisition exceeding $5 billion as part of the company’s drive to supply natural gas to Asia.

“This is going to be big,” Chief Executive Officer Shamsul Azhar Abbas said in a March 30 interview on the 81st floor of the company’s twin towers headquarters that dominates the Kuala Lumpur skyline. “There are quite a few candidates out there, who are willing to talk,” he said, adding a deal may be announced within three months.

Petronas, as the company is known, joins Asian peers including PetroChina Co., Mitsubishi Corp. and Cnooc Ltd. in seeking production in North America, where natural gas sells for less than 15 percent of Asian benchmark prices. At more than $5 billion, a purchase would be more than double the company’s biggest deal, the $2 billion acquisition of a 40 percent stake in Santos Ltd. (STO)’s Gladstone LNG project in Australia in 2008.

“I want to grow big in Australia and Canada,” said 59-year-old Shamsul, surrounded by modern art from the Petronas collection that adorned the walls of the round conference room. “In terms of country risk, it’s less” than other gas-rich areas such as the Middle East, he said.

There were $8.7 billion in deals announced in Canada’s oil and gas industry in the first quarter, the busiest start to the year since 2009, when mergers and acquisitions in the sector there peaked at $47 billion, according to data compiled by Bloomberg. Since 2009, there have been 487 deals, the biggest being China Petrochemical Corp.’s $4.7 billion purchase of a stake in Syncrude Canada Ltd. from ConocoPhillips in 2010.

Cheap Gas

Asian buyers have been lured by the growing difference between the price of gas in Asia and North America, where production has surged following the development of technology to extract gas trapped in shale rock. Gas has averaged $2.50 per million British thermal units this year on the New York Mercantile Exchange. Japan LNG import prices were $16.76 per million British thermal units as of Jan. 31, the most recent data.

That differential was part of the attraction for Petronas in June, when the company agreed to pay Progress Energy Resources Corp. C$1.07 billion for a 50 percent stake in three gas fields in Canada that included as much as C$802.5 million in development spending.

As part of the purchase, it agreed to invest as much as C$600 million in the company if it develops a terminal to export liquefied natural gas from Canada’s west coast, Progress Chief Executive Officer Michael R. Culbert said at the time.

Progress Energy rose 7.9 percent to C$10.79 at the close in Toronto.

Competing Projects

Petronas would own 80 percent of the LNG joint venture that is one of at least three planned in Canada. A group led by Apache Corp. (APA) is leading one of the groups planning a terminal in Kitimat, British Columbia. Royal Dutch Shell Plc along with PetroChina and partners from Japan and Korea are planning another terminal.

“By August we should be able to complete the feasibility study for another liquefied natural gas plant on the west coast of Canada,” Shamsul said. “We are getting good support from the government.”

Petronas’s total oil and gas production globally has fallen for two straight years, reaching 2.14 million barrels of oil equivalent a day in the financial year ended March 2011, according to its annual report.

To be sure, not every planned deal in Canadian shale has gone ahead. PetroChina, Asia’s largest energy producer, walked away last year from what would have been its biggest acquisition -- an agreement to pay C$5.4 billion for a 50 percent stake in Encana Corp. (ECA)’s Cutbank Ridge joint venture and fund development of about 635,000 net acres in British Columbia and Alberta.

Stable Supplier

Encana later agreed to sell a 40 percent stake in Cutbank Ridge to Mitsubishi for C$1.45 billion upfront and a commitment to spend C$4.5 billion on development work over five years.

Petronas may look to Encana, as the Calgary-based company is seeking additional partners to develop its natural gas assets, Philip Skolnick, an analyst with Canaccord Genuity Inc.

“Partnering up with national companies would help to expedite an LNG movement out of Canada,” said Skolnick, who rates Encana a hold.

Developed Markets

Encana said today it’s seeking minority partners to help fund drilling on 1.58 million acres of oil and natural-gas liquids fields in North America, allowing the company to accelerate development without increasing costs.

Petronas’s push into developed markets is also fueled by customer demand for energy supplies that can be guaranteed for years, a promise that seems less sure following rising tensions in the Middle East, Shamsul said. Buyers of Petronas’s gas such as Japan, South Korea, Taiwan and China are keen on stability in their supplies. They will probably have to pay a premium for the higher production costs in these countries, Shamsul said.

“When we mentioned we have projects in Iran, Iraq or whatever, to bring in LNG from there, is it acceptable to them. They said no.” Shamsul said. “The Middle East issue is going to linger. I don’t see a long term solution there.”

Countries including Egypt and Syria will face problems in creating enough jobs to stem the social uprising, he said.

Record Spending

Petronas, which plans to spend a record 300 billion ringgit ($98 billion) over five years to help replenish Malaysia’s diminishing reserves, has embarked on a worldwide review of its portfolio since Shamsul took over as CEO in February 2010. It exited projects in places including Ethiopia, East Timor and Pakistan, while acquiring oil and gas blocks in countries such as Venezuela, Australia and Brunei.

Funding for its future projects isn’t guaranteed. Malaysia’s government traditionally relied on Petronas for about a third of state revenue. Petronas paid 65.7 billion ringgit to the government in the year ended March 2011, including dividend, taxes, petroleum proceeds and export duties, according to the company annual report. The state has estimated revenue of 183 billion ringgit last year, a finance ministry report shows.

The company, whose Engen unit operates the Durban refinery in South Africa, isn’t keen to add more assets in the region, Shamsul said. Many African countries are “challenging” politically, and Petronas was forced to stop production in Sudan recently, he said. It is also not keen to invest in South America due to the language differences, even after countries from Brazil to Argentina found billions of barrels of oil.

In Iraq, he said one of the four energy fields it operates there is expected to start producing oil by the end of this year. Still, it is spending a “massive” amount of money on security, describing it as a “tough” country to operate in.

To contact the reporter on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net

To contact the editor responsible for this story: Timothy Coulter at tcoulter@bloomberg.net

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