RICHMOND, British Columbia/KUALA LUMPUR (Reuters) - Malaysia's Petronas said it would review a proposed C$36 billion ($27.25 billion) liquefied natural gas (LNG) project in western Canada after Ottawa approved the project with conditions to limit the environmental impact.
The green light for the Pacific NorthWest LNG project in northern British Columbia comes after a 3-year wait for Petronas and its partners, but analysts are skeptical about the project's prospects given low gas prices and cost-cutting at the Malaysian oil giant.
The decision on the project was seen as a major test for Canada's Liberals, juggling the needs of an energy industry suffering from job losses and the concerns of environmentalists, courted by Prime Minister Justin Trudeau in last year's election campaign.
The approval came with 190 conditions that Petronas and partners in China, India, Japan and Brunei would have to meet, after a review found the project would have a significant environmental impact.
"We need time to look at the conditions and then we will have a review of the project," Petronas CEO Wan Zulkiflee Wan Ariffin told reporters on the sidelines of an event in Kuala Lumpur.
Petronas' investment in the project would depend on LNG prices that have dropped by over a third in two years amid worries about oversupply and faltering Chinese demand.
"The economics (of the project) require much higher LNG prices than currently and than are forecast for the next few years," said Wood Mackenzie analyst Alex Munton. "That's what we think will cause Petronas to pause investment until it's more confident about future gas prices."
Other LNG projects also face delays: In July, Royal Dutch Shell and its partners pushed back a decision on building an LNG export terminal in British Columbia, and Chevron has delayed the scheduled 2017 start of its Kitimat LNG project, also in British Columbia.
The Canadian project's go-ahead comes at a difficult time for Petronas, which is going through a significant cost-cutting amid low energy prices.
The Malaysian state firm has this year cut jobs and said it would cut its spending by up to 50 billion ringgit ($12.1 billion) over the next four years. Its profits slid 85 percent in April-June, and it predicted the outlook for the industry would remain "gloomy" well into 2017, another roadbump for a slowing Malaysian economy. It has slashed its dividend commitment to the government by a third compared to last year.
"We expect Petronas to go free-cash-flow negative this financial year and next after meeting their capex and dividend requirements," said Fitch senior director Sajal Kishore.
Given the low LNG prices, Petronas would look to re-evaluate its options with the Canadian project, he said, adding there was unlikely to be much appetite for long-term LNG supplies for new projects.
Asian spot LNG prices LNG-AS have dropped by some 70 percent since 2014. Energy consultancy FGE has forecast the supply glut to peak at around 23 million tonnes a year by 2020 and persist through 2023.
The legally binding conditions Canada attached to the project include a hard cap on carbon emissions.
Environmentalists have said the facility would cause a massive increase in greenhouse gas emissions at a time when Canada looks set to badly miss its existing climate change targets.
"If this project is built as currently approved, it will be one of the single biggest sources of carbon pollution in the country," said Merran Smith, executive director of Clean Energy Canada.
Environment Minister Catherine McKenna, who announced the project's go-ahead on the banks of the Fraser River, flanked by Natural Resources Minister Jim Carr and Fisheries Minister Dominic LeBlanc, said she was confident the project would proceed in the most sustainable manner possible.
Additional reporting by David Ljunggren and Andrea Hopkins in Ottawa, Nia Williams in Calgary, Emily Chow and Praveen Menon in Kuala Lumpur, and Mark Tay in Singapore; Editing by Ian Geoghegan