(Adds comment from BC LNG industry group, Green Party and TransCanada Corp)
CALGARY, Alberta, July 25 (Reuters) - Malaysian state-owned energy company Petronas will not proceed with a proposed C$36 billion ($29 billion) liquefied natural gas (LNG) project in western Canada due to weak global prices, dealing a blow to Canada's ambitions to become a global LNG player.
While Petronas' decision is a blow to the regional economy, industry observers said the move was widely expected given years of delay to the huge project near Prince Rupert in the north of the province of British Columbia.
It is also the latest setback for the country's energy industry, already bruised by international oil firms selling off around $23 billion in Canadian energy assets this year alone.
Pacific NorthWest LNG was meant to produce 12 megatonnes per year and spur further development of British Columbia's Montney natural gas play in the northeast of the province, Canada's largest shale play.
"We have a window of opportunity to develop B.C.'s LNG industry, but the next several years will be critical," said Gillian Robinson, spokeswoman for the BC LNG Alliance. "We risk losing thousands of jobs and billions of dollars in benefits if B.C. does not have diversified access to markets."
Pacific NorthWest LNG received approval from the Canadian government last year, but Petronas, which has been going through significant cost-cutting, delayed its final investment decision.
The project would have been Petronas' biggest foreign investment and was seen as a sign of Malaysia's global energy ambitions.
The C$36 billion price tag included around C$11 billion for the export terminal, C$6.5 billion in pipelines, the C$5.5 billion Petronas paid for Progress Energy and its natural gas assets and around C$2 billion a year expected to be spent on producing natural gas.
TransCanada Corp, which was contracted to build the pipeline connecting gas wells to the LNG terminal, said it will be reimbursed for costs associated with the project. It had spent C$500 million as of April, spokesman Shawn Howard said.
Petronas had planned to produce its own gas to supply Pacific NorthWest LNG, rather than buying it from other producers, but no LNG demand means firms like Painted Pony Petroleum and Seven Generations Energy will continue to see low gas prices, analysts said.
"The demise of the LNG industry in Western Canada means that Western Canadian gas will largely remain captive to the oversupplied North American market," BMO Capital Markets analyst Randy Ollenberger said in a note.
Of more than a dozen projects proposed for British Columbia, only the C$1.6 billion privately held Woodfibre project has so far been given the green light by its developers.
Last July Royal Dutch Shell and partners pushed back a final investment decision on their proposed LNG Canada project, citing global industry challenges.
Michelle Mungall, British Columbia's energy minister, said she will be calling other LNG companies to reassure them her government is ready to work with them, but B.C. Green Party leader Andrew Weaver released a statement saying the future does not lie in "chasing the fossil fuel economy."
The ruling New Democratic Party, which formally took power this month, is backed by the environmentalist Green Party. Its rise has fueled uncertainty about energy development in the province.
A spokesman for Canada's Natural Resources Minister Jim Carr, said Petronas' move was a business decision.
Petronas and partners will continue to develop natural gas assets in Canada, Anuar Taib, chairman of the board of Pacific NorthWest LNG, said in a statement.
"We are disappointed that the extremely challenging environment brought about by the prolonged depressed prices and shifts in the energy industry have led us to this decision," Taib said. ($1 = 1.2509 Canadian dollars) (Additional reporting by Leah Schnurr in Ottawa; Editing by Leslie Adler and Chris Reese)