* Decision widely expected after long delay, weak prices
* Blow to Canada's aim to become global LNG player
* Petronas has been cutting costs in tight markets (Adds comments from Petronas)
By Nia Williams, Ethan Lou and Emily Chow
CALGARY, Alberta/KUALA LUMPUR, July 26 (Reuters) - Malaysian oil company Petronas has scrapped a proposed C$36 billion ($29 billion) liquefied natural gas (LNG) project in western Canada due to weak prices, in a blow to both its global ambitions and Canada's hopes of becoming a major LNG player.
Pacific NorthWest LNG in British Columbia was meant to produce 12 megatonnes per year and spur further development of Canada's largest shale play, but industry observers said the move was widely expected given years of delay.
"It is a good decision not to invest in this project which is expensive and risky," said Subbu Bettadapura, senior director, Asia Pacific, Frost and Sullivan. "Only question is why they took so long to come to this decision."
Analysts had been skeptical about the project's prospects given current low gas prices and constraints facing state-run Petronas, which has been cutting costs to deal with lower profits and cash flow.
The decision is the latest setback for Canada's energy industry, already bruised by international oil firms selling off around $23 billion in Canadian energy assets this year alone.
"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 delayed its final investment decision on what would have been its biggest foreign investment.
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.
Petronas said on Wednesday it had made significant investments in the project along with its partners over the last five years, but declined to give a figure. It added it was committed to developing its significant gas assets in Canada.
"We are already producing from the North Montney area, where production has increased from about 200 million standard cubic feet per day (mmscfd) in 2012 to about 540 mmscfd in 2017, to supply gas to Canada's domestic market," it said in a statement.
"We are now working on finalizing our strategy in North America looking at various options to monetise the gas assets further."
TransCanada Corp, which was contracted to build the pipeline connecting gas wells to the LNG terminal, said it would be reimbursed for costs associated with the project. It had spent C$500 million as of April, spokesman Shawn Howard said.
Japan Petroleum Exploration Co (Japex) said it would take a loss of about C$102 million ($82 million) due to the scrapping of the project.
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.
Pacific NorthWest LNG board chairman Anuar Taib said in a statement that Petronas and partners would continue to develop natural gas assets in Canada.
"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.
However, the company also appears to have shifted its focus to the $27 billion Refinery and Petrochemical Integrated Development (RAPID) in southern Malaysia, that got a $7 billion investment boost from Saudi oil giant Aramco in February.
With Malaysian Prime Minister Najib Razak expected to call elections in coming months, the state firm may also be more inclined to push ahead domestic projects, said Bettadapura.
"They would want to make sure the economy grows here and they have a good report card before the elections. Petronas would not want to squander away its capital," he said. ($1 = 1.2509 Canadian dollars) (Additional reporting by Leah Schnurr in Ottawa; Editing by Chris Reese, Richard Pullin and Mark Potter)