CALGARY, Alberta—Petronas’ decision to cancel its Pacific NorthWest LNG project is a blow to the growth outlook for Canada’s largest shale play, eliminating a potentially huge source of future gas demand.

Gas from the Montney shale play in western Canada would have supplied the $28.7 billion project in northern British Columbia. The project, majority-owned by Malaysia’s Petronas, would then have shipped 12 megatonnes per year of LNG to Asia.

Instead, state-owned Petroliam Nasional Bhd (Petronas) subsidiary Progress Energy will keep developing and selling gas from its vast Montney position into a North American market where prices have been languishing at historically low levels.

Any increase in production from Progress, which holds the largest land position in the Montney, will weigh on prices in western Canada, while the loss of a major source of demand means much of the play's potential could go untapped.

“The Montney resource is huge and with significant market demand you could see a doubling of production,” said Mark Pinney, manager of natural gas markets and transportation at the Canadian Association of Petroleum Producers.

“But without LNG growth it won't be anything like as dramatic. It’s a missed opportunity.”

CAPP estimates the Montney, which covers 50,000 square miles of northeastern British Columbia and northwestern Alberta, currently produces around 4 billion cubic feet a day (Bcf/d) of natural gas and even without LNG will grow to around 5 Bcf/d.

But that forecast falls well short of the 8 Bcf/d of production CAPP expected when Pacific NorthWest LNG and Royal Dutch Shell’s LNG Canada projects looked likely to proceed.

The Montney still remains one of the top shale plays in North America. Producers like NuVista Energy and Seven Generations Energy have secured capacity on export pipelines to markets across North America like the Dawn hub in Ontario, Chicago and the U.S. Gulf Coast.

But a glut of gas and plans by Progress to keep selling into an over-supplied market instead of to Asia will keep pressure on prices, particularly at the AECO hub in Alberta.

“Any exports off our shores help the supply-demand balance,” Advantage Oil and Gas Ltd. CEO Andy Mah said. “If just one of these projects got off the ground, there would be opportunities to find more markets and that would help Canadian producers.”

Progress currently produces between 700 and 750 million cubic feet equivalent of natural gas per day and expects to maintain those levels until the end of 2018, spokeswoman Eryn Rizzoli said. Beyond that, output will depend on market access and price, she said.

The key pipeline for Progress will be TransCanada Corp.’s proposed North Montney Mainline project, scheduled to start up in April 2019 subject to regulatory approvals.

“They cannot ramp up production until the North Montney pipeline comes in. Assuming that happens they do have the potential to increase supply and that could cause prices to weaken,” said ARC Financial analyst Jackie Forrest.

Pacific NorthWest LNG always intended to source its gas from subsidiary Progress rather than buy it from other producers, but the loss of a major outlet for regional natural gas supply is a disappointment to other producers.

Hopes for reviving at least part of Canada’s LNG dream are now with Shell’s LNG Canada project, which will make its investment decision next year.

“LNG needs to happen,” said NuVista CEO Jonathan Wright. “It’s a very good thing for Canada and it would have been indirectly good for us because more demand is good for the basin.”