CALGARY (Reuters) -- Malaysian state-owned energy company Petronas will not proceed with a proposed C$36-billion ($28.8 billion) liquefied natural gas (LNG) project in western Canada because of weak global prices, the company said on Tuesday.

The cancellation is a heavy blow to Canada's ambitions to become a global LNG player and to the regional economy, although many industry observers said it was not unexpected given years of delay to the huge project near Prince Rupert in the north of the province.

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. Without demand from an LNG facility, low gas prices in the region are expected to persist, 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 to clients.

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 while reviewing the 190 conditions attached.

The Canadian project would have been Petronas' biggest foreign investment and was seen as a sign of Malaysia's global energy ambitions.

Of more than a dozen projects proposed for the west coast of 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 24-megatonne LNG Canada project, citing global industry challenges.

British Columbia's energy minister, Michelle Mungall, said she will be calling other liquefied natural gas companies to "reassure" them that her government is ready to work with them.

The ruling New Democratic Party, which formally took power this month, governs through an accord with 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 and the government would continue to support the energy sector.

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.