Exploration firm Providence Resources said it would not be buying a 40 per cent stake in the Kinsale Head project, citing changed economics of the deal.
The company said a greater capital investment requirement and falling gas prices had reduced the benefit of the deal.
Under the agreement, Providence subsidiary Eirgas was given the option to buy its stake on the same pro-rata terms by which Petronas acquired it in April 2009, with a total value of $180 million.
"Due to a combination of updated financial data and increased funding requirements, it became clear that the transaction no longer represented the same opportunity for Providence shareholders. Whilst the long term economics of gas storage are compelling, and Kinsale represents a unique world class asset, the short term marked erosion in gas prices, combined with a different planned capital structure going forward, led us to withdraw," said chief executive Tony O@Reilly.
"Looking at our overall exploration and development portfolio, and noting the longer term development nature represented by this opportunity, the board took a view that it was in the best interests not to proceed as it no longer presented the same financial dynamics for shareholders."
A $3.8 million deposit paid as part of the option exercised in September 2009 will be refunded in full.
Davy stockbrokers said the cancellation was "disappointing" but said the the company still had gas storage potential through its Dragon Field and Kish Bank licences.
