Canada blocked Petronas' bid for Progress this month after Industry Minister Christian Paradis said it was not likely to bring a "net benefit" to the country. He gave Petronas 30 days to make additional representations to amend its bid.

The Canadian government, sources have told Reuters, wanted to approve the deal but was afraid that would tie its hands when reviewing a much more controversial $15.1 billion bid by China's CNOOC Ltd for Nexen Inc.

Two Petronas sources familiar with the deal told Reuters on Monday that the firm agreed to the extension and was eager to complete the acquisition despite the shock decision by Canada.

The Petronas board agreed to the extension at a regular monthly meeting, the sources told Reuters. The Malaysian firm is also studying additional steps to reassure Canada that the proposed acquisition will meet the "net benefit" requirement, the sources said.

"Petronas will go all the way to secure this deal. It is important to Petronas that the deal is done," one of the sources said.

Spokespeople for Canadian Prime Minister Stephen Harper and Paradis were not immediately available for comment.

Officials from Petronas and Progress held talks in Ottawa last week with Investment Canada, part of the country's industry ministry. Canadian officials are drawing up new guidelines for investment by foreign state-owened companies, possibly complicating Petronas' attempt to improve its offer.

Petronas sources said Canada was not keen on Progress being delisted from the Toronto stock exchange if the Petronas buyout was approved, due to concerns about accountability.

CNOOC has pledged to seek a listing of its own shares on the Canadian exchange, establishing international headquarters in Calgary and retaining Nexen's staff and capital spending.

"Progress is a much smaller deal than Nexen is the argument and Petronas has promised to retain Progress staff," said the second Petronas source with direct knowledge of the deal.

"After all, we need the expertise in unconventional oil and gas, but we now need to make changes to convince Canada."

Petronas officials say they will underline their plans with Progress under an existing joint venture to build an LNG export terminal on the Pacific coast.

"Petronas is moving on with this joint venture for the LNG export terminal. It will bring about more jobs," said the second source.

Progress CEO Michael Culbert has blamed a "communications breakdown" for Canada's rejection of the deal, and said he was optimistic the deal could get back on track.

Harper's office has declined to comment on whether CNOOC-Nexen derailed the Petronas-Progress approval, or if there had been any miscommunication between his government and the companies.

(Reporting by Niluksi Koswanage; writing by Stuart Grudgings; Editing by Raju Gopalakrishnan)

• A Permanent Economic Emergency