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Mac gas line: Thin project getting thinner Imperial Oil stops government negotiations to revise a budget being squeezed by hyper-inflation in construction sector Gary Park For Petroleum News
The Mackenzie Gas Project has collided with the looming realities of raging inflation in Canada’s oil and gas industry, forcing the proponents to call a time out in their discussions with the Canadian government on fiscal terms until they can complete a revised budget this fall.
“We don’t have a lot of confidence in the cost estimates right now,” Imperial Oil Senior Vice President Randy Broiles told reporters June 14.
While declining to get drawn into guessing numbers, he left little doubt that the current projection of C$7.5 billion will rise.
Because the construction industry has changed so much in the past two years “it’s impossible to know what the new number is,” Broiles said.
Referring to what he called “the frothiness ... in global conditions,” he said the Mackenzie project along with more than C$100 billion worth of oil sands ventures now on the table are being hit with a full spectrum of rising costs for labor, steel and equipment.
While the Mackenzie partners try to get a better fix on where those increases — which have climbed 30 percent to 50 percent in the past two years and are expected by some analysts to rise a further 30 percent — “we have paused discussions with the government right now, to let us do the homework we need to on the cost side,” Broiles said.
But he said that was not the same as the halt in operational work ordered by Imperial in April 2005 to resolve problems such as the regulatory timetable and negotiations with aboriginal regions on access and benefits agreements.
Imperial had previously indicated it hoped the current negotiations would produce a result by mid-2006.
“Last year, we weren’t getting the help we needed to see a way through the hurdles of the Mackenzie,” he said. “We’ve got that help, so it’s not that sort of thing at all.”
However, he conveyed a strong message that Ottawa may be expected to hike its contributions to the project, currently estimated at C$1.2 billion.
Reiterating a frequent theme from Imperial executives, Broiles said the project has been economically “thin from the beginning and with more cost pressure, that’s bad news.
“So we have to finish that work and then we’ll know what we need to talk through with the government,” he said.
The cost spiral started in late 2004, when estimates were hiked from C$5 billion to C$7 billion. More recently, another C$500 million has been added.
Barge across top of Alaska As well as reviewing the budget, Imperial is exploring cost-saving options, including the possibility of barging major components, such as a gas processing plant, across the top of Alaska to Inuvik in the Northwest Territories, rather than moving them in pieces along the Mackenzie River Valley. Broiles said that has the “potential to claw back big savings.”
He said another alternative is extending the pipeline construction season to three summers from two, which would push the start of production at 1.2 billion cubic feet per day beyond the current target of 2011.
One of the few to attempt a new cost forecast, Tristone Capital analyst Chris Theal said earlier this month the project could cost C$9 billion, although he said higher gas prices by the completion date would leave the return on investment largely unchanged.
He suggested to the Globe and Mail that Imperial’s decision to announce a break in the government negotiations might be mostly a bargaining ploy.
To attempt to negotiate better leverage from the government is a “great tactic,” Theal said.
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