Mackenzie gas project ‘not a second-hand effort,’ says Hearn

There is “no lack of will on anybody’s part” to make the Mackenzie Gas Project happen, but neither should anyone underestimate the challenges, said Tim Hearn, chief executive officer of Imperial Oil, the lead partner in the C$16.2 billion venture.

He told reporters May 1 that “serious” money has been spent “trying to get to this stage” — the latest estimates put the outlay by the proponents at more than C$600 million.

“This is not a second-hand effort,” Hearn said. “We’ve had all hands on deck trying to figure out if we can make this go (in a way) that would meet all the stakeholders’ needs.”

He said talks are under way with the Canadian government on a fiscal framework that could include accelerated depreciation rates, royalty breaks and cost-sharing on infrastructure such as roads and airstrips in the Northwest Territories to benefit other resource development.

A new Tristone Capital report portrayed the Mackenzie Valley pipeline as uneconomic without as much as C$2 billion in federal aid or incentives.

Imperial — and its industry partners ConocoPhillips Canada, Shell Canada and ExxonMobil Canada — have left little doubt that without some form of fiscal concessions the Mackenzie project economics are too shaky to proceed.

Almost 70 percent of Imperial is owned by ExxonMobil.

Imperial trying to restrain Kearl costs

“The model we are trying to do for Kearl for Phase 1 is just to do the mining portion and upgrade in a number of refineries in Canada and elsewhere if there is extra product available, and not get into a huge mega-project,” Hearn said.

Traditionally, he noted, the mining portions have been easier to execute.

Kearl is designed to start at 100,000 barrels per day, with the potential to triple that volume.

Final regulatory approval is anticipated later this year.

UBS Securities Canada analyst Andrew Potter put out a research note May 1 that underscored the obstacles Imperial faces in trying to build the Mackenzie project and Kearl.

He said they both “face considerable development risk reflecting the high costs.”

Compounding those problems is the loss of the federal government’s accelerated capital cost allowance in the oil sands, the climate-change regulations being imposed by the Alberta and Canadian governments, changes to the income trust tax structure and the prospect of higher Alberta royalties.

Hearn said that with so much on the table he hopes for concise and balanced public policy results.

He said the industry must have a clear understanding of public policy because “we make huge capital decisions with significant risks in a commodity environment and these investments are not for one or two years — they’re around 30, 40, 50 years.”

Under those circumstances, Hearn said it is essential to “understand the context in which we’re going forward.”

On the climate-change front alone, he urged the governments to ensure Canada does not lose its competitive place globally.

While not opposed to paying the cost of environmental improvement, he cautioned that it “serves no purpose if we get regulatory aspects that really put our industries at a competitive disadvantage.”

—Gary Park