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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2007

Vol. 12, No. 18 Week of May 06, 2007

Arctic delays raise need for LNG

TransCanada's CEO Hal Kvisle hasn't given up on Mackenzie gas pipeline project, but says whether gas comes on stream in 2010 or 2020 ‘is not critical,’ Tristone Capital study offers solutions

Gary Park

For Petroleum News

Delays in moving natural gas pipelines from the North Slope and Mackenzie Delta through political, regulatory and corporate hoops have reinforced for TransCanada Chief Executive Officer Hal Kvisle the urgency of bringing liquefied natural gas into North America.

And that puts Russian LNG supplies at the top of Kvisle’s shopping list, regardless of the unpredictable and uncertain atmosphere in Russia.

For now, developing North America’s Arctic gas resources is a distant prospect that, coupled with Canada’s new greenhouse gas regulations, means the continent will “need LNG sooner rather than later and failure to get it will lead to a lot of discomfort,” Kvisle told analysts in a conference call.

He said the Mackenzie Gas Project is “a really long-term initiative” that is proving an “enormously challenging project as it continues to move slowly through the regulatory process.”

Although TransCanada, which has covered the Aboriginal Pipeline Group’s pre-construction costs through a loan and stands to lose as much as C$115 million if the project folds, has “not given up hope on the Mackenzie. … It’s still important to TransCanada over the longer term that gas comes on stream and into our system, but whether it comes on in 2010 or 2020 is not critical.”

Kvisle, who has issued some of the most frequent warnings about the consequences of slow progress, said there is no easy solution to the problems confronting the Mackenzie Gas Project, dominated by the time-consuming regulatory phase and the rapid rise in overall costs to C$16.2 billion, against a backdrop of uncertain natural gas prices.

He said the pipeline proponents have already invested a combined C$600 million to get the project to its current stage.

Tristone: Mackenzie uneconomic

Kvisle’s comments came on the heels of the latest assessment by Tristone Capital which said the current proposal is uneconomic under the current fiscal regime, suggesting federal government intervention is needed.

It listed options to improve the economics including:

• Legislation enabling the National Energy Board to regulate access, tolls and tariffs on the gas-gathering system to add gas from the Mackenzie Explorer Group to the Mackenzie Valley pipeline volumes and boost startup capacity in 2015 to 1.2 billion cubic feet per day from the 960 million cubic feet per day from the anchor fields;

• An accelerated capital cost allowance tied to the 15-year life of the gas fields rather than the 30-year physical life of the pipeline; and

• A loan guarantee along the lines of that available for the proposed Alaska gas pipeline, allowing producers to increase their debt-equity ratio from the assumed 70-30 split, lowering the cost of service and the toll. The study estimates that incorporating the gas-gathering system into the rate base would result in a combined toll of US$3.14 per thousand cubic feet.

• Municipal, territorial and federal governments, acting individually or collectively, could issue bonds to fund regional infrastructure such as roads, airstrips and barge landings. The issuer of the bonds would then charge a toll to those using the facilities.

Lack of fiscal terms could delay project 15 years

Co-author Chris Theal suggested the failure of the industry partners and the federal government to settle on fiscal terms could delay the project by as much as 15 years.

“Under the current fiscal regime, there is no economic incentive to build the Mackenzie Valley pipeline,” Theal said.

Based on Imperial Oil’s updated budget of C$18 billion, including C$1.77 billion allowance for funds used during construction, the study said the revised budget requires gas prices of US$5.78 per million British thermal units to achieve a break-even level in developing 6.1 trillion cubic feet of gas reserves in the Mackenzie Delta anchor fields.

Theal said that made the Mackenzie project 8.4 percent more expensive than importing LNG.

Kvisle said he “doubted this project would go” with gas prices at $5 or $6 per million Btu.

However, he gave “full marks to the Mackenzie” partners, suggesting “other companies might have given up a long time ago.”

But TransCanada has made it clear it has other major undertakings that command its attention, including its fast-moving Keystone oil sands pipeline to deliver 435,000 bpd from Western Canada to Cushing, Okla., where it could continue on to the Gulf Coast.

Kvisle said his company is open to buying an existing pipeline to take Keystone as far as the Gulf.

He also said building a nuclear power plant in Western Canada could be an option for meeting long-term electricity demand in the region.

“Does it make sense?” he asked. “Well, we have very large coal reserves (in Alberta) so you would have to weigh the merits of power generation from a nuclear source versus electric power generation from a coal source.”

TransCanada is already a partner in North America’s largest nuclear complex on the shores of Lake Huron in Ontario.






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