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September 2009

Vol. 14, No. 38 Week of September 20, 2009

MGM kills Arctic gas drilling program

Area’s only recent explorer blames Mackenzie line delay; might shoot seismic this winter in central Mackenzie Valley, oil the target

Petroleum News

On May 5, MGM Energy said it was, at best, paring down its natural gas exploration program in Canada’s Northwest Territories or, at worst, canceling it altogether. On Sept. 14, the Calgary junior said it had decided to completely terminate its Arctic gas drilling plans, even though it will have to pay a $10 million penalty to the Inuvialuit Regional Corp. for not drilling in the Inuvialuit Concession Areas this coming winter.

According to a Sept. 15 report in the Calgary Herald, MGM also said it was considering a $1 million seismic program this winter in the central Mackenzie Valley, presumably to further delineate known oil prospects.

MGM has been the only natural gas explorer in recent winters looking to discover and prove up reserves for the proposed Mackenzie gas pipeline. In May company President Henry Sykes said MGM would not make “any large capital” investments in the Mackenzie Delta until there were “positive, concrete steps” toward building a pipeline down the Northwest Territories to southern markets.

The decision to pull back from its active winter drilling program, Sykes, said, was the result of a stalled regulatory process that has driven other independent companies from the region.

One or two wells vs. $10 million penalty

At that time, MGM said it was reviewing drilling costs and prospects to decide whether it was more economic to drill one or two wells rather than make a penalty payment to the Inuvialuit Regional Corp. in August 2010.

Although Sykes was not available for comment, similar sentiments were expressed by MGM in a Sept. 14 press release, which said the company had decided not to drill any wells on the Inuvialuit concession and pay the penalty, the Calgary Herald reported on Sept. 15.

According to a Sept. 15 article in the Herald, “The Mackenzie project, a 1,220-kilometre gas line in the Northwest Territories led by Imperial Oil Ltd., is beset with regulatory delays, high costs and the threats of cheaper shale gas supplies to the south and a competing gas line from Alaska. The project is stuck in the hands of a Joint Review Panel, which has delayed its report, but it also needs National Energy Board and builder approvals to proceed.” (See related Mackenzie Gas Project article by Gary Park on page 5 of this issue.)

Three wells deferred in May

In May, MGM restructured its farmout agreement with partners Chevron Canada and BP Canada Resources, assuming responsibility for the $10 million penalty.

When Sykes announced the revised agreement, he also vented his feelings about the drawn-out regulatory phase of the Mackenzie Gas Project, saying MGM would not do any more drilling or seismic work until the project, last estimated to cost C$16.2 billion, cleared the official hurdles.

MGM said it would defer three final wells and remaining seismic work covered by its revised farmout agreement pending a decision by the Mackenzie consortium to go ahead with a pipeline.

Sykes said that the actions were in the best interests of MGM shareholders “given the complete lack of progress on the regulatory process.”

He said the farmout changes meant MGM was “no longer required to spend substantial amounts of money on the Chevron/BP farmout (apart from an obligation under the Inuvialuit concession) until a decision has been taken to build the Mackenzie Valley pipeline.”

As a result of the new agreement, MGM was committed to drilling three wells within three winter drilling seasons after the decision to construct occurs, instead of drilling the wells by April 2010 at an estimated remaining cost of C$55 million-C$60 million. Those wells could be appraisal or development wells.

It would also be able to carry the joint account for the balance of the seismic commitment, about C$26 million, on development costs after the decision to construct occurs.

Under the original agreement MGM would have been required to spend that money by April 2012, or pay 50 percent of the unspent commitment as a cash penalty.

In addition, under the new agreement MGM acquired 100 percent of the Inuvialuit Concession Areas 1 and 2, agreeing to make all penalty payments due to Inuvialuit Regional — to a maximum C$10 million — if no wells were drilled on those lands by April 2010.

MGM said in May that it would not complete a drilling program in the 2009-10 winter, but might complete one or two wells on the Inuvialuit lands because, given the location and nature of the Inuvialuit concession wells, the cost would be significantly less than what it had spent on wells over the past three years.

Under the restructured farmout agreement, contingent resources in four areas (Umiak, Ellice J-27, Chevron-BP previous discoveries and Nogha) total 1.3 trillion cubic feet and prospective resources total 355 billion cubic feet, with the net to MGM standing at 703 bcf of contingent resources and 185 bcf of prospective resources.

According to the Calgary Herald, MGM, which was spun out of Paramount Resources in January 2007, “debuted at around C$5 and hit a peak of C$6.43 soon after. It has steadily declined since then, closing at 12.5 cents Sept. 15.”






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