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Providing coverage of Alaska and northern Canada's oil and gas industry
October 2008

Vol. 13, No. 41 Week of October 12, 2008

Regulatory indecision carries a price

Head of Canadian pipeline industry calls for government leadership

Gary Park

For Petroleum News

The Canadian pipeline industry is poised to spend C$40 billion delivering “clean, reliable and affordable” energy to all consumers — a figure that would double if the Mackenzie and Alaska natural gas projects go ahead — but government indecision is undermining investor confidence, Canadian Energy Pipeline Association President Brenda Kenny said.

She said Canada’s regulatory processes are the biggest obstacle to doubling the domestic network of 60,000 miles of pipelines over the next 15 years and overcoming an “infrastructure deficit.”

Kenny said her sector is “ready to go and we’re ready to go responsibly … all we need is government leadership.”

She said that stalling decisions, as has happened with the Mackenzie project, does not make the pipelines safer or more environmentally sound, arguing that pipelines are the safest way to transport oil and gas.

It should be a “no-brainer” to approve and build new pipeline to meet North America’s appetite for energy, but “that is not the case. … In fact, the opposite is true: With each passing year it gets harder for our industry to make the investment we all know is needed,” Kenny told an international pipeline conference, attended by 1,337 delegates.

Because of the capital-intensive nature of the pipeline businesses, she said financing requires clarity, certainty and a solid understanding of what the risks and timelines are upfront.

She said the “connection to the credit crisis is one of investor certainty. I think that will make it all the more important for us to work with government and for government to be decisive and provide the leadership to create a more certain environment on timelines.”

Mackenzie stymied

Although the Alberta oil sands represent a huge economic advantage for Canada, the “way forward is uncertain, time-consuming and costly” whenever the industry presents infrastructure options to deliver on public policy objectives, Kenny said.

She said the Mackenzie Gas Project is typical of the industry’s efforts to build a much-needed facility, but it has been stymied by aboriginal land claims, negotiations over aboriginal participation, an unwieldy regulatory regime and administrations that are less-than-forthright about their positions on issues such as taxes, royalties and infrastructure.

She called for a more direct role from the Canadian government on issues such as native consultation, both on the Canadian Prairies and in the Arctic.

However, Kenny said there is hope in the Canadian government’s establishment of a Major Projects Management Office to coordinate and streamline regulatory regimes.

She identified TransCanada’s Keystone pipeline and Enbridge’s Alberta Clipper pipeline, both carrying production from the oil sands to the United States, as projects that are critical to Canadians, while a carbon dioxide pipeline would be an important part of the energy and environmental mix.

”We need to proactively move forward on managing our carbon footprint across (Canada) and a key part of that is taking advantage of things like carbon capture and storage.

“The Alberta government is way out in front of any jurisdiction in the world in terms of putting money towards the early-stage technical development that is so necessary for industry to be able to move forward reliably … it’s going to take a lot of work and a lot of innovation but CO2 pipelines are definitely part of the mix,” she said.

Kenny’s concerns about rising costs and the challenge of raising capital have been reinforced by other analysts.

Squeeze on capital budgets

Vic Kroeger, an insolvency specialist with Deloitte & Touche, and Rob Moss, an analyst with Acumen Capital Partners, say turmoil in the capital markets, combined with helter-skelter commodity prices and faltering share values, are putting a severe squeeze on capital budgets.

Kroeger said the door to equity markets, far from being open is barely ajar, with most of the recent new equity issues being private placements.

Moss said the additional pressure on profit margins from Alberta’s new royalties will create difficulties for juniors, in particular, to generate new capital outside of flow-through shares.

The only shred of hope is that Canadian banks have stronger capital ratios than their U.S. counterparts and have not yet experienced the same market losses.

But fundamental changes over the past 20 years mean companies can no longer borrow at prime, driving down borrowing spreads from 50 percent of the value of oil and gas assets to something closer to 25-30 percent currently.

While banks will lend against proved, developed and producing reserves, juniors are generally trying to raise money against exploration prospects and limited cash flow.

Capital lacking for juniors

As a result, there is not enough capital for junior oil and gas companies, said Kel Johnstone, chief executive officer of Alberta Clipper, predicting a decline in drilling levels, especially in Alberta. His own company expects to slash its 2008 spending of C$81 million by 40 percent next year.

On the materials side, steel prices have left the stability of 2007 well behind, rising through 2008 and giving no signs of relief in 2009.

Randy Cousins, an analyst with BMO Nesbitt Burns, said the benchmark feedstock for hot rolled steel was US$540 per ton at the end of last year, but is now above US$1,000.

Given that steel-related expenses cover about half the cost of a heavy oil upgrader, oil sands operators are feeling the squeeze, but drillers and pipeline companies say they have not yet experienced a dramatic impact, especially if they have been successful in sourcing pipe and tubing.





A short, sharp message

It was brief, but it was an event that carries a strong message for energy companies operating on traditional aboriginal lands in Western Canada.

After a build-up of threats and accusations over two weeks, two aboriginal groups in Saskatchewan brought a halt to work on Enbridge’s Alberta Clipper oil pipeline from central Alberta to Superior, Wis.

The blockades lasted only a couple of days, while Enbridge, Native leaders and government officials swung into action, reaching a swift resolution that allowed construction to resume without any material impact on the C$3 billion project.

A 36-inch, 1,000-mile system, Alberta Clipper is designed to carry 450,000 barrels per day of oil sands production by mid-2010, with design capacity for 800,000 bpd.

The Treaty 4 and 6 communities said they were frustrated by a list of alleged broken promises to deliver hundreds of jobs and millions of dollars in contracts to the aboriginal communities.

Chief Sheldon Wuttunee of the Red Pheasant First Nation said he has been told that 95 percent of contracts had been assigned by Enbridge and his people had landed only a handful of jobs.

Two equipment blockades

The issue got a thorough airing at a mid-September meeting of chiefs from across Western Canada and resulted in two blockades against heavy equipment, stopping the bulk of work on the pipeline.

The dispute had its roots in a Supreme Court of Canada ruling that the Canadian and provincial governments must consult with First Nations when traditional aboriginal lands are affected by resource development.

In Saskatchewan, it has led to demands by the Federation of Saskatchewan Indian Nations and the Metis Nation-Saskatchewan demanding a set share of provincial resource revenues — a non-starter for Premier Brad Wall.

But Federation of Saskatchewan Indian Nations vice-chief Morley Watson said his organization is determined to bridge the gap between those who are “getting rich” from resource projects, while First Nations are being left behind.

“Pipelines are running through our lands and the First Nations are getting peanuts,” said Wuttunee.

Enbridge, governments blamed

He blamed Enbridge and the federal and provincial governments for shrugging off their responsibilities to make sure benefits and access agreements were fulfilled.

Saskatchewan First Nations and Metis Relations Minister June Draude said the provincial government was prepared to “make sure everyone in the province is benefiting” from the rapid expansion of resource development and wants First Nations and Metis people to be “active partners,” provided they operated within the law.

But she said the Alberta Clipper blockades “create anxiety and uncertainty for industry and for the participants.”

Although the details of the settlement were not disclosed, Wuttunee said Enbridge had offered “good incentives” that would see First Nations people become more involved in the project.

Metis Nation-Saskatchewan Vice President Allan Morin said the agreement reached is “satisfactory and (Enbridge) is holding up their end of things.”

Enbridge said 140 aboriginal people are working on the pipeline and more will be hired under agreements it has reached with 40 First Nations and Metis communities along the pipeline right of way.

—Gary Park


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