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

Vol. 12, No. 30 Week of July 29, 2007

Imperial, Exxon create Arctic buzz

Make unprecedented bid for 508,000-acre Beaufort Sea exploration block, but won’t say what they have in mind other than insisting it’s ‘separate and independent’ from Mackenzie gas line

Gary Park

For Petroleum News

In straight dollar terms, it’s a breathtaking vote of confidence in the oil and gas future of the Canadian Arctic.

Even a federal official who manages Canada’s northern bidding process was caught off guard.

Richard Casey, with Indian and Northern Affairs Canada, said the joint bid by Imperial Oil and ExxonMobil Canada to win exploration rights to 508,000 acres in the Beaufort Sea has no parallel.

“To be honest with you, when I opened the bid I was shocked,” he told the Financial Post.

In fact, the work commitment of C$585 million by the affiliates of ExxonMobil is not far short of the combined value of C$658 million for the eight successful bids in the Beaufort Sea-Mackenzie Delta region over the past eight years.

It has observers scratching their heads and they’re not getting any help from Imperial.

Exxon: too soon too explain

Just hours after the bid was announced, company spokesman Gordon Wong told Petroleum News it was too soon to explain what motivated Imperial to return to the Beaufort for the first time since 1989 and double its land-holdings in the process.

But he was emphatic that the Beaufort exploration license “is an opportunity in its own right” and is “separate and independent” from the Mackenzie Gas Project.

“The Beaufort Sea license is exploratory in nature and a lot of detailed work still has to be undertaken to determine if hydrocarbon deposits even exist,” Wong said.

“We view this as a high-potential, technologically challenging area to do work in and we put in what we felt was a realistic bid for the work that will be required,” he said.

Imperial Senior Vice President Randy Broiles, the company’s point man on the MGP, said that although the Arctic remains a “high potential, technology intensive frontier area, this (successful bid) presents a potential opportunity to add to our resource base in the Beaufort Sea and is consistent with our continued interest in energy development for Canada.”

The message from Wong is that it will be some time before Imperial is ready to disclose its exploration plans.

Companies have five years to spend C$146.2 million

Under the license terms, the two companies have five years to spend a combined C$146.2 million on exploration and qualify for a four-year extension of the license.

Imperial is 34.4 percent operator of the MGP and ExxonMobil Canada has a 5.2 percent stake.

ConocoPhillips Canada, a 15.7 percent partner in the MGP co-venturers group, also surfaced with a winning bid at the sale, committing C$12.08 million in exploration spending for a block covering 256,270 acres.

That coincided with remarks by Jim Mulva, chairman of ConocoPhillips, who showed some frustration with delays in both the MGP and Alaska gas pipeline projects.

He said the U.S. and Canada face declining production of conventional gas that imported liquefied natural gas will not be able to overcome.

Chevron Canada, an active explorer on the Mackenzie Delta, also picked up 267,325 acres in the Beaufort for C$1 million.

Northwest Territories Industry Minister Brendan Bell told reporters the Beaufort results are a shot in the arm for the MGP at a time when project costs have more than doubled to C$16.2 billion, startup dates keep getting extended and negotiations between Imperial and the Canadian government on fiscal terms seem bogged down.

Like many others, Bell views the MGP as the best chance to open a new oil and gas basin in Canada.

“No one would spend this kind of money with the intent of finding stranded gas,” he said.

Despite the hurdles confronting the MGP he said the license results show that major companies “share our vision of the North’s true energy potential.”

“It should boost our confidence and it should boost investor confidence, generally, in the offshore Beaufort.”

Only one recent Canadian Beaufort well

And the Beaufort has been in need of a lift after recording only one wildcat well in almost 20 years — Devon Canada’s Paktoa well that was completed last year.

It encountered hydrocarbons “but not the trillions of cubic feet we had been hoping for,” said John Richels, president of parent company Devon Energy.

Pending stronger indications that the MGP will go ahead and greater certainty over access to the Mackenzie Valley pipeline, Devon Canada has obtained a one-year extension to the 2008-09 winter to drill a second well.

The Beaufort, combined with the Mackenzie Delta, is estimated to hold 67 trillion cubic feet of recoverable gas and 7 billion barrels of oil, but has been barely scratched on the exploration front, recording only 91 shallow and deepwater wells.

However, Imperial CEO Tim Hearn has expressed interest in probing the shallow Beaufort to bolster gas resources backing the MGP and add to Imperial’s 3 tcf of existing gas reserves in the Taglu field.

Bill Gwozd, with Ziff Energy Group, told the Globe and Mail the push into the Beaufort could indicate Imperial’s desire to improve the economics of the MGP.

“You have to have more gas offshore linked into the Mackenzie pipeline to make it go. The onshore gas will not be adequate to keep the pipeline full for 20 years.”

Analyst suggests target could be oil

Another wrinkle was suggested by Ian Doig, a veteran offshore analyst, who suggested the target could be oil rather than gas.

If oil is discovered in large quantities, he said it could be carried across Alaska rather than by pipeline along the Mackenzie Valley.

But, whatever the objective, an exploration and development program would require major support from resources and expertise, Doig said.

Kam Sandhar, an analyst with Calgary-based investment dealer Peters & Co., said in a research note that Imperial has clearly shown its support for Arctic exploration, giving a lift to the MGP in the process.

“This announcement reaffirms that the Mackenzie Valley pipeline’s benefit extends will beyond the (three Mackenzie Delta anchor fields), opening a significant exploration corridor for other operators,” Sandhar said.

The Canadian government’s latest northern oil and gas annual report said that “given the high potential of Canada’s Arctic for both oil and gas, continuing investment in new exploration can be a source of sustainable long-term economic growth.”

But it underscored the importance of the MGP.

“The potential of the Central Mackenzie Valley, Delta and Beaufort Sea, and perhaps further afield depends on the realization of infrastructure to export petroleum to southern markets: a Mackenzie Valley gas pipeline would be a key element of such infrastructure,” the report said.

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