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Mac explorers weary Independent group losing interest; Devon says may be ‘simpler’ to leave basin Gary Park For Petroleum News
Northwest Territories Industry Minister Brendan Bell has a direct warning for regulators weighing the Mackenzie Gas Project — if the current window to start developing Canada’s Arctic natural gas starts to close the project “may in fact never go ahead.”
For his government and independent explorers operating outside the Mackenzie Gas Project core producers’ group, a big part of keeping that window open is ensuring that the Mackenzie Gas Project is the catalyst for promoting exploration of the Mackenzie Delta-Beaufort basin and its potential resources of 100 trillion to 120 trillion cubic feet.
In wrapping up the National Energy Board’s evidence-gathering phase in mid-December, Bell and representatives of the Mackenzie Explorer Group made it clear that, unless there is a resolution of the dispute over what constitutes fair and reasonable access to the planned Delta gas gathering pipeline network and ultimately the Mackenzie Valley pipeline, the desire to invest in the region may evaporate.
Explorers tired of negotiating Despite a consensus among explorer group members that the basin has already posted one of the best exploration success rates anywhere and represents a relatively low-risk play for almost limitless prospects, they are reaching the breaking point in their negotiations with the Imperial Oil-led Mackenzie Gas Project partners.
Michel Scott, Devon Canada’s vice president of government and public affairs, said “we’ve reached the point where we’re tired of attempting to negotiate solutions.”
He bluntly told the NEB that until the federal regulator establishes the “rules of the game” for operating the Mackenzie gathering system it is difficult for Devon Canada to make further investment decisions without knowing if or when the gas can be delivered to market — a level of frustration reflected in the scaling back of drilling activity in the Delta-Beaufort this winter.
Rod Maier, Chevron Canada’s manager of frontier development, said the flurry of activity following the granting of exploration licenses in 1999 and 2000 was in anticipation of a pipeline coming into service as early as 2006 — a target that has since been pushed out towards 2012.
“It’s very difficult to set an appropriate pace of investment when you’re not sure when you can actually commercialize that particular investment,” he said.
The building uncertainty around the Mackenzie Gas Project has forced the Mackenzie Explorer Group companies to slow down and “rethink our overall pace of investment,” Maier said.
Scott said Devon Canada has so far spent more than C$250 million, but the “timelines are working against us as we go forward.”
He said Devon Canada is ready to bring 50 million cubic feet per day to market (the Mackenzie project anchor gas owners have indicated they can ship 830 million cubic feet per day initially on the planned 1.075 billion cubic foot per day Mackenzie pipeline), but he noted that a lot of work is needed to produce “what is a fair small amount of gas net to us.”
“So we may or may not choose to put that effort in there,” Scott said. “Maybe it’s simpler to leave the basin.”
The Mackenzie Explorer Group currently consists of Devon Canada, Chevron Canada, BP Canada Energy, EnCana and Nytis Exploration.
Anadarko withdrew after unloaded its Delta, Beaufort and Yukon interests in an asset swap with Chevron, while Petro-Canada pulled out for unannounced reasons.
Explorer setback from NEB Six months ago the NEB handed a setback to the Mackenzie Explorer Group when it refused to issue an order placing the gathering system and the Mackenzie Valley pipeline under a “single” jurisdiction with the tolls and tariffs regulated by the NEB itself.
The explorer group has argued that placing the gathering system under the Canadian Oil and Gas Operations Act without any provision for tariff regulation would offer little incentive for the Mackenzie Explorer Group companies to continue exploring the region.
Alaska project could strand Mackenzie gas In the final days of the NEB hearing, Bell said potential delays, including the development of cheaper offshore gas sources, the import of liquefied natural gas and the prospect of an Alaska gas project moving ahead of the Mackenzie Gas Project in delivering Arctic gas to market, “could inevitably strand” the Mackenzie Delta-Beaufort Sea gas.
Under questioning, Bell said there are experts who believe that the current value of the Delta-Beaufort gas could disappear over the next 20 to 50 years.
The rising costs of project construction, the uncertain economics of such a major undertaking and the unresolved aboriginal issues related to the Mackenzie Gas Project are all factors that could undo a project that has involved more than C$500 million of spending to date by the project’s owners.
Bell made it clear that his government views the Mackenzie Gas Project as the first step towards making the Mackenzie Delta-Beaufort region the “next great oil and gas producing basin in Canada” as well as being a long-term source of wealth and activity in one of Canada’s most economically deprived areas.
He said his government’s hope is to see a major industry on the scale of the Mackenzie Gas Project turn the NWT into a self-sufficient jurisdiction.
“This ambitious vision can only be realized if the MGP is undertaken in a way that has regard to more than the specific interests of the project proponents,” Bell said.
That means building and making available infrastructure that will contribute to the development of northern resources, he said.
NWT troubled by lack of access agreement He left no doubt that his government is troubled by the failure of the anchor proponents on one hand (lead partner Imperial Oil, along with Shell Canada, ConocoPhillips Canada and ExxonMobil Canada) and the potential users of the Mackenzie Gathering System “to develop a set of acceptable principles that will govern future access to the MGS in the public interest.”
Bell said it is “simply unacceptable that a failure of the private interests involved in this process to identify common ground with respect to access to the MGS could frustrate the enormous public potential and interest in the development they wish to undertake.”
He said tolls and tariffs for the Mackenzie Gathering System have to allow “others who are exploring for gas to have the ability to bring their gas to the project.”
“This is critical (to attract the investment needed to fully develop) the basin ... and also for the interests of the Aboriginal Pipeline Group (which needs volumes from independent explorers to secure a one-third equity stake in the Mackenzie Valley pipeline).”
He ended by making a direct appeal to the NEB to intervene to moderate the conflict between the parties and “to determine terms and conditions of access which serve the public interest.”
Priddle: NEB needs to ensure access Roland Priddle, a former long-time chairman of the NEB and now an advisor to the NWT government, said the situation calls for the NEB to ensure that producers who want to use the Mackenzie Gathering System can gain access under tolls which are “just and reasonable, where there is no unjust discrimination (and) where there is no undue burden imposed on the investors in the MGS. …”
Alan Hollingworth, an attorney for Paramount Resources, probed the prospect of whether Imperial Oil, having received a cabinet order approving the Mackenzie Gas Project, could decide it did not like some of the conditions and choose to either scrap the project or downsize the pipeline.
Priddle said he found it “simply inconceivable” that the economic regulation of the Mackenzie Gathering System could result in the whole Mackenzie Gas Project being “cratered.”
From his own experience, Priddle said he could not recall an instance where an NEB decision resulted in a pipeline failing or being unable to attract capital.
But Hollingworth noted that contractual documents put out by Imperial Oil gave it the choice of not building the pipeline once it received certificates of approval.
He said Paramount believes that if Imperial scraps the pipeline “it should be required to assign (its certificates) to someone who was prepared to proceed.”
Bell said that if a certificate of approval was issued and Imperial sat on that approval “we would have grave concerns.”
“Our first and foremost priority is to ensure that this basin is developed,” he said. “The future of this region, the future of the territory depend on it.”
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