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Meeting MGP’s economics May go back to reject pile, such as ‘over-the-top’ route, federal stake in Mac line By Gary Park For Petroleum News
Now that cost estimates are no longer a crapshoot for the Mackenzie Gas Project — beyond those wondering if Imperial Oil deliberately inflated the numbers to squeeze the best fiscal terms out of the Canadian government — a new round of guessing games is under way.
Federal Indian Affairs and Northern Development Minister Jim Prentice, Ottawa’s point man in the negotiations, has stuck to a consistent theme: The project must make “business sense.”
“The economics of the project is private-market, private-sector economics,” he said earlier this year.
Prentice said the MGP is the cornerstone of an oil and gas infrastructure to open up an entire new basin in the Canadian North and will not proceed solely on grounds of being a social undertaking to create jobs in the Northwest Territories.
The challenge is how to make “business sense” out of a venture that, by one estimate, needs gas prices of US$7.75 per thousand cubic feet to yield a 10 percent after-tax return — the minimum threshold set by Imperial and its partners.
Much of the thinking is now colored by the reputation of Imperial and its 69.6 percent parent, ExxonMobil, that they never go ahead with a megaproject until governments match their bottom line terms.
That leads to deep-seated skepticism that, regardless of the C$600 million invested to date by Imperial, Shell Canada, ConocoPhillips Canada, ExxonMobil Canada and the Aboriginal Pipeline Group (underwritten by TransCanada), Imperial won’t hesitate to shelve the plan once it has obtained regulatory approval and go somewhere else in the world.
Such a line of thinking is shored up by estimates that a full-scale liquefied natural gas project matching the MGP’s likely start-up volumes of 1.2 billion cubic feet per day could be built for C$10 billion.
Among Canadian nationalists there is also a deep-seated resentment that four foreign-controlled companies, seen as a “private club,” would have the nerve to demand subsidies (an idea rejected by Imperial and the government), or incentives (much more palatable) from Canadian taxpayers to keep their shareholders happy.
For now, whatever his corporate masters have in mind, Imperial Senior Vice President Randy Broiles is adamant that the lead partner is pledged to “complete the regulatory process,” although field work and detailed engineering are on hold until Ottawa decides how far it will go to meet the co-venturers definition of “economic.”
Federal cabinet has ultimate power With that in mind, the real issue on the table becomes clearer — a recommendation of approval from the parallel regulatory reviewers (the Joint Review Panel examining social and environmental issues and the National Energy Board which weighs safety, engineering and economic matters) is important, but one rung below the pivotal decision-making.
The ultimate power rests with the federal cabinet, which has to sign off on the length of the permit to complete construction and start moving gas out of the Mackenzie Delta and decide what pipeline tolls it will support.
As just one example, companies in the Mackenzie Explorer Group could, to gain access to the Mackenzie Valley pipeline, be asked to sign up for demand charges for shipping their gas.
At a mere C50 cents per thousand cubic feet for volumes of 500 million cubic feet per day it would cost C$1.8 billion over 20 years — a daunting prospect for decision-makers in those E&P companies.
If overall costs of shipping gas from the Mackenzie Delta to enter the North American gas network in northern Alberta were C$2 per thousand cubic feet that would not make much “business sense.”
But, without a “fair and reasonable” accommodation for the Mackenzie explorer companies, Imperial could find itself seriously at odds with the rest of the industry and governments, especially the NWT which is a vigorous advocate of making the MGP the entry point for developing the gas riches of the Mackenzie Valley, Delta and Beaufort Sea.
What could put shine on economic case? So what can Ottawa do to put some shine on the economic case?
Two of the alternatives that veteran industry observers see as ways to cut costs and improve the bottom line have been shunted aside.
The “over-the-top” alternative, with a pipeline from the North Slope under the Beaufort and connecting with an enlarged Mackenzie pipeline, spluttered from the start, finds no favor in Alaska and has gone quiet in the last four years, with not a peep from Houston-based Arctic Resources, which led the charge when the MGP was revived.
But there are persistent low-level rumblings that ExxonMobil would prefer going “over-the-top,” although Broiles was vague when questioned about the idea during a March 12 conference call.
Similarly out of the running is the Dempster Lateral, which had its most promising fling about 30 years ago, with plans to build a 720-mile pipeline from the Delta, following the Dempster Highway and joining an Alaska Highway system at the Yukon capital in Whitehorse.
A Canada-United States agreement provides for the Dempster option, but Imperial’s budget review rejected the idea, without disclosing whether it offered any cost advantages.
Other possibilities have been tossed into the mix, including a suggestion by newcomer MGM Energy that a Mackenzie line could be staged, starting with a system from its discoveries at Colville Hills in the Central Mackenzie Valley.
That notion is endorsed by International Frontier Resources, a small junior which was a partner in a substantial oil and gas find at Summit Creek in the same broad area as MGM.
It has become a magnet for farm-in deals with Husky Energy BG Group and EWOG Resources.
International Frontier President Pat Boswell told the Calgary Herald that there is merit in the idea of a two-stage pipeline, but only after more exploratory drilling has built up the resource base.
It’s not a concept that the key government and industry players are eager to talk about so long as the full-scale MGP is drawing breath.
Federal equity stake also gets an airing One more long-standing, but previously discarded option that is likely to get a fresh airing involves a federal government equity stake in the pipeline.
It resurfaced earlier in March in the Financial Post, which reported an unnamed government official had suggested that owning a chunk of the pipeline may be the only way around a federal role that doesn’t involve subsidies.
He emphasized that an equity stake would only be considered on “commercially reasonable terms.”
Despite having turned down the notion of the government as an equity partner, the MGP consortium has also talked about wanting a financial arrangement that shares risks and rewards.
Now that the project budget has more than doubled from a level that Imperial said represented shaky economics, the co-venturers might be more open to revisiting the full range of proposals if they are serious about actually completing the project.
Politically for the minority government of Prime Minister Stephen Harper that is facing the possibility of an early election, equity ownership that generated the same return for taxpayers as the corporate partners would be an easier sell than anything that smacked of a hand-out to the consortium.
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