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Vol. 17, No. 16 Week of April 15, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Mackenzie project falters

Partners scale back budgets, reduce staff, close offices; Conoco records impairment

Gary Park

For Petroleum News

Dead man walking, a self-induced coma, or a lull in proceedings — call it what you want, but the latest lurch in the drawn-out history of the Mackenzie Gas Project does not bode well for the plan to commercialize Canada’s stranded Arctic natural gas.

Amid a flurry of mixed messages on April 8 from partners in the MGP consortium, the emerging consensus is that budgets are being slashed and some staff are being laid off in response to the erosion of project economics caused by a dismal outlook for natural gas prices.

ConocoPhillips set the ball rolling by announcing it was recording a first-quarter non-cash impairment for the carrying value of its undeveloped leasehold on the Mackenzie Delta and capitalized project development costs of about US$525 million after-tax.

Lead partner Imperial Oil said its ExxonMobil Canada affiliate will scale back spending, while Imperial will close its Northwest Territories offices in Fort Simpson and Norman Wells and downsize its Inuvik operation.

Then the Aboriginal Pipeline Group or APG, which stood to obtain a one-third equity stake in the planned C$11.3 billion Mackenzie Valley pipeline, said it was taking similar measures to Imperial with its northern offices.

No death warrant

Although none of the entities offered budget or staffing specifics, all insisted they were not signing the death warrant of the MGP.

The partners are Imperial at 34.4 percent, the APG at 33.3 percent, ConocoPhillips at 15.7 percent, Shell Canada (which is trying to unload its 11.4 percent) and ExxonMobil Canada at 5.2 percent.

A Canadian spokesman for ConocoPhillips said his firm’s cuts did not represent a wholesale abandonment of the project.

He said there has been some “misunderstanding” over what was meant by ConocoPhillips’ announcement.

Despite the suspension of capital expenditures, the MGP remains part of the ConocoPhillips portfolio and discussions with the Canadian government on a fiscal framework will continue, he said.

Fred Carmichael, chair of the APG, said in a statement that his group has “not quit on this project. We intend to explore all available options to make this pipeline happen and intend to continually see opportunities to push the restart button as early as possible.”

He said that includes pursuit of a federal agreement which will protect the National Energy Board certificate of approval issued a year ago.

“Northerners have been waiting too long for the huge economic benefits this project will bring to the people of the Mackenzie Valley,” Carmichael said.

“People of the Western Arctic need jobs and opportunities just like the rest of Canada. APG will continue to press forward to make this project a reality,” he said.

Commercial viability diminished

A spokesman for Imperial told reporters that the “structure of the (federal government’s) support, combined with private sector natural gas economics, haven’t resulted in the right commercial opportunity to continue progressing at the rate we were before.”

He said the commercial viability of the MGP has diminished, but the project “must be competitive with new sources of supply in North America” to proceed.

NWT Premier Bob McLeod said the scaling back will have a significant impact on the Beaufort region, where businesses have invested heavily in anticipation of a pipeline that could generate billions of dollars.

APG President Bob Reid told a Calgary conference a year ago that the MGP was not economic at then-prevailing gas prices of US$4, which have since shrunk by 50 percent, but he held out hope that the gas might be needed by 2020.

In November, the National Energy Board also forecast prices might strengthen enough to justify developing Arctic gas by 2020.

But the ConocoPhillips spokesman in Canada said the forecasts “don’t look great. The big strike against the project is the oversupply of gas in North America. We can’t build a multibillion dollar project into that kind of environment.”

Steven Paget, an analyst with FirstEnergy Capital, said it was hard to justify building a pipeline into current markets from a region beset by a lack of infrastructure, undeveloped fields and uncertainty around how big or good the resource is when compared to natural gas in Alaska.

“I can’t make economic sense of this project,” he told the Calgary Herald, referring to the unknowns, risks and size of the resource.

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