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Vol. 16, No. 12 Week of March 20, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Fiscal framework negotiations next for Mackenzie Gas Project

Having emerged intact from a drawn-out, tangled regulatory process, the Mackenzie Gas Project now faces a fresh round of challenges, building toward a final corporate decision on whether to start construction.

The venture is now largely in the hands of its proponents, who now have to weigh the future of North American gas demand and price outlook as they try to decide whether it can be economically viable in the 2018-20 startup period and for at least the next 30 years.

The National Energy Board, following approval from the federal government cabinet, issued a certificate of public convenience and necessity March 9.

That opens the way for negotiations to resume on a federal fiscal framework, the completion of engineering and field work and a start to the process of obtaining about 6,300 permits and authorizations.

The partnership has until the end of 2013 to decide whether to give the final go-ahead and the end of 2015 to start construction, which would likely bring the project onstream in the 2018-20 period, delivering 1.2 billion cubic feet per day to southern markets.

Imperial looking for balance

The partners are Imperial Oil 34.4 percent, Aboriginal Pipeline Group 33.3 percent, ConocoPhillips Canada 15.7 percent, Shell Canada 11.4 percent and ExxonMobil Canada 5.2 percent.

Imperial is “very pleased” to have the regulatory approval and will now focus on seeking an agreement with the Canadian government on a fiscal framework to “provides an appropriate balance of risk and benefit” for both sides, a spokesman said, while emphasizing that there is a long road ahead.

The Northwest Territories government is seeking a fiscal deal that includes loan guarantees and federal money to pay for related infrastructure to ensure the MGP is the springboard to a producing oil and gas basin in the Mackenzie Delta and Beaufort Sea.

TransCanada, the frontrunner to build and operate a gas pipeline from the Mackenzie Delta along the Mackenzie Valley, has argued Arctic gas will be needed to offset the decline in conventional gas in the Western Canada Sedimentary Basin and keep its pipelines operating at capacity.

APG: Northern gas needed

Bob Reid, president of the APG, said that although the MGP is not economic at current gas prices of around $4 per thousand cubic feet and despite the popular belief that shale gas will serve long-term market requirements, Canada will need northern gas in the latter part of this decade.

He said it is inevitable that gas prices will improve, adding “I’m a firm believer that market forces will prevail.”

After a long regulatory process, “we are looking forward to moving ahead — finally,” he said.

“There’s a lot of work to be done and that December 2015 date is going to creep up on us pretty quickly,” Reid said.

APG Chairman Fred Carmichael called for support to put pressure on the Canadian government to follow the U.S. government lead and “provide a loan guarantee that will make this project happen.”

He said the APG will need to borrow up to C$6 billion to secure its equity stake in the pipeline and a federal loan guarantee would allow the APG to obtain that money “at the lowest possible interest rate.”

Analyst sees little support

Doug Matthews, a Calgary oil and gas analyst, told the Canadian Broadcasting Corp. earlier this year that the Canadian government has failed to sell the MGP to taxpayers.

“I think there’s very little support, certainly within the federal government, for significant financial injections into this project. And that’s just too bad,” he said. “You’re hard pressed to think back to a cabinet minister really going public with strong support for the MGP.”

Despite recent signs of renewed support for the MGP, FirstEnergy Capital analyst Steven Paget said the outlook for the North American gas market is more crucial than the regulatory formalities.

He said shale gas projects, which are much closer to existing infrastructure and major population centers than the MGP, are likely to proceed first.

Paget said the MGP would need gas prices of $6-$8 per thousand cubic feet to proceed and that is not likely before at least 2015 and, according to Canadian Natural Resources, possibly as late as 2018.

Alberta Energy Minister Ron Liepert said the current price of gas does not justify either the Mackenzie or Alaska pipelines.

“There are challenges to overcome and they are economic rather than environmental or land concern issues,” he said.

Joe Marushack, Canadian president for ConocoPhillips, said earlier in March the MGP is a “pretty tough project” given where gas prices stand.

—Gary Park

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