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Vol. 16, No. 11 Week of March 13, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Mackenzie bounces back

Aboriginal Pipeline Group president optimistic about fiscal deal with government

Gary Park

For Petroleum News

Suddenly, out of a gathering gloom, the Mackenzie Gas Project has reappeared, apparently full of vigor and hope.

The rallying cry came from Bob Reid, president of the Aboriginal Pipeline Group, who told a Calgary conference that the MGP’s corporate partners are set to resume talks with the Canadian government in hopes of reaching agreement on federal fiscal terms by mid-2011.

“We want to get back and get this thing done,” he said. “The north is truly ready and waiting.”

Reid told the Canadian Institute’s Arctic gas symposium that the federal cabinet is expected to give final regulatory approval to the project in March, opening the way to settle on a fiscal framework.

If a fiscal deal included loan guarantees for borrowing capital at a low cost, it would allow the APG to finance its one-third share of a Mackenzie Valley pipeline — last estimated to cost C$11.3 billion of the project’s overall price tag of C$16.2 billion.

That, along with federal money for related infrastructure in the Northwest Territories, might ensure the MGP was economically viable for the other partners — Imperial Oil 34.4 percent, ConocoPhillips Canada 15.7 percent, Shell Canada 11.4 percent and ExxonMobil Canada 5.2 percent.

The consortium could then start talks for final off-take deals with shippers to provide 1.2 billion cubic feet per day, Reid said.

He said a key breakthrough is imminent that would see the Dehcho First Nations join the APG and provide unanimous support from aboriginal communities along the proposed pipeline right of way.

First oil by 2018

Reid indicated that if all the pieces fall into place, construction could start in 2013 and the first gas could reach markets in 2018.

In the meantime, completion of a fiscal deal might also open the way for the MGP partners to rehire staff and resume detailed engineering and field work which was suspended in 2007 during the protracted regulatory process.

Northwest Territories Industry Minister Bob McLeod said the Canadian government must demonstrate its support in a tangible way, remarking that “currently federal engagement is lacking.

“Northern leaders are saying the federal government is not doing nearly enough to support development in Canada’s north or development of Arctic gas,” he said, arguing that was in “stark contrast” to U.S. government backing of an Alaska natural gas pipeline.

McLeod said Ottawa must ensure that the MGP’s aboriginal partners can obtain the best possible financing rates.

In making a case for the project at a time when many observers question its need, Reid said the initial 6 trillion cubic feet of Mackenzie Delta reserves that back the MGP would provide enough gas to heat every home in Canada for six years.

Like other proponents of the MGP, he also noted that the U.S. government has committed US$18 billion in loan guarantees for an Alaska gas pipeline.

Lower tolls could result

If Canada followed the U.S. lead it would lower the cost of capital by improving ratings of the debt, resulting in lower transportation tolls, Reid said.

“If you take an A rating, which we would get with this collection of companies right now, and improve that to an AAA ratings, you could reduce the toll by US$1.50 (per million British thermal units). That’s how sensitive it is. It’s huge,” he said.

Reid also said he is a firm believer that “market forces will prevail” and gas prices will recover, estimating that Canada needs to deliver 3 billion cubic feet per day of new gas per year just to maintain 2009 levels of 15.8 bcf per day.

He said that on an energy-equivalent basis the current price of oil versus gas is 25-to-1, when it should be 6-to-1.

Reid said shale gas — aside from concerns about the high initial decline rates in shale gas wells, high water consumption and potential groundwater consumption — has not been able to offset natural declines in Canadian production and gas well completions are now down 66 percent from 2004.

On top of that, demand from Canada’s industrial sector is forecast to rise 3.1 percent a year, while the country’s 33 coal-fired power plants have been given until 2020 to meet new environmental standards — an incremental market that would by itself consume the entire throughput of the Mackenzie Valley pipeline, he said.

The APG estimates power generation, where consumption has grown by 70 percent since 2000 — will be the largest growth sector for natural gas over the next 10 to 15 years.

Both lines can proceed

Speaking at the same conference, Larry Persily, federal coordinator for Alaska natural gas transportation projects, echoed Reid’s view that both the Alaska and Mackenzie projects could proceed in the long term, provided they are designed and financed to compete in the North American market.

“If there is ever going to be an Alaska pipeline project, somehow there is going to have to be a commercial deal between the producers on the North Slope, who will provide the financial underpinnings, and TransCanada probably,” he said.

“Alaskans are losing patience as they once made money out of oil and now they want to be rich on gas.

“They need to stop thinking of their fair share in tax dollars alone and rather sit down and negotiate fiscal terms and find shippers that will tip the balance in their favor,” he said.

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