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Vol. 11, No. 11 Week of March 12, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Sink or swim for Mac line

Pipeline exec draws hope from meetings with new government; risk sharing vital

Gary Park

For Petroleum News

The new Canadian government has given “top priority” to the Mackenzie Gas Project, which is just as well because Imperial Oil is unyielding in spreading the message that without federal help the venture will die.

Based on recent meetings with Indian Affairs and Northern Development Minister Jim Prentice, Imperial Vice President Randy Broiles and Northwest Territories Premier Joe Handley are certain the government will make the project work.

“Every signal I am getting (from Prentice and Prime Minister Stephen Harper) is that this is a major project for them,” Handley told reporters at an Arctic gas symposium in Calgary March 6.

Broiles told the conference, organized by the Toronto-based Canadian Institute, that a 90-minute meeting with Prentice in February left him in no doubt that the project is a “high priority for the new administration and I have no concerns whatsoever.”

But, in case there is any wavering on the government’s part, Broiles said “mutual risk sharing” between the government and the Mackenzie proponents is vital because the project economics are “slim by any measure” when stacked up against imported liquefied natural gas undertakings.

“If new gas pipeline projects like the Mackenzie are not competitive with LNG they simply won’t be built,” he said. “Our focus for the Mackenzie is ensuring we have a viable project that can compete head-to-head with LNG in the long term.”

He forecast it will take another three or four months to complete the current round of negotiations and reach closure on “the more substantive issues.”

Broiles reiterated that a government equity stake in the pipeline has been thrown aside since it was first raised by the Liberal government of Prime Minister Paul Martin “because it doesn’t solve the (economic) problems.”

However, he said Ottawa could become a shipper if it agrees to take royalties in kind rather than cash.

One of the risk-sharing options being discussed involves the government initially moving small volumes because royalty payments start low and only climb after projects reach the payout stage.

Even striking a deal with the government is no guarantee that the Mackenzie will go ahead, Broiles cautioned.

In addition to regulatory approvals and permits, Imperial must still obtain access and benefits agreements with aboriginal regions and settle on final commercial terms. Other factors include the state of natural gas markets, project costs and the level of shipping commitments.

He said it’s typical that investments opening up new basins are “marginal at best ... that is the case here.”

On the issue of access and benefits agreements, four of five aboriginal regions have negotiated agreements in principle. The K’asho Got’ine and Sahtu have yet to ratify theirs, but Broiles is confident about the outcome. He said talks are continuing with the Deh Cho, the major hold-out.

Imperial wants a clear signal on all outstanding agreements by the time regulatory hearings end later this year.

The Aboriginal Pipeline Group, a consortium of groups that hopes to secure one-third ownership of the pipeline, has given the Deh Cho until June 30 to join the group or lose their option, said APG president Bob Reid.

He said the deadline is necessary because APG plans to approach the financial markets this summer to borrow the C$1.3 billion (30 percent debt and 70 percent equity) needed to back its stake.

Reid said there will also be pressure on the Canadian government to offer a loan guarantee to help reduce the cost of APG equity.

Handley told the conference the Harper government will honor agreements reached with the previous regime, notably a promise of C$500 million over 10 years to ease the cost of socio-economic impacts from the pipeline.

He said the government understands that the fund is the basis for all access and benefits deals, which would be undermined without the fund.

Handley’s impression is that the new government is going to make “good sound policy decisions” not those involving political expediency.

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