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Vol. 11, No. 36 Week of September 03, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Costs pose threat

Minister uneasy about new Mac numbers; warns gas line can’t bear more delays

Gary Park

For Petroleum News

Two obstacles keep growing for the Mackenzie Gas Project, but the one that most disturbs Northwest Territories cabinet minister Brendan Bell is the rising costs.

He candidly admits he is “not looking forward” to a time this fall when project operator Imperial Oil lays out its updated budget.

That’s when the common betting has the price tag jumping from C$7.5 billion to somewhere close to C$10 billion, which puts the venture on the borderline.

Tom Ebbern, an analyst at Tristone Capital, figures the development of Mackenzie Delta gas is economic with crude oil at US$60-$70 a barrel and natural gas at US$7-$9 per million British thermal units.

Imperial Vice President Randy Broiles, announcing a new evaluation of the cost projections in June, said the soaring cost of labor and materials forced the partners to take a second look at their budget.

Imperial has yet to establish a breakeven point or say when the new estimate will be released beyond indicating it is likely later this year.

Regulatory and cost concerns

Bell, who holds the industry, tourism and investment portfolio, told Petroleum News he is hoping the NWT government will be at the table with the Canadian government when Imperial presents the numbers and makes what many expect will be a bid for royalty and tax relief.

Speaking from the annual conference of Canada’s federal, provincial and territorial energy ministers in Whitehorse, Yukon, Bell said his concerns are two-fold: Continuing delays in the regulatory process and the costs.

Of the two he is “much more concerned about costs” which are caught in period of inflation that has put the squeeze on other energy mega-projects such as the oil sands, where operators Imperial, EnCana and Husky Energy have warned they could be forced to move upgraders from Alberta to the United States or overseas.

The regulatory delays, which point to the postponement of the Mackenzie project’s start-up date from 2011 to 2012, are weighing heavily on all energy ministers, who issued a communiqué calling for energy supply, infrastructure, efficiency and conservations options to be developed in a timely and responsible manner.

They agreed to identify and develop pilot projects using a “single window” regulatory approach over coming months and report back in early 2007.

Bell: too late to intervene in Mackenzie

Federal Natural Resources Minister Gary Lunn, echoing concerns expressed in August by Prime Minister Stephen Harper, urged the ministers to figure out how to expedite projects through the regulatory process. Bell said it is too late to intervene in the Mackenzie process, which has “got to run its course.”

But he said the latest delay, when the Joint Review Panel examining environmental, socio-economic and cultural impacts, extended its completion date by five months to mid-April 2007, will result in overall “slippage” of one year in the completion date because of the weather-affected construction season in Canada’s North.

“The project can’t withstand any more delays,” he said. “This (the panel delay) has got to be it.”

Apart from hearings being conducted by the panel and Canada’s National Energy Board (which deals with technical, safety and economic matters), the project also needs thousands of permits and licenses to proceed and that, too, is an open-ended phase, Bell noted.

Bell said the worry among ministers is that a failure by Canada to set fixed regulatory deadlines along the lines of the U.S. Federal Energy Regulatory Commission will drive investors away.

He emphasized the deadlines would be tailored to specific projects and would not “diminish or water down environmental standards or debate.”

But for now there is no provision in Canada for governments to legislate or issue ministerial directives to bring discipline to the regulatory process.



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