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Vol. 11, No. 31 Week of July 30, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Setbacks don’t mean backing down

Mackenzie Gas Project hit with 5-month regulatory delay; partners, NWT government keep the big prize in their sights

Gary Park

For Petroleum News

The challenges were formidable to begin with and they just keep building.

That’s something that neither the proponents of the Mackenzie Gas Project, nor those who stand to benefit from opening a natural gas basin in Canada’s Arctic, have ever disputed.

What they can’t answer is whether a combination of cost inflation, unresolved aboriginal and environmental concerns, the competing economics of Arctic gas and imported liquefied natural gas and now a further regulatory delay can ultimately bring the venture to its knees.

But there is a stiff resolve among the project partners and the Northwest Territories government to push ahead.

“At the core is our belief that this can be an attractive project” for the companies involved, aboriginal and other residents of Canada’s North and the North American gas market, said Pius Rolheiser, spokesman for project operator Imperial Oil.

“The economics that underpin the project are still there” to use the Mackenzie Delta gas resources as a basin-opening venture that can be a source of a sustainable industry in his region, said Northwest Territories Resources Minister Brendan Bell.

But, in interviews with Petroleum News, they both agreed the task ahead is formidable.

“This is not a sure thing,” said Rolheiser. “We have recognized from the outset that this is a challenging project on a number of fronts.”

To underscore that view, he said the “easiest part” could be the construction of a pipeline through permafrost in mid-winter.

Joint review panel adds five months

The latest hitch occurred July 19 when a joint review panel assigned to examine the environmental and social impacts — the National Energy Board is dealing with technical and commercial matters — rattled the proponents by adding another five months to its hearing schedule, setting a new wrap up date of April 12, 2007.

The delay came after the panel asked presenters in March how much more time they would need.

Once final submissions have been made, the joint review panel estimates it will need four months to write its report, pushing the hoped-for start of Mackenzie Delta gas shipments from 2011 (based on regulatory approvals by the third quarter of 2007) to 2012.

That comes at a time when the project partners are updating their budget which has already climbed from C$5.5 billion to C$7.5 billion because of soaring costs of labor and materials.

Some speculate that the new number, expected to be nailed down later this year, will be at least C$9 billion and could top C$10 billion.

LNG costs dropping

As the Mackenzie costs rise, LNG costs are heading in the other direction, undercutting current natural gas prices of US$6 per million British thermal units by a couple of dollars.

If LNG can find greater acceptance in the United States, some observers say there will be downward pressure on North American natural gas prices, raising even more questions about the need for Mackenzie gas.

But the Canadian Energy Pipeline Association warns the slowdown in the joint review panel work will translate into steeper gas bills as well as delaying the benefits of thousands of new jobs and millions of dollars of additional tax revenues to various governments.

It has strongly urged the panel to stick to its original schedule that would have seen public hearings conclude by Dec. 15.

In October 2005 the association issued a 45-page report estimating that a two-year slowdown in completing the Mackenzie Valley pipeline, the proposed Alaska gas line and new LNG terminals, could cost Canadians C$57.7 billion in higher gas bills and reduced government revenues over the 20-year period from 2005-2025.

David MacInnis, the association’s president, said in a release that the joint review panel delay “deprives Canadians of project benefits and creates costly uncertainty for project proponents.”

The association said the panel’s failure to “meet its commitment to conclude hearings this year also means that Canadians will have to wait for the moderating effect on natural gas prices that will occur when this new source of much needed natural gas comes to market.”

Rolheiser said the panel decision reflected what the Mackenzie partners have known from the time they revived prospects of developing Mackenzie Delta gas about five years ago — that such a “tremendously complex” undertaking, on a scale without parallel in the Northwest Territories, would encounter obstacles.

Mackenzie partners surprised

But the Mackenzie partners were surprised that the extra time needed by the joint review panel could not have been accommodated within the original 10-month schedule.

“It is too early to know the exact impact of the delay,” he said.

Even so, the partnership is pressing ahead with aligning the various stakeholders and “doing the best we can to make the economics work,” Rolheiser said.

Bell said he prefers to see a five-month delay than have issues such as the impact of the project on water quality glossed over in the joint review panel’s final report.

Although the postponement is disappointing he said “other issues are more significant” — notably the rising cost projections, the long-term outlook for gas prices and efforts to persuade the Deh Cho First Nations and a community in the Sahtu region to become full aboriginal equity partners.

Bell said that despite the drop in gas prices since late last year, they are “still robust and in the grand scheme of things are not too low” to support the project.

He remains confident the aboriginal holdouts will eventually see the business deal they have been offered, including the C$80 million provided by TransCanada to cover aboriginal participation in regulatory hearings, as “too good to pass up.”

Bell is also encouraged by signs that Canada’s Indian Affairs and Northern Development Minister Jim Prentice, who oversees the Mackenzie file, is able to “make decisions on his own without having to run the gauntlet” of various federal departments.

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