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Vol. 10, No. 19 Week of May 08, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Where now for Mac?

Arctic gas partners dismiss claims they are bluffing: Shell Canada chief executive officer says Mackenzie gas pipeline project ‘looks threatened’

Gary Park

Petroleum News Calgary Correspondent

It’s not a replay yet, but it’s close.

Efforts to open up development of Canada’s Arctic natural gas have stumbled over aboriginal demands and regulatory uncertainty, just as they did in the 1970s.

Whether the end result will be the same, and the Arctic is returned to the deepfreeze for an indefinite time, now hangs in the balance.

But the options have been painted in stark terms by partners in the Mackenzie Gas Project.

They are fed up with regulatory stalling and perplexed by demands for social and economic agreements that Imperial Oil Senior Vice President Michael Yeager told a conference call April 28 could cost “hundreds of millions of dollars” and are “far beyond our scope and responsibility.”

To those who think the proponents are bluffing, Clive Mather, chief executive officer of Shell Canada, had an unambiguous message: “This project looks threatened. Believe me, we are not posturing. What I hope this will do is signal the depths of concern we have.”

Hal Kvisle, chief executive officer of TransCanada, the frontrunner to operate the pipeline, said the partners want to move the gas on the same economic basis that applies in the rest of Canada.

But the pressure is on the consortium to meet the social needs in the Northwest Territories — “hospitals, education, dental care, many other things.

“Local communities have asked the pipeline project to provide all this. We don’t think that is right. We think these are matters between the federal government and the people who live there,” Kvisle said.

Government action required

What the consortium wants, Yeager said, is:

• A clear regulatory process with fixed timelines that provides a foundation “we can plan our work around.”

• Action by the Canadian and Northwest Territories governments to resolve socio-economic issues raised by aboriginal organizations.

While the partners have halted field work that relates to gathering geotechnical data, starting detailed engineering and awarding construction contracts, the 200 full-time staff will proceed with the regulatory aspects.

Brendan Bell, the Northwest Territories cabinet minister responsible for resource development, put in blunt terms what Yeager skirted around.

Unless Northwest Territories communities get behind the project — and so far not one aboriginal access permit has been secured — the venture could collapse this fall, he said.

Failure to get formal regulatory hearings under way by then could see the gas owners divert their spending to assets elsewhere in the world, he said.

He hoped the Mackenzie Gas Project stand would be a “wake up call for everybody,” especially the Canadian government, which he insisted has the responsibility to deal with aboriginal land access and benefits claims.

“I don’t think we can let (the 2010 start-up date) slip,” he told reporters. “If (the partners) walk away the project could be delayed for many years.”

Gathering clouds over the C$7 billion scheme to bolster North American gas supplies by 2010 only darkened in the aftermath to the Mackenzie Gas Project announcement.

Kakfwi: developers bluffing

Stephen Kakfwi, a former Northwest Territories premier and a key player in scuttling the first Mackenzie project, offered no apologies for seeking compensation for aboriginal organizations both as land owners and governments in their own right.

Viewing the Mackenzie Gas Project’s stand as a bluff, Kakfwi, a negotiator for Fort Good Hope, said that unless the First Nations organizations can reach agreements now the “oil and gas will be gone from our land and everybody will get rich except us.”

Yeager said the aboriginal problems, such as a severe housing shortage, are matters governments must address, taking advantage of taxes and royalties generated by the Mackenzie Gas Project.

He echoed what his boss Tim Hearn said a week earlier — there is little room for more delays.

“We can’t have more and more months of slippage,” he said, pointing out that even a short delay could translate into a year of lost time, given the narrow, 75-day northern construction season.

What is urgently required by the consortium is “confidence that our investment will yield a reasonable return (and) right now we don’t have that confidence.

“We certainly did not make a decision to stop the project,” he said. “We made a decision to continue to focus on the priority issues.”

Even so, the Mackenzie Gas Project announcement is the clearest setback to several years of work that have cost C$350 million, involved hundreds of hours of meetings and consultations with northern residents and resulted in 6,500 pages of regulatory filings.

The process has also spawned thousands of requests from regulators, environmentalists and aboriginals for information — not all of which Yeager views as pertinent to the project.

Although 250 approvals have been received, Imperial projects manager Randy Ottenbreit said thousands more are needed.

“Recent experience suggests there are some uncertainties with these processes,” he said.

But Yeager carefully stepped around any finger-pointing.

He deflected suggestions that the Mackenzie Gas Project is engaging in brinksmanship; declined to single out northern or aboriginal communities for blame; and had only positive comments on the Canadian government.

Gobert: demands economic ‘ransom’

Others were less reticent.

Wilf Gobert, vice-chairman of Peters & Co., who was a pipeline analyst during the rise and fall of the first Mackenzie project, said no-one should take Imperial lightly, noting that the subsidiary of ExxonMobil won’t hesitate to walk away unless the economics work.

He told the Globe and Mail that the aboriginal demands have become unreasonable and amount to an economic “ransom.”

Andrew Fairbanks, an analyst with Merrill Lynch, said in a report to clients that although the project is not yet doomed, the Mackenzie pipeline and related Arctic development have “fallen from a probability to a possibility.”

“We do not believe the partners would engage in this degree of brinkmanship with a C$7 billion project simply to gain concessions unless they were truly ready to abandon the effort,” he said.

The snapping point for the Mackenzie Gas Project seemed to be a fresh demand from Northwest Territories aboriginals for C$40 million a year to fund programs such as health and dental care, alcohol and drug abuse, housing, roads and schools and the right for communities to impose surcharges and 1 percent property tax.

Yeager said the Mackenzie Gas Project has always been ready to work on education, job training and business development opportunities with the Inuvialuit, Gwich’in, Sahtu and Deh Cho groups, and to pay pipeline-related royalties and taxes, but the demands that have poured in are “far beyond that.”

But Kakfwi views Imperial’s offer of “a contract and a few jobs” as unreasonable, given that the company stands to “make billions.”

Canadian government teetering

Gobert agreed that the warning shot should be a catalyst for the Canadian government to act, but he thought the likelihood of movement from Ottawa is remote with the government of Prime Minister Paul Martin teetering on the brink of defeat, forcing a possible June election. (See related news item on the side of page 1.)

Yeager was tactful when questioned on the political uncertainties in Canada, which are impeding decisions on both the Mackenzie Gas Project and the Canadian portion of the proposed Alaska pipeline.

He said only that “we are pleased with the time the federal government has given us.”

Not everyone was willing to give the Mackenzie Gas Project proponents a free pass.

Ian Doig, a veteran analyst of Canada’s frontier energy regions, took the unusual step in a conference call of scolding Imperial and its partners.

He accused them of misreading how ill-prepared regulators were to handle such a complex project, suggesting they should have used EnCana’s regulatory hang-ups with its Deep Panuke gas project offshore Nova Scotia as a “litmus test.”

“You got into a marathon run when you had no idea where the finish line was,” Doig said.

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