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Vol. 10, No. 42 Week of October 16, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

‘Sensitive and critical’

Mackenzie project running out of time in efforts to find economic solutions

Gary Park

Petroleum News Canadian Contributing Writer

There’s a story doing the rounds in Calgary these days that illustrates the shaky outlook for the Mackenzie Gas Project, also known as Mackenzie II.

It involves an engineer engaged in the project whose father, also an engineer, lost his job almost 30 years ago when Mackenzie I crumbled.

He is now seriously wondering whether his son, a third-generation engineer, will be left to finish the family legacy in another 30 years.

Just because close to C$400 million has been spent so far by major partners in Canada’s Arctic gas venture there is no reason to assume the project is a cast-iron certainty.

The original attempt to move gas out of the Mackenzie Delta was blocked in 1977, when a Canadian government commission imposed a moratorium on northern oil and gas developments to allow time to resolve aboriginal land claims and tackle environmental concerns.

The next month will likely tell whether Mackenzie II is, in the words of Imperial Oil Chief Executive Officer Tim Hearn, destined to take the back seat for a “long period of time.”

Headaches become migraines

Whether his warnings are interpreted as bluff and bluster or a hearty dose of realism, the headaches facing the C$7 billion project are becoming full-fledged migraines.

The filing of major regulatory applications a year ago was months behind the tentative schedule and progress towards public hearings has been bogged down in procedural matters and entangled in community and environmental opposition.

Hopes of starting gas deliveries this decade have been discarded.

A planned Alaska pipeline, rapidly moving to the fast-track stage, looms as a threat both to the Mackenzie’s ability to hire construction workers and negotiate pipe contracts and the economics of Mackenzie gas competing with 4.5 billion cubic feet per day of Alaska gas in the North American market.

Imperial has promised to advise Canada’s National Energy Board in November whether it is ready to engage in public hearings, which need to get under way by early 2006 if there is any hope of starting deliveries in 2010.

Using some of the bluntest language yet, Hearn said in Calgary Oct. 6 that “under current conditions, we don’t have an economic project and we’re working to make sure we can find one.”

Attempts to start hearings are at a “sensitive and critical stage” and quick progress is needed “because time is not on our side,” he said.

Cost recovery necessary

Without disclosing the details of the Mackenzie consortium’s case to make the pipeline economic, he said a project of that scale needs a way to ensure cost recovery for companies who are making heavy investments before seeing “one ounce of revenue or gas flowing.”

Hearn rejected speculation that the proponents want royalty breaks, saying “we are not asking for handouts, we are not asking for giveaways,” but need some protection against a precipitous drop in gas prices.

The Sierra Club of Canada has claimed the demands total C$2 billion — a figure Imperial won’t confirm or deny, although the mere speculation has aroused bitterness among aboriginal regions in the Northwest Territories who want the right to impose property taxes in return for land access and not the one-time payments proposed by the Mackenzie consortium.

Herb Norwegian, grand chief of the Deh Cho First Nations, said the aboriginal regions along the pipeline right of way are legitimate governments and have authority to impose taxes.

Stephen Kakfwi, a former Northwest Territories premier and now a negotiator for the K’Asho Got’ine Dene, wants C$47 million paid in annual property taxes to communities along the pipeline.

He said that is the only way to break out of poverty and for “dirt-poor communities to have access to decent infrastructure.”

Yet, to date, Imperial has not put a serious offer on the table and has failed to strike a deal with any government or aboriginal group, Kakfwi said.

He will not entertain promises of “revenue sharing” at a later date, saying this is the “time to negotiate.”

Norwegian: signed agreements needed

Norwegian also warned the companies against proceeding without signed agreements, saying negotiations would collapse and give way to an aggressive defense of Native rights and interests.

Hearn said that “if we could get the final fiscal framework and benefits and access agreements agreed to, at least in principle. I would want us to go ahead.”

Analysts and industry sources say Imperial is using gas prices of US$2.50 per thousand cubic feet to squeeze a better deal out of the Canadian government — a figure no one takes seriously.

Wilf Gobert, vice chairman of Peters & Co., said the bulk of producers are working on long-range forecasts of US$4 and others are counting on several years of US$5 floor prices.

Hearn refused to disclose Imperial’s expectations, beyond saying that recent prices of US$14 can’t survive a surge in liquefied natural gas imports to North America.

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