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Vol. 14, No. 25 Week of June 21, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Who’s on first?

Exxon-TransCan Alaska gas line push sends tremor through Mackenzie ranks

By Gary Park

For Petroleum News

So ExxonMobil hitches up with TransCanada to build an Alaska natural gas pipeline.

Does that spell the end of the current road for Canada’s Mackenzie Gas Project: yes or no?

Make that a definite maybe.

As opinions rolled in, there was no consensus.

Meanwhile, a separate issue is clouding the future demand for Arctic gas as North America deals with the impact on demand of gas from the continent’s shale deposits.

Steve Letwin, the Houston-based executive vice president, gas transportation and international, with Enbridge told a conference the industry is overbuilt, pointing to weak prices for a long time.

He said it is unlikely that Arctic gas, from either Alaska or the Mackenzie Delta will be needed before 2025.

Letwin said the cost of building transportation facilities could run to about US$5 per million British thermal units for the Alaska line.

Eresman: markets oversupplied

A strong indication of the current state of the North American gas market came from EnCana June 15 when the big producer said it had entered fixed price hedge contracts for 35 percent of its expected production in the upcoming sales year from Nov. 1, 2009, to Oct. 31, 2010.

EnCana said it will get an average US$6.21 per thousand cubic feet for 1.39 billion cubic feet per day, compared with its current hedged price of US$9.13 for about two-thirds of its 2008-09 production, or 2.6 billion cubic feet per day.

EnCana Chief Executive Officer Randy Eresman said the present hedging program generated close to US$2 billion in cash flow above what market prices would have delivered in the first five months of 2009.

But he said North American markets “remain oversupplied, due to two factors — the emergence of large new supplies from unconventional plays, followed by a major economic downturn in the past year that has cut demand.”

Eresman said these events have pushed prices below what it costs to add new supplies, although his company believes those levels are “unsustainable.”

“In recent months, drilling has slowed and over time we expect that production will decline, bringing the market back into balance. However, it is difficult to predict when that will occur and what price will emerge,” he said.

Looking long-term

But proponents of Arctic gas ventures have held fast to the line over recent years that their projects are proceeding on their estimate of where gas supplies and prices are headed over the long-term.

Imperial Oil (69.6 percent owned by ExxonMobil and the lead partner in the MGP consortium) reacted to the TransCanada-ExxonMobil partnership announcement with a familiar corporate line that the North American gas market will ultimately need gas from the Arctic regions of both Canada and the United States.

But the company would not be drawn into speculating on the timing of either project, or what the gathering pace of the Alaska project might mean for the MGP.

What Imperial remains focused on is wrapping up the regulatory phase, negotiating commercial and fiscal terms with the Canadian government and concluding access and benefits agreements with communities along the pipeline route in the Northwest Territories.

NWT Industry Minister Bob McLeod said the tilt towards Alaska shows even more the urgent need to settle on fiscal arrangements and conclude the regulatory process.

Otherwise, he found some comfort in assurances by the proponents that both pipelines are needed and — despite some corporate overlap — are independent of each other.

Jim Prentice, the Canadian cabinet minister overseeing the government’s role in the MGP, said he has been assured by the chief executive officers of TransCanada (Hal Kvisle) and Imperial (Bruce March) they are still committed to the MGP.

He also suggested the MGP remains several years ahead of Alaska in the planning and regulatory phases and, as he has previously said, it’s important the MGP proceed first to avoid competition for construction labor and materials.

Others were not quite so sanguine.

Lack of government support?

Fred Carmichael, chairman of the Aboriginal Pipeline Group, which has rights to acquire a one-third equity stake in the MGP, said it is obvious that ExxonMobil prefers Alaska over Canada because of the potential returns.

He told the Globe and Mail that “as mad as I am, as disappointed as I am, I have to face the reality that this is a business deal and there’s more money for (ExxonMobil) and TransCanada to be made on the Alaska pipeline” than on the MGP.

With the MGP “stuck in the mud” he said Alaska is not just moving forward; “it’s getting momentum.”

Carmichael suggested that if the Canadian government played its part in supporting the MGP, the NWT could reduce its dependence on federal money, which covers almost the entire budget of the territorial government.

Chris Theal, an analyst with Tristone Capital, said ExxonMobil, without saying so openly, has “firmly thrown its weight behind Alaska,” while the Canadian government has yet to deliver on its promise this year to deliver a fiscal package for the MGP.

Steven Paget, an analyst with FirstEnergy Capital, told the Calgary Herald that “Alaska just keeps looking better and better all the time.”

Steve Letwin, executive vice president for gas transportation at Enbridge, doubts Arctic gas will be needed over the next 15 years because of the prospect for massive development of shale gas.

“Alaska has 36 trillion cubic feet of gas, way up in the North; Haynesville (the shale play in Texas and Louisiana) has potential 70 tcf (close to market), so where are you going to go?” he said.

Bill could boost guarantees

Separately, the NWT government is uneasy that a bill before the U.S. Congress could boost loan guarantees for an Alaska pipeline to $30 billion from the $18 billion set in 2004, with Washington covering 80 percent of total project costs if the pipeline owners defaulted on the financing.

McLeod is pressuring Prentice for answers on whether the playing field has been altered with regard to the loan guarantees.

On the shale gas issue, Letwin said the years of worries over the shrinking conventional gas supplies have given way to concerns that there are not enough buyers for 1,200 trillion cubic feet of shale gas that has been discovered in the past three years, plus imported liquefied natural gas that “is needed like a hole in the head.”

As a result, he said gas prices will remain locked in the US$5-$7 range (almost double current trading levels on the New York Mercantile Exchange), for a “long time to come.”

While shale producers can operate profitably at low commodity prices, the prevailing market does not give hope to those planning Arctic pipelines.

However, he said the MGP has an edge over the Alaska project because its gas will be needed to fuel extraction and processing of bitumen in the Alberta oil sands, which are much closer to the Arctic source than markets in the Lower 48.

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Key players in MGP

It’s straightforward enough figuring out who owns what in the three anchor gas fields underpinning the Mackenzie Gas Project.

From there, the lines can get a bit tangled.

The Mackenzie Producers Group controls 5.8 trillion cubic feet of proven reserves on the Mackenzie Delta and is the driving force behind the proposal that got pulled off the shelf almost a decade ago.

Imperial Oil (owned 69.6 percent by ExxonMobil), is the lead player, with estimated marketable gas reserves of just over 3 tcf in the Taglu field, discovered in 1971.

Shell Canada is outright owner of the Niglintgak field, discovered in 1973, with marketable reserves estimated at 970 billion cubic feet.

ConocoPhillips Canada, with 75 percent, and ExxonMobil Canada, with 25 percent, jointly own the Parsons Lake discovery of 1972, with estimated marketable reserves of 1.8 tcf.

Sharing a spot among the co-venturers is the Aboriginal Pipeline Group, which could represent six aboriginal regions along the pipeline right of way, and holds an option to take up to a one-third equity stake if it is able to deliver incremental gas volumes from independent explorers in the Mackenzie Delta.

Up to 1.2 bcf a day

Current plans before regulators point to combined initial volumes of 830 million to 1.2 billion cubic feet per day, with design capacity for 1.9 bcf per day.

TransCanada is the front-runner to build and operate the main gas line from the Delta to northern Alberta (Enbridge is viewed as a contender to build and operate a natural gas liquids pipeline to its existing crude oil line from Norman Wells to northern Alberta).

TransCanada has contributed upwards of C$85 million to help the APG play its role in the regulatory process.

If the pipeline proceeds, the APG is committed to repaying that loan, while TransCanada has an option to obtain up to 5 percent of the pipeline if the anchor producers choose to reduce their overall share.

If any of the producers sells or reduces its ownership interest in the pipeline, TransCanada has first right to acquire 50 percent of such opportunities, with the APG and other owners sharing the remaining 50 percent.

The full details of various other options available to the APG, TransCanada and the owners are available on the MGP Web site at

—Gary Park