November 18, 2005 --- Vol. 11, No. 95November 2005

Canadian government ready to share Mackenzie risks

The dam holding back the Mackenzie Gas Project for the past six months appears to have broken.

In the most telling breakthrough yet, the Canadian government has laid out a bundle of options that Imperial Oil says appears to have solved the bulk of its concerns over the fiscal terms.

In a further sign of the galloping confidence in the C$7 billion venture, Imperial told the National Energy Board it will advise the regulator Nov. 23 whether it is ready to embark on regulatory hearings in early 2006.

Canada’s Deputy Prime Minister Anne McLellan, in a letter to Randy Broiles, Imperial’s senior executive in the Mackenzie project, said her government is ready to support the project on “terms that Canada considers commercially reasonable.”

To that end, the government is “prepared to consider assuming some of the project downside risks, provided it is able to increase its share in the potential financial rewards.”

The only significant option McLellan did not put on the table included subsidies to improve the project economics by C$1.2 billion.

She also ruled out attempts by aboriginal regions in the Northwest Territories to collect property taxes on the pipeline. McLellan left no doubt that Ottawa is committed to opening up Arctic gas resources, given the “broad benefits of the project for all Canadians and residents of the Northwest Territories in particular.”

Options the government is expected to start early negotiations with the Mackenzie gas owners include:

* Accepting royalties in kind.

That would see the government take gas rather than cash payments, without reducing the government’s returns over the life of the project.

* Accepting incremental gas transportation commitments above commitments by the Mackenzie’s main partners.

Although the pipeline is being designed to carry an initial 1.2 billion cubic feet per day, the anchor gas owners — Imperial, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada — are backing only 830 million cubic feet per day. The Aboriginal Pipeline Group is attempting to line up the balance from other producers to secure a one-third equity stake. The government said it is open to offering a loan guarantee to the APG to facilitate its participation.

* Adjustments to the royalty regime.

This could see the government trim royalty payments during periods of reduced shipments and low gas prices.

McLellan told reporters in Ottawa that the producers feel that because the Mackenzie Delta is an untapped region “there are inherent risks involved. They are concerned about rates of return” and the need for “enhancements to make the project more fiscally attractive.”

Meantime, a flurry of developments, including word of early voting among Northwest Territories aboriginal communities on proposed land access and economic benefits agreements, has raised hopes that the other major barrier to the project is being dismantled.

Northwest Territories Energy Minister Brendan Bell said he is optimistic that signings will be announced within weeks, perhaps days.

Editor’s note: This story is an update to the Mackenzie Gas Project story in the Nov. 20 issue of Petroleum News that went to press yesterday and will post on Petroleum News’ web site at noon today.

Budget bill without ANWR squeaks by in House

The U.S. House of Representatives narrowly passed a $50 billion package of spending cuts early Nov. 18, ending more than a week of heated negotiations among the Republican majority over contents of the budget reconciliation package.

The measure passed by a vote of 217-215 around 1:45 a.m.

The Republican victory came more than a week after GOP moderates forced leaders to drop language that opened the coastal plain of the Arctic National Wildlife Refuge to oil and gas drilling. Republican conservatives then threatened a revolt. Party leaders hashed out changes in the deficit-cutting package to corral enough votes for passage. The last round of these negotiations came Nov. 17.

Though ANWR did not survive in the House, it is part of a budget reconciliation package passed by the Senate Nov. 3. This means the drilling language has a good chance of being included in compromise legislation House and Senate leaders are expected to negotiate before Christmas.

Offshore drilling also did not make the final cut, but a controversial provision that allows sale of public lands to mining companies did. The provision would allow companies to buy rights to public lands, ending a 10-year moratorium on the practice, and update the pricing for the first time in over a century. The purchase price of land for mining would be 200 times higher per acre than it was before the moratorium went into place.

Conservative Republicans hailed passage of the House bill as a crucial first step toward reining in federal spending balancing out the budgetary effects of the war in Iraq and Hurricane Katrina.

Democrats, who unanimously opposed the bill, criticized the idea of curtailing social programs while laying groundwork to pass a tax-cut package worth roughly $57 billion. That vote is expected before the House recesses for Thanksgiving Nov. 19.

The Senate passed its own tax cut bill, worth about $60 billion, just after midnight Nov. 18.

Editor’s note: This story is an update to the ANWR story in the Nov. 20 issue of Petroleum News that went to press yesterday and will post on Petroleum News’ web site at noon today.

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