Mackenzie line milestone passed, potholes lie ahead

Gary Park

Petroleum News Calgary Correspondent

Whether it was one small step or one giant leap, the filing of major regulatory applications on Oct. 7 has hastened the day when the Mackenzie Gas Project consortium will come face-to-face with the issues that could make or break the C$7 billion undertaking.

The partners have already spent upwards of C$200 million on the project definition phase, including C$60 million on northern environmental studies, geotechnical work and engineering, and anticipate doubling that before they completes the regulatory process by late 2006.

Any serious stumbles or diversions that put the Mackenzie project outside its planned start-up this decade will only shorten the lead time it currently enjoys over plans to develop Alaska North Slope gas .

By most reckoning if the Alaska project, roughly four times the size of the Canadian venture, moves ahead at an accelerated pace, the demands on construction labor and materials could see the Mackenzie return to the deep freeze.

Northwest Territories Premier Joe Handley told a northern oil and gas forum in September that the project is in the long-term strategic interests of his region.

But he warned that the opportunity “may not be here 20 years from now, 10 years from now or even two years from now if we are not careful.”

Imperial: Filings a milestone

Focusing strictly on those matters it can influence, the Mackenzie consortium says that in addition to the regulatory approvals and hundreds of permits it needs, a final decision to proceed hinges on complex benefits and land access agreements with aboriginal communities along the pipeline route, an assessment of the gas markets, updated project costs and firm fiscal terms.

The price tag for developing the three anchor gas fields on the Mackenzie Delta, building connections and process facilities and completing two pipelines — a gas delivery system from the Delta to northern Alberta and a gas liquids line to Norman Wells — is now C$7 billion, up 40 percent from the initial estimates.

That increase stemmed partly from the decision to include a separate liquids pipeline and build a larger gas processing facility at Inuvik.

“We now have a much better understanding of the costs of developing the anchor fields,” Searle said.

He said that getting to grips with the costs is an evolutionary process that has generated today’s number, but will likely change again “once we come out of the regulatory process.”

Added costs reinforce marginal nature

In the view of Calgary analyst Ian Doig, publisher of Doig’s Digest, it might also pump fresh life into the Dempster Lateral project by Foothills Pipe Lines, which is now owned by TransCanada and is the sole holder of government permits to build the Canadian portion of the Alaska Highway pipeline project.

The Dempster would see a pipeline from the Delta follow a route down the Yukon where it would connect with the Alaska Highway system and also feed into the existing Foothills pipelines, which carry 30 percent of Canada’s gas exports from central Alberta to the United States.

Other critical challenges

• Dealing with opposition from the Deh Cho First Nations to the current environmental review process.

Two lawsuits filed by the Deh Cho threaten to slow or halt the review unless the Canadian government can resolve land claims and self government deals for land covering the southern 40 percent of the pipeline right of way.

Even for those communities that are full members of the Aboriginal Pipeline Group, the benefits agreements have yet to be concluded. Negotiations have started with the Inuvialuit and Gwch’in in the Delta and northern Mackenzie valley, which Imperial’s project development executive Randy Ottenbreit indicated earlier in October are close to agreement on short-term matters. Overtures have been made to the Sahtu in the Central Mackenzie, where one of the districts is seeking an access agreement where fees would be paid in exchange for a pipeline right of way.

“We cannot afford to lose this window of opportunity,” said Aboriginal Pipeline Group Chairman Fred Carmichael. “We can no longer make a living from the land.”

• Growing environmental concerns, with the Sierra Club of Canada listing global warming as a critical issue because the Mackenzie Delta “is the place on the planet where the rate of warming is fastest.”

The Mackenzie Valley Environmental Impact Review Board has added its weight to that concern, requiring the proponents to demonstrate how pipeline design, construction, operation and reclamation and abandonment plans will be adapted to a changing climate.

• The terms and conditions for E&P companies outside the Mackenzie consortium who hope to gain access to the pipeline.

Rod Maier, Chevron Canada’s northern program manager, said those companies are required to make a significant long-term commercial exposure, which represents a financial commitment of C$1 billion or more if a company nominates 100 million cubic feet per day over 20 years at a toll of C$1.50 per thousand cubic feet.

He said it is “not for the faint of heart” to have enough confidence in their resource to commit to a 15- to 20-year period, adding that Chevron Canada has not reached that point despite a discovery in partnership with BP Canada and Burlington Resources.

• Negotiations with potential shippers outside the Mackenzie Gas Project owners — Imperial, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada — to determine whether the start-up volumes can exceed the 800 million cubic feet per day from the anchor fields.

Documents filed with Canada’s National Energy Board have contracted for total transportation of about 830 million cubic feet per day from the four Delta gas owners, leaving 370 million cubic feet per day uncommitted and available for contracting on the proposed 1.2 billion cubic feet per day pipeline.

A study by Gilbert Laustsen Jung Associates that accompanies the application has concluded there are sufficient resources for a 1.2 billion cubic feet per day pipeline to operate over 25 years, assuming a reasonable pace of exploration and development.

The study estimates total discovered and undiscovered onshore and offshore resources to support the pipeline at 16.7 trillion cubic feet.

But so far there have been only two discoveries this century by members of the seven-company Mackenzie Delta Explorers Group and plans for the upcoming winter carry an estimated cost of only C$100 million, with two wells planned — one by Chevron Canada-BP and one by EnCana-ConocoPhillips-Anadarko, although some wells from last year might be tested.

• A simmering debate on where the Mackenzie gas will end up, with the Sierra Club claiming it will be exclusively used in northeastern Alberta’s oil sands to produce “dirty oil” for export to the United States.

However, Doug Matthews, director of minerals, oil and gas for the Northwest Territories government, told an Insight Information forum earlier in October that such an argument is “uninformed and incorrect.”

He said the Mackenzie gas will move through the Alberta hub to “any number of markets,” adding his government would not endorse any northern project that served a single market.