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MGM defers Arctic programs
MGM Energy, the last active explorer in Canada’s Mackenzie Delta, has vented its feelings about the drawn-out regulatory phase of the Mackenzie Gas Project in the most telling way.
The Calgary-based junior said it will not do any more drilling or seismic work until the project, last estimated to cost C$16.2 billion, clears the official hurdles.
MGM said it will defer three final wells and remaining seismic work covered by its revised farmout agreement pending a decision by the Imperial Oil-led Mackenzie consortium to go ahead with a pipeline.
MGM President Henry Sykes said in a statement May 5 that the actions, facilitated by a restructured exploration agreement with Chevron and BP, are in the best interests of MGM shareholders “given the complete lack of progress on the regulatory process.”
In particular, he blamed delays by the Joint Review Panel, charged with making recommendations on environmental and socioeconomic matters, and the failure by the pipeline proponents and the Canadian government to reach a fiscal agreement.
He said the farmout changes mean MGM is “no longer required to spend substantial amounts of money on the Chevron/BP farmout (apart from an obligation under the Inuvialuit Concessions) until a decision has been taken to build the Mackenzie Valley pipeline.”
MGM now operator The changes to the farmout agreement transfer the operator’s role to MGM, allowing it to delay the drilling and seismic work until after a “decision to construct” has been made.
However, MGM said it will “immediately earn the maximum interest available to it under the farmout agreement, consisting of a 50 percent interest in the farmout lands as well as in the discoveries in the Mackenzie Delta previously made jointly by Chevron and BP Canada.”
As a result, MGM is now committed to drilling three wells within three winter drilling seasons after the decision to construct occurs, instead of drilling the wells by April 2010 at an estimated remaining cost of C$55 million-C$60 million. Those wells could be appraisal or development wells.
It will also be able to carry the joint account for the balance of the seismic commitment, about C$26 million, on development costs after the decision to construct occurs.
Under the original agreement it would have been required to spend that money by April 2012, or pay 50 percent of the unspent commitment as a cash penalty.
Acquires concession areas In addition, MGM will acquire 100 percent of the Inuvialuit Concession Areas 1 and 2 and make all penalty payments due to the Inuvialuit Land Corp. — to a maximum C$10 million for MGM — if no wells are drilled on those lands by April 2010.
MGM said it will now not complete a drilling program in the 2009-10 winter, but may complete one or two wells on the Inuvialuit lands to extinguish the C$10 million penalty.
It said that given the location and nature of the Inuvialuit Concession wells, the cost would be significantly less than what it has spent over the past three years.
The company said it expects to have working capital of about C$18 million at June 30, which it believes will fund its existing obligations and commitments until the third quarter of 2010.
Under the restructured agreement, contingent resources in four areas (Umiak, Ellice J-27, Chevron-BP previous discoveries and Nogha) total 1.3 trillion cubic feet and prospective resources total 355 billion cubic feet, with the net to MGM standing at 703 billion cubic feet of contingent resources and 185 billion cubic feet of prospective resources.
Separately, MGM reported a net first-quarter loss of C$36.4 million, or C14 cents a share, tied largely to dry-hole costs from two wells of C$34.2 million. Capital spending for the three months was C$45.19 million in drilling and logistics for the three wells drilled and C$504,000 for geological and geophysical work.
—Gary Park
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