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Decade older; what have we got? Mackenzie Gas Project faces being overtaken by Alaska line, shale gas; Ziff Energy analyst — pipeline dead without government money Gary Park For Petroleum News
In more than a decade since visionaries unveiled the second serious attempt in 30 years to develop Canada’s Arctic natural gas resources — call it Mackenzie Mark II — time has been wasted; costs have spiraled upward; question marks hang over the project’s financial returns; and hopes have soured.
Yet the Mackenzie Gas Project, rated as one of Canada’s largest construction ventures, hangs on for reasons that are not always clear.
Now, while Canadian regulators and governments dither, two once-unthinkable possibilities loom.
A pipeline from Alaska to the Lower 48 could overtake the MGP, shunting the Canadian venture to the sidelines in the competition for construction labor and materials.
A vastly bigger prize, offering more certain upside potential, the Alaska juggernaut could bury the MGP plans, regardless of Canadian government proclamations about the importance of developing northern oil and natural gas to strengthen national energy security and Arctic sovereignty claims.
Mark I scuttled in 1977 When Mark II was rolled out it was touted as a sleeker, more advanced version of Mark I that was scuttled in 1977 when British Columbia Supreme Court Justice Thomas Berger (appointed federal commissioner of a Mackenzie pipeline inquiry) imposed a 10-year moratorium on construction of a pipeline along the Mackenzie River Valley to allow for the settlement of aboriginal land claims.
In the interim much changed: Land claims were negotiated, allowing aboriginal communities to participate in energy projects and share royalties; an Aboriginal Pipeline Group was formed to take a one-third equity stake in a Mackenzie pipeline; and technical barriers to building a pipeline through permafrost had been lowered.
Brendan Bell, the Northwest Territories energy minister when Canada’s National Energy Board started formal hearings into Mark II, said in early 2006 that the project could redefine the economy of Canada’s North by revisiting the assumptions of 1977 that northern people did not have the capacity or ability to “benefit substantially from development in their own backyard.”
Review panel in fifth year Not all of the aboriginal opposition has been overcome to this day, but there was no shortage of optimism as the NEB and a Joint Review Panel set out to tackle the financial, physical, environmental and socioeconomic consequences of approving the MGP.
The hearings wound up in late 2007 and that’s when whatever glue held the MGP together started coming unstuck.
The Joint Review Panel was originally supposed to deliver its findings within two years of being appointed by the Canadian government.
It’s now well into its fifth year, has spent more than C$19 million compared with the initial budget of C$6.8 million and isn’t scheduled to submit its final report before late this year.
The NEB will then need the best part of another year to combine its recommendations with those of the Joint Review Panel and ask the federal cabinet for a verdict.
The NEB has indicated it does not expect deliveries can start from the Mackenzie Delta before 2017 — at least a decade later than what was hoped when Mark II made its appearance on the starting grid.
No longer tactful Government and industry leaders have long since given up being tactful.
As they have watched the possible completion dates for the MGP and an Alaska pipeline shrink to about three years, their anxieties have boiled over.
Canada’s Environment Minister Jim Prentice, who has carried the MGP file through two changes of cabinet portfolios, has openly shown his exasperation this year, disclosing that he had contemplated legal action to prod the Joint Review Panel to complete its work, but found that was outside his mandate.
He still insists the MGP, after being worked on for almost 40 years, has “never been closer” to proceeding, suggesting the government and the MGP proponents are on track to a fiscal agreement.
Economics under attack
But, whatever optimism Prentice can muster, the economics of the MGP are under attack from two directions.
An initial ballpark estimate of C$5 billion has long since been tossed on the reject pile. The last official guess was C$16.2 billion in 2006 and most bets now put the cost closer to C$20 billion.
That requires a major leap of faith by the industry co-venturers, who are faced with trying to read the future of gas markets and commodity prices far into the future, when they have access to established reserves of a mere 5.8 trillion cubic feet.
Whether they can count on independent explorers outside their owners’ group of Imperial Oil, Royal Dutch Shell, ConocoPhillips and ExxonMobil, to expand pipeline capacity to 1.8 billion cubic feet per day is also a dubious proposition, now that those companies have pulled back from the Mackenzie Delta pending a final go-ahead from the main government, aboriginal and industry players.
Montney and Horn River Through all of the plodding progress, two other names have surfaced that, perhaps more than anything else, spell trouble for the MGP: Montney and Horn River.
Together those two unconventional gas resources in northeastern British Columbia have recoverable reserves tentatively estimated at 100 tcf, 17 times more than the Mackenzie Delta, and are likely to be accounting for at least 10 percent of Canada’s total gas volumes before construction could start on the MGP.
The NEB has affirmed that prospect in its latest short-term natural gas deliverability report covering 2008-10, predicting that Montney and Horn River will more than offset the expected 7 percent decline in Canada’s conventional output by 2010.
Add to that the rapid growth of gas production from horizontal drilling for shale gas in Texas, Louisiana, Oklahoma and Wyoming, adding 8 percent a year to U.S. volumes.
While it’s not clear what fiscal terms the Canadian government has, or will offer the MGP consortium, there has been talk of an initial royalty of 1 percent on gross revenues for the first 18 months, growing in increments of 1 percentage point each 18 months until a 5 percent rate is achieved and will remain in place until the capital costs have been paid off at which point the federal government will be entitled to either 5 percent of gross or 30 percent of net, whichever is greater.
Stern competition In a gas outlook report to 2020, the NEB has conceded that Arctic projects face stern competition from shale gas, extreme market volatility, the availability of labor, cost escalation, lining up financing and obtaining access to land.
But it notes that Canada’s gas resources north of the 60th parallel and stretching into the Arctic Islands could contain 225 tcf, but, even under the best circumstances, will make only a minor contribution to Canadian supplies by 2020.
Having conceded there is nothing it can do through the courts to bring the Joint Review Panel’s work to an end, the Canadian government keeps pledging it will figure out a way to streamline approvals of energy and mining projects.
Natural Resources Minister Lisa Raitt told a conference of energy ministers Sept. 1 that Ottawa wants to consolidate the powers of the federal, provincial and territorial governments to achieve a single-level approval process, once they can agree on how to achieve that goal.
She said her counterparts agreed “to the concept of one project, one process” — small consolation for the MGP.
Northwest Territories Industry Minister Bob McLeod said the ministers did not view the harmonization as encroaching on their authority.
“There’s concern about the fact that the regulatory process takes a long time and some of the ministers felt that some of the federal departments are requiring certain things that could be done a lot faster.”
Major Projects Management Office Raitt said the federal government, which established a Major Projects Management Office last year to coordinate resource projects, now realizes that a “more fundamental step-change has to happen in order to ensure we remain competitive in the world. Capital is dispassionate. It will go where it has the best environment for investment. And we need to ensure that we don’t have a man-made obstacle in the way.”
McLeod told reporters that the federal government must do more to accelerate the MGP by offering concrete backing in light of the U.S. government’s willingness to provide $30 billion in loan guarantees for an Alaska pipeline.
He said Canada “needs to find the political will to make sure the Mackenzie line goes ahead. It’s not just about money. It’s about creating jobs, lower fuel costs for Canadians and it will open up the north for exploration.”
McLeod said the Canadian government should look on the MGP as a key plank in its assertion of Canadian sovereignty over Arctic lands and waters.
APG frustration The building frustration is mirrored by Fred Carmichael, chairman of the Aboriginal Pipeline Group, which has rights to a one-third equity stake in the Mackenzie pipeline for NWT Native communities. He told the Globe and Mail, “People are getting tired of waiting.”
“My goal is to see our people become self-sufficient here, with an economic base,” he said. “This is a great opportunity for the government to make sure this happens.”
The APG, with financial and logistical support from TransCanada, estimates the MGP could generate C$30 million in dividends for its member communities, along with jobs and business opportunities.
Even without regulatory and corporate approvals, it has arrangements with Canadian banks to provide loans for its one-third share, estimated at C$8 billion.
Simon Mauger, manager of gas services for Ziff Energy Group, said that unless the government offers billions of dollars in cash there will be “no deal, no pipeline.”
Prentice, who flatly rejects any prospect of direct funding, said progress is being made on the MGP fiscal framework to make the project viable.
But, in a comment that causes despair among the proponents, he said “We are not there yet.”
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