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Arctic gas slammed Exxon puts cost-pressures on Alaska, Mackenzie gas lines; Imperial disagrees Gary Park For Petroleum News
Hopes of developing the Arctic natural gas resources of the United States and Canada got a bleak assessment May 30 from ExxonMobil’s chief executive officer, who pinned the future of the two projects on the chances of finding an answer to fast-rising costs.
Rex Tillerson said the latest budget projection of C$16.2 billion for the Mackenzie Gas Project mean “it’s not viable to build that pipeline.”
Imperial Oil spokesman Pius Rolheiser told Petroleum News May 31 he was not aware of anything in Tillerson’s comments that was inconsistent with Imperial’s long-standing position, adding “there is nothing new from our perspective.”
“We continue to believe this is ultimately a do-able project,” he said. “Is it economically challenged? Absolutely. It has never been a slam-dunk.”
Rolheiser said ExxonMobil, which owns 69.6 percent of Imperial, is a member of the MGP proponents’ group, but Imperial remains the lead partner and operator.
Other than confirming negotiations with the Canadian government on fiscal terms are on-going, including an examination of a “variety of options to improve the economics,” he would not comment on what he described as “confidential and sensitive” discussions.
Tillerson was similarly pessimistic about the cost outlook for getting North Slope gas to southern markets, although he said no recent studies have been undertaken.
“My expectation is if we went back and looked at the (Alaska) costs again, they would have gone up dramatically,” Tillerson told reporters May 30 after ExxonMobil’s annual meeting in Dallas.
“It involves lots of steel, lots of compressors, lots of valves, all the same things you need for the Canadian project,” he said.
Enbridge: 10 years to start of Alaska project Meanwhile, Ron Brintnell, Enbridge’s director of gas development, told a conference in Whitehorse, Yukon, that it will be at least 10 years before construction could start on an Alaska Highway pipeline, suggesting that it is “not unrealistic” to look beyond 2020 for initial shipments from the North Slope.
He estimated that Enbridge, if it gained a stake in the pipeline, would likely spend at least C$1 billion moving the application through the regulatory process.
“There has never been an infrastructure project of this magnitude in North America,” he told the May 29 conference. “It could quite possibly be the largest private-sector construction project in the world.”
Brintnell said the “A to B portion (the North Slope to Alberta) could be well in excess of $20 billion. If that’s Canadian dollars or U.S. dollars, we’re still talking about a lot of money.”
He also said Canada does not have sufficient skilled workers to build its portion of the pipeline.
The bulk of Tillerson’s remarks were directed at the MGP, which both Imperial (34.4 percent operator of the MGP) and the Canadian government have insisted remains alive despite the latest surge in costs to C$16.2 billion from C$7.5 billion in fall 2004, a drawn-out regulatory process and slow progress towards reaching benefits and access agreements with aboriginal communities in the Northwest Territories.
Tillerson said it is not clear whether the Canadian government is willing to create “enough room in the fiscal structure” by offering a package of royalty and tax incentives to give the co-venturers an acceptable rate of return.”
“It may just be that this project will have to wait for a different cost environment,” he said. “We’re now in a situation where it’s not economic at current costs.”
Tillerson has been more upbeat About 18 months ago, Tillerson was decidedly more upbeat, suggesting Arctic resources could play a key role in meeting global energy needs.
He said at that time that good progress was being made on the MGP and he expected “that we will ultimately get across the finish line.”
UBS Securities analyst Andrew Potter told the Globe and Mail it is clear Imperial is not willing to proceed without federal royalty and tax breaks.
He said that at current spot market gas prices, the MGP would yield an 8 percent rate of return, short of the double-figure returns most observers see as minimum to keep the project alive.
But Potter said the Canadian government, despite its reluctance to subsidize the world’s most profitable oil company, is eager to open up Canada’s North to resource development.
He said Ottawa views the MGP as a strategic project for Canada and North American gas supply.
The office of Indian Affairs and Northern Development Minister Jim Prentice said the government has no indication that Imperial is on the verge of walking away from the project.
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