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Petroleum News: Mackenzie in crunch

Mackenzie in crunch

Imperial not ready to speculate on reviving over-the-top option for Arctic gas

Gary Park

For Petroleum News

Cost pressures have not yet reached breaking point with the Mackenzie Gas Project, but could make the venture uneconomic, or force a rethinking of design and construction, Imperial Oil officials said.

Company chairman Tim Hearn said “we’re not close to pulling the plug,” but if costs get too high “we will have to reassess what we can do.”

“We can’t push billions beyond C$7.5 billion or I think we’ll have some pretty difficult decisions to make,” he said.

The answers could be known later this year after the latest review of the numbers, which stand at C$7 billion to develop the Mackenzie Delta’s three anchor fields and C$500 million for additional wells to sustain production.

Imperial spokesman Hart Searle told Petroleum News new numbers are needed “so that we can make an informed decision.”

He was reluctant to discuss hypothetical options, but said the Mackenzie co-venturers — Imperial, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada — would “do everything we can to make the project go, but we won’t do an uneconomic project.”

Imperial is almost 70 percent owned by ExxonMobil. In Alaska, the producers looking at building a gas line from the North Slope through Canada to Lower 48 markets are BP, ConocoPhillips and ExxonMobil.

Single pipeline not yet revived

Hearn, speaking with reporters May 2, and Searle said that looking at other ways to connect the Arctic with southern markets did not yet include reviving earlier talk of delivering Mackenzie Delta and North Slope gas into a single pipeline.

When the Arctic proposals resurfaced in the 1990s there was talk of building an “over-the-top” pipeline from the North Slope, under the Beaufort Sea and linking up with a Mackenzie Valley pipeline, or building a Dempster Highway lateral in Canada to connect with an overland Alaska pipeline in the Yukon.

“Linking up with Alaska gas is not really part of our focus,” Searle said.

He said the Mackenzie economics have been challenging from the outset and have been amplified because of the demands on construction materials and labor at a time when Canada is unable to handle every major project that has been announced.

In addition, Searle said there are the costs of infrastructure, such as airstrips and roads; the costs of participating in year-long public hearings and meeting whatever regulatory conditions might be imposed; and the market outlook for gas that will be produced over 25 years.

He said Mackenzie gas has to compete with other gas projects in North America, including liquefied natural gas proposals that are as big or bigger than the Mackenzie proposal.

The applicants want to do “everything we can to make the project go, but we don’t want to do an uneconomic project,” Searle said.

Hearn urged regulators involved in the current parallel public hearings to facilitate their review without compromising the integrity of the process.

Conservative government has budgeted C$500 million

However, he said Canada’s new Conservative government and the appointment of Jim Prentice as Indian and Northern Affairs Minister give him hope that Arctic gas can be developed.

He said that except for Deputy Prime Minister Anne McLellan the previous Liberal government had done a poor job of managing the file. “It was embarrassing,” he said.

But Prentice is “very knowledgeable and very active. … I think he gives everybody a fair degree of confidence,” by tackling unresolved matters, including a tax and royalty regime.

That view got a further lift May 2 when the federal government released its 2006-07 budget and delivered on a Liberal promise to provide C$500 million over 10 years to cover the social and economic impact of the Mackenzie pipeline.

Northwest Territories Premier Joe Handley said the fund my help conclude access and benefits negotiations between Imperial and first nations.

Without the fund, he would have been “very concerned about the message (from Ottawa) to aboriginal leaders.”

Handley is more certain than ever that the Mackenzie pipeline will proceed because of the need for new gas supplies.

Dene Tha’ take opposition to court

Hearn did not make specific reference to the various regulatory obstacles, which ratcheted up May 2 when the Dene Tha’ of northern Alberta decided to take their opposition to the pipeline to the Federal Court of Canada, arguing they have not been fully consulted.

The first nation has stepped up its complaints recently, concentrating on the impact of oil and gas development on what they consider traditional land.

Dene Tha’ Chief James Ahnassary told the Canadian Broadcasting Corp. a pipeline would drive a 100-yard wide right of way across northern Alberta, adding to a network of seismic lines, pipelines, roads and leases.

However, he places low odds on his community of 2,500 succeeding when the court hearing starts in June.

Dene Tha’ residents estimate that 350 oil and gas wells in their region have already damaged the environment and reduced animal populations that are caught for food and fur.

In addition to the Dene Tha’s case and the continuing refusal of the Deh Cho First Nations to become a partner in the venture, the Mackenzie proponents face a National Energy Board hearing that could start June 2 when six independent Mackenzie Delta/Beaufort Sea explorers ask the board to take regulatory control over the Mackenzie’s gas-gathering and mainline systems.

Meanwhile, a joint review panel assessing the potential social and environmental consequences of a pipeline has scrapped planned hearings in Edmonton and Calgary in June.

The panel said a “lack of expressed interest” in the only hearings planned for south of the Northwest Territories and Yukon has forced it to use June 6 and 7 for extra sessions in Hay River, NWT.

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