April 2007 index

Mackenzie gas line still ‘leading case’ despite $16.2B tab

By Dina O'Meara

The federal government reaffirmed its support for the Mackenzie Valley pipeline project March 12th – with limitations – after project leader Imperial Oil Ltd. (TSX:IMO) announced massive new cost hikes for the proposed natural gas line.

“I can only say that our government is committed to working with industry and territorial governments and provincial governments when it comes down to Alberta, to do anything we can to support this project,” said federal Natural Resources Minister Gary Lunn.

“When I say that, obviously it's with limits,” he cautioned.

Lunn said he has not discussed subsidies with the Mackenzie group, formed by Imperial, ConocoPhillips Canada, Shell Canada (TSX:SHC), ExxonMobil Canada and the Aboriginal Pipeline Group.

The energy companies and the Northwest Territories government see federal involvement as crucial to the 1,220-kilometre project, which would bring Arctic natural gas to southern markets.

The overall cost estimate has hit $16.2 billion, up from an original $4 billion, Imperial has revealed.

The in-service date also was rescheduled to 2014, three years past the original schedule, due to delays in permits and approvals.

Despite the cost challenges, “the Mackenzie Valley pipeline continues to be our leading case,” Randy Boiles, Imperial's senior vice-president, told a conference call.

“It's very much not on hold,” Broiles stressed.

“That said, we will not be starting new work, new field work, detailed engineering, until we've had some sort of indication from the federal government that we have an economic project.”

The increase in expected costs for the Mackenzie line followed a detailed examination of higher expenses for steel pipe, labour and capital, he said.

Imperial Oil, as lead proponent, filed its updated cost and schedule information March 12th with the National Energy Board and its joint review panel.

The new estimate includes $3.5 billion for the gas-gathering system, up from $1.6 billion, and $7.8 billion for the pipeline, up from $4.5 billion. In addition, the estimated cost of developing anchor fields is $4.9 billion, up 150 per cent from original estimates filed in 2004.

“It's not that surprising, given what we've seen around the world,” said Steven Paget, an analyst with FirstEnergy Capital.

“In the end, it makes a lot of sense that costs have gone up that much.”

While the news of higher material and labour costs wasn't surprising, the scale was a jolt to some.

“We've seen the appreciation in the oilsands projects, so we knew costs were going up,” said Northwest Territories Energy Minister Brendan Bell.

“But I will admit that I am surprised at the magnitude of the cost increase.”

Federal money could provide funding for needed infrastructure like docks and bridges absent in the vast and largely uninhabited North, Bell said.

“We also think there's huge merit in federal involvement in improving territorial infrastructure,” he said. “That's a logical role for the government.”

Another uncertainty is the price of natural gas, which peaked at over US$15 per thousand cubic feet in the winter of 2005-06 but is currently around $7.00.

Analysts see $5.50 to $7.75 as breaking points for the Mackenzie project to go ahead.

Broiles would not reveal the consortium's pricing scenarios, but said: “We expect double-digit (percentage) returns on this kind of investment, and we're nowhere near that.”

“This project needs to be competitive with other opportunities that each of the (co-venturers) have, and it's that simple.”

Imperial Oil, Canada's largest integrated energy company, announced record annual profits of $3.04 billion for 2006, and its parent company, ExxonMobil, is the most profitable company in the world.

The Mackenzie pipeline group has been in discussions with the federal government on several issues, including cost-sharing for infrastructure – installations such as roads and airstrips that residents of the Northwest Territories would also use.

The group would like to see changes in the federal depreciation rate, and is seeking third-party commitments for gas volumes beyond the three anchor fields.

A risk-sharing proposition is being discussed which would tie federal revenues to the price of natural gas, with no payout until the project became profitable. Broiles said the consortium expects an indication from Ottawa on the fiscal terms within “several weeks.”

FirstEnergy analyst Paget considered this remark positive as negotiations have been going on for months.

The project includes development of an estimated six trillio cubic feet of natural gas in the three largest onshore fields discovered in the Mackenzie Delta, and the building of a gas and liquids system.

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Oil & gas exploration in the Arctic is moving full speed ahead

By Doug Mellgren

Barren and uninhabited, Hans Island is very hard to find on a map.

Yet these days the Frisbee-shaped rock in the Arctic is much in demand – so much so that Canada and Denmark have both staked their claim to it with flags and warships.

The reason: an international race for oil, fish, diamonds and shipping routes, accelerated by the impact of global warming on Earth's frozen north.

The latest report by the UN Intergovernmental Panel on Climate Change says the ice cap is warming faster than the rest of the planet and ice is receding. It's a catastrophic scenario for the Arctic ecosystem, for polar bears and other wildlife, and for Inuit populations whose ancient cultures depend on frozen waters.

But some see a lucrative silver lining of riches waiting to be snatched from the deep, and the prospect of timesaving sea lanes that could transform the shipping industry the way the Suez Canal did in the 19th century.

The U.S. Geological Survey estimates the Arctic has as much as 25 per cent of the world's undiscovered oil and gas. Moscow reportedly sees the potential of minerals in its slice of the Arctic sector approaching US$2 trillion.

Regardless of climate change, oil and gas exploration in the Arctic is moving full speed ahead. State-controlled Norwegian oil company Statoil ASA plans to start tapping gas from its offshore Snoehvit field in December, the first in the Barents Sea. It uses advanced equipment on the ocean floor, remote-controlled from the Norwegian oil boom town of Hammerfest through a 145-kilometre undersea cable.

Alan Murray, an analyst with Wood Mackenzie in Moscow, said most petroleum companies are now focusing research and exploration on the far north. Russia is developing the vast Shkotman natural gas field off its Arctic coast, and Norwegians hope their advanced technology will find a place there.

“Oil will bring a big geopolitical focus. It is a driving force in the Arctic,” said Arvid Jensen, a consultant in Hammerfest who advises companies that hope to hitch their economic wagons to the northern rush.

It could open the North Pole region to easy navigation for five months a year, according to the latest Arctic Climate Impact Assessment. That could cut sailing time from Germany to Alaska by 60 per cent, going through Russia's Arctic instead of the Panama Canal.

Or the Northwest Passage could open through the channels of Canada's Arctic islands and shorten the voyage from Europe to the Far East. And that's where Hans Island, at the entrance to the Northwest Passage, starts to matter.

The 1.29-square-kilometre rock is wedged between Canada's Ellesmere Island and Danish-ruled Greenland, and for more than 20 years has been a subject of unusually bitter exchanges between the two NATO allies.

In 1984, Denmark's minister for Greenland affairs, Tom Hoeyem, caused a stir when he flew in on a chartered helicopter, raised a Danish flag on the island, buried a bottle of brandy at the base of the flagpole and left a note saying: “Welcome to the Danish island.”

The dispute erupted again two years ago when then-defence minister Bill Graham set foot on the rock while Canadian troops hoisted the Maple Leaf flag.

Although both countries have repeatedly sent warships to the island to make their presence felt, there's no risk of a shooting war – both sides are resolved to settle the problem peacefully. But the prospect of a warmer planet opening up the icy waters has helped push the issue up the agenda.

“We all realize that because of global warming it will suddenly be an area that will become more accessible,” said Peter Taksoe-Jensen, head of the Danish Foreign Ministry's legal department.

Shortcuts through Arctic waters are no longer the stuff of science fiction.

In August 2005, the Akademik Fyodorov of Russia was the first ship to reach the North Pole without icebreaker help. The Norwegian shipyard Aker Yards is building innovative vessels that sail forwar in clear waters, and then turn around to plow with their stern through heavier ice.

Global warming is also bringing an unexpected bonus to American transportation company OmniTrax Inc., which a decade ago bought the small underutilized Northwest Passage port of Churchill, Man., for token fee of $10.

The company, which is private, won't say how much money it is making in Churchill, but it was estimated to have moved more than 500,000 tons of grain through the port in 2007.

Managing director Michael Ogborn said climate change was not something the company thought about in 1997.

“But over the last 10 years we saw a lengthening of the season, which appears to be related to global warming,” Ogborn said. “We see the trend continuing.”

Just a few years ago, reports said it would take 100 years for the ice to melt, but recent studies say it could happen in 10-15 years, and the United States, Canada, Russia, Denmark and Norway have been rushing to stake their claims in the Arctic.

Canada, Russia and Denmark are seeking to claim waters all the way up to the North Pole, saying the seabed is part of their continental shelf under the 1982 United Nations Convention on the Law of the Sea. Norway wants to extend its claims on the same basis, although not all the way to the pole.

Canada says the Northwest Passage is its territory, a claim the United States hotly disputes, insisting the waters are neutral. Prime Minister Stephen Harper has pledged to put military icebreakers in the frigid waters “to assert our sovereignty and take action to protect our territorial integrity.”

Politics aside, there are environmental concerns. Apart from the risk of oil spills, more vessels could carry alien organisms into the Northwest Passage, posing a risk to indigenous life forms.

The Arctic melt has also been intensifying competition over dwindling fishing stocks. Fish stocks essential to some regions appear to be moving to colder waters, and thus into another country's fishing grounds Russian and Norwegian fishermen already report catching salmon much farther north than is normal.

“It is potentially very dramatic for fish stocks. They could move toward the North Pole, which would make sovereignty ver unclear,” said Dag Vongraven, an environmental expert at the Norwegian Polar Institute.

Russia contests Norway's claims to fish-rich waters around th Arctic Svalbard Islands, and has even sent warships there to underscore its discontent with the Norwegian Coast Guard boarding Russian trawlers there.

“Even though they say it is about fish, it is really about oil,” said Jensen, the consultant in Hammerfest.

In 2004, Russian President Vladimir Putin called the sovereignty issue “a serious, competitive battle” that “will unfold more and more fiercely.”

With all the squabbling over ownership, Tristan Pearce, a research associate at the University of Guelph's Global Environmental Change Group, reminded Arctic countries of who got there first: Indigenous peoples like the Inuit and the Sami.

“Everybody is talking about the potential for minerals, diamonds, oil and gas, but we mustn't forget that people live there, all the way across the Arctic,” he said. “They've always been there and they have a major role to play.”

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