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Producers Continue to Support Mackenzie Development

Some Canadian natural gas producers evidenced continued confidence the stalled Mackenzie Gas Pipeline will be built, putting up C$58 million (US$46.4 million) last week for new drilling rights in the central Mackenzie Valley.

Three weeks after work and spending on the arctic pipeline project was halted as a result of never-ending land and benefits disputes with Indian nations, five producers bid for rights to drill on 4,460 square kilometres (1,780 square miles) of prospective areas that straddle the proposed Mackenzie Valley Pipeline were sold by an annual auction of Northwest Territories exploration licenses.

"It was encouraging for us," said Richard Casey, land tenure manager at Indian and Northern Affairs, Canada's northern oil and gas directorate. The federal government continues to own and lease mineral rights in most of the Canadian north, except in areas where aboriginal communities have taken over as a result of land claim settlements. The complications of attempting to launch industry into the Canadian north include "devolution" negotiations aimed at giving territorial authorities at least some control over natural resources.

Industry interest almost matched the 2004 central Mackenzie Valley auction, when eight companies pledged C$63 million (US$50.4 million) for access to 2,352 square kilometres (940 square miles). There was, however, no repetition of a 2004 sale of new rights on the Mackenzie Delta. Properties are posted for auction according to industry requests. Much of the hottest Delta prospects have been bought up or transferred by land claim settlement to the resident Inuvialuit community.

Natural gas is the prime target of drilling in the region, and there will be no way to sell production from any discoveries until the pipeline is built. Prices in northern Canadian auctions take the form of exploration expenditure commitments backed by 25% deposits.

While licenses last eight years, the rules of the northern drilling game require activity. Companies normally pledge to honor their expenditure commitments within the first four years. A one-year reprieve costs an additional C$1 million (US$800,000) deposit.

The 2005 northern drilling lineup includes an international newcomer: BG Canada, which was created last year as an exploration subsidiary of London-based BG Group. Formerly British Gas, the firm entered Canada by buying the former Alberta and British Columbia properties of El Paso Oil and Gas for US$345.6 million.

BG teamed up with International Frontier Resources Corp. on commitments to spend C$16.5 million (US$13.2 million) on exploring two licenses covering nearly 1,470 square kilometres (588 square miles) northeast of Fort Good Hope.

"The Northwest Territories has potential for finding resources of a decent size and is complimentary to some of the skills we have used in other parts of the world," BG Canada president Karen Burrows said. "There's obviously a lot of effort going into building the pipeline. We very much hope the issues will be speedily resolved," Burrows said, adding that BG has experience with difficult environments and remote communities elsewhere in international industry.

Petro-Canada was the biggest buyer at the northern drilling rights auction, committing C$32 million (US$25.6 million) including a C$8 million (US$6.4 million) deposit for access to an 880 square kilometer (350 square mile) spread southeast of Norman Wells.

Natural gas will be the exploration program's target, Petro-Canada communications officer Susan Braungart confirmed. "Petro-Canada sees significant potential in this block and the area. We recognize there are challenges. We continue to monitor progress on the Mackenzie Gas Project." The company makes no predictions about when the pipeline will be built. "Our planing for exploration activities on these lands will take into consideration the challenges," Braungart said.

Other firms taking out new Mackenzie Valley exploration licenses included Apache Canada Ltd. and Paramount Resources Ltd. Efforts to revive the Mackenzie project continue. The territorial government announced grants of C$1.3 million (US$1 million) to help 33 communities along the proposed pipeline route participate as interveners in the environmental review of the project, which continues.

All work on the project has been halted except for land access discussions, benefits talks and regulatory paperwork. Territorial Industry Minister Brendan Bell pledged to help communities settle differences with the gas industry, saying Mackenzie Valley residents "are optimistic and excited but also concerned about potential impacts."

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