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Producers Seek Lower Tolls on Prospective Mackenzie Pipeline

On top of unresolved northern aboriginal relations issues, industry requests for lower tolls and strict affiliate guidelines and complaints about regulatory uncertainty are beginning to pile onto the limping C$7 billion (US$5.6 billion) Mackenzie Gas Project (MGP).

The requests have been laid before the National Energy Board, which is continuing the economic side of regulatory proceedings on the Mackenzie Valley Pipeline while operational work is suspended during negotiations with aboriginal, territorial and federal authorities.

Reduced tolls and improved access to the proposed MGP are sought by natural gas producers which are active in the Northwest Territories but not partners in the project.

Appeals for a better deal from the pipeline come from the Mackenzie Explorer Group of Anadarko Canada, BP Canada, Chevron Canada, Devon Canada, EnCana Corp., Nytis Exploration and Petro-Canada. All are participants in long-range exploration programs that have begun to yield fresh northern discoveries.

The group seeks a reduction of about C$0.10 per gigajoule (US$0.08 per MMBtu) or 7% in the MGP's proposed cost of service for the 1,200-kilometer (750-mile) arctic pipeline. The project seeks tolls averaging C$1.24-$1.42 per GJ (US$1.04-$1.19 per MMBtu), depending on the years involved in forecast calculations.

A variety of changes are sought to the financial structure, and especially a reduction in a penalty for 15-year capacity bookings as opposed to the MGP's target of 20-year transportation service contracts. The proposed penalty is C$0.15 cents per GJ (US$0.13 per MMBTU).

In evidence before the NEB, the MGP consortium of Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada has said the proposed penalty was not derived from any calculation of pipeline costs. Instead, the penalty was set at a level deemed to be high enough to influence choices of capacity bookings.

To improve long-range access to the arctic pipeline system, the explorers group seeks about C$315 million (US$250 million) in added facilities. The requested additions are meant to increase the system's ability to expand as producers outside the MGP consortium make discoveries and develop new fields.

Projections prepared for the explorers group by the geology, engineering and energy economics house of Sproule Associates maintain the MGP is underestimating the gas that the Mackenzie Delta-Beaufort Sea region will be capable of producing.

Sproule calculates the discovered resources in the region are 11.5 Tcf, as opposed to 10.8 Tcf estimated by the MGP's experts. The expert for the explorers group estimates the region's undiscovered gas resources at 56.4 Tcf, quadruple the calculations prepared for the MGP consortium.

An "unconstrained" supply forecast by Sproule predicts the Delta-Beaufort region could sustain daily production of 3 Bcf -- nearly double the maximum 1.8 Bcf anticipated by the MGP.

The explorers group also urges the NEB to make the project adopt a permanent code of conduct, citing policies adopted for pipelines with producer affiliates by Washington's Federal Energy Regulatory Commission. The MGP's behavior code proposals covers only the project planning stage of the arctic development.

"The corporate owners of the MGP components (pipeline, processing and production facilities) are competitors of the MEG members," the explorers group points out. "Strict guidelines on affiliate relations are necessary to ensure fair treatment of independent shippers relative to owner-shippers. This comprises such issues as sharing of information, independence of transmission system operations from affiliate operations and prevention of preferential treatment."

Apache Canada and Paramount Resources highlighted the big stakes in the Canadian arctic gas game. The wholly-owned subsidiary of Apache Corp. and the Canadian independent disclosed that over the past three years they have spent about C$140 million (US$112 million) on a 10-well exploration program in a central Mackenzie Valley area known as Colville Hills.

To tie the gas into the proposed pipeline, Apache and Paramount said their 50-50 arctic partnership will need to build gathering, processing and transportation facilities for C$350-$650 million (US$280-US$520 million) over a five-year period.

The plan requires the MGP to add a connection point south of the northern-most inlet at Inuvik, Apache and Paramount said. The plan will work better if the NEB breaks Canadian tradition and requires the MGP to offer distance-based tolls, the partners added.

The team also warned the NEB they are becoming "concerned about the lack of regulatory certainty currently associated with the Mackenzie Valley Pipeline and the associated increase in costs that will likely arise from this uncertainty." Apache and Paramount called on Canadian authorities to establish "reasonable confidence that the Mackenzie Valley Pipeline will be built, reasonable certainty of the timing of commencement of operations, and reasonable confidence that the ultimate tolls will be close to the proposed tolls."

Apache and Paramount warned, "In the absence of certainty on these three items, the risk of stranded investment is significant."

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