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Producers Want Mackenzie Project Opened to Broader Exploration Plans

A new front is flaring up in the Canadian conflict over northern development, with Mosbacher Operating Ltd. (MOL) stepping forward as champion of independent companies' rights against the industry giants' Mackenzie Gas Project (MGP).

The MGP owners, Imperial Oil, Shell Canada, ConocoPhillips and ExxonMobil, "have utterly failed to present plans that would optimize production of the underlying resource, minimize the ultimate disturbance or respect the rightful economic interests of adjacent lands," MOL has told the National Energy Board.

The C$7-billion (US$5.6-billion) MGP's Mackenzie Delta production scheme takes a big step backward to the "rule of capture" -- a law of the jungle among pioneer resource grabbers that was eliminated by Canadian regulators and industrialists more than half a century ago, MOL warned.

The duel, long developing in private preliminary fencing, burst into the open as interveners in the MGP regulatory review this month met NEB deadlines for filing written evidence. Board proceedings are continuing, along with environmental reviews in the Northwest Territories, after the MGP producers suspended field operations this spring until land access and benefits agreements can be worked out with divided aboriginal communities.

Like the native relations front, MOL says dealings by the MGP group with the rest of the gas industry must be thoroughly scrutinized because methods used by the project will define the future of an entirely new supply region.

MGP's owners "are applying to facilitate their own resource development, but are also applying to open an important incremental production basin for the benefit of Canada," says MOL. The wholly-owned subsidiary of its Texas namesake has an extensive portfolio of minority interests in oil and gas fields across Canada, including the Sable Offshore Energy Project offshore Nova Scotia and the Terra Nova oil field on the Grand Banks of Newfoundland.

In the Canadian arctic, "the terms under which the basin is initially made accessible to the broader energy exploration industry and energy hungry markets will ultimately bear upon, if not dictate, the economic limits of the resource development particularly as they relate to small interest owners such as MOL," the American-based independent company said.

"This stark fact requires that the board look well beyond the narrow interests of the specific applicants and consider the broader interests of all potential resource developers that may be captive to the gathering, processing and pipeline infrastructure that is ultimately approved," MOL says.

MOL predicts production plans for two of the MGP's three Delta anchor fields, Parsons and Niglintgak, would drain gas from its holdings which are geographically and geologically connected. To protect itself, MOL says it would either have to rush into development or take expensive defensive steps including drilling new wells to seal off its reserves that cost $30 million each on the Delta.

MOL appeals to the NEB to devise northern territorial conservation regulations similar to those enforced by the Alberta Energy and Utilities Board. The Alberta system -- devised, tested and ultimately victorious against the first-come, first-take rule of capture in marathon 1930s political and courtroom battles -- upholds a cooperative approach. Notable features include "unitization," where majority and minority owners of gas pools work out ownership, cost and revenue sharing contracts. Big owners can be declared common purchasers and required to buy minority partners' production.

The Alberta system was adopted from the outset on Canada's offshore oil and gas frontiers with the encouragement of joint regulatory boards created by the federal, Nova Scotia and Newfoundland governments, MOL pointed out.

In the Canadian arctic "the [MGP] project proponents have not considered economic impacts on the owners of more distant resources in assessing the merits of the pipeline location," MOL says.

"Furthermore the project proponents have taken the position that MOL and other owners of 'fringe' or 'adjacent' interests to the owners' anchor fields do not have an 'economic' interest in the proposed development of the proponents' Significant Discovery Licenses (the Canadian name for frontier finds that producers are allowed to keep for as long as it takes to connect them to markets)."

MOL urges the NEB to require the MGP owners, at their expense, to devise technical evidence that their production plans will not drain other producers' holdings or to work out unitization schemes with all affected by the Delta field development programs.

MOL says it "would prefer cooperative negotiation among the parties, which we believe should result in equally acceptable outcomes. Again, given the current lack of willingness of the (MGP) applicants to entertain such discussions, the negative consequences should be visited upon the applicants."

The Mosbacher organization's appeal for help comes on top of variations on the theme that a public interest element should be built into the MGP that were sounded in earlier submissions to the NEB by the seven-company Mackenzie Explorers Group and a northern drilling partnership of Apache Canada and Paramount Resources.

Those groups are seeking improved access to the proposed Mackenzie Valley Pipeline, changes in its proposed tariffs including a code of conduct governing service deals with the system's owners, and design changes that would enhance ability to increase delivery capacity in future.

Although MOL is a relatively small gas producer in Canada, the industry appeals for a better deal from the MGP are by no means confined to little companies. The explorers group includes Anadarko Canada, BP Canada, Chevron Canada, Devon Canada, EnCana, Nytis Exploration and Petro-Canada.

Nor is the extent of development affected by the case small. A supply projection crafted for the explorers group by Sproule Associates estimates the ultimate potential of fields within reach of the Mackenzie pipeline as 67.9 Tcf -- or a resource endowment capable of supporting a pipeline for 3 Bcf/d instead of the maximum 1.8 Bcf sought by the MGP.

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