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Mackenzie Gas Project Costs Escalate, More Delays Expected

Soaring construction costs are forcing producers to once again "pause" discussions with the Canadian government over the long-proposed Mackenzie Gas Project (MGP), an Imperial Oil Co. executive said last week.

Speaking at the Canadian Association of Petroleum Producers Oil & Gas Investment Symposium, Imperial's Randy Broiles, senior vice president of resources, said the MGP producer group will be revising upward its C$7.5 billion (US$6.7 billion) project cost estimates this fall. Imperial also plans to revise the timeline, which already has been pushed forward several times (see NGI, March 13). Last December, the MGP had set January 2008 for pipeline right-of-way clearing, site preparations and construction of gas production facilities, with pipeline construction scheduled for the winters of 2009-10 and 2010-11 (see NGI, Dec. 19, 2005).

Until the cost and timeline revisions are completed, Broiles said, further talks with Canadian officials about the MGP's fiscal terms will have to be delayed.

"The Mackenzie Valley project is facing significant cost and scheduling pressures," Broiles said. "The costs are significant. The Mackenzie Valley project is no different than other major projects...it is facing continuing changes in its action plans. The cost estimates have continued to be refined. We'll have a better estimate this fall. Once we have the new estimates, we will have to make a decision and the regulators will have to make a decision on whether to move forward."

Talks with regulators have been "paused...for a few weeks or months," Broiles said. "I don't know what it is going to take to keep Mackenzie on track right now without a good investment number, so we're focusing our attention on the investment." The construction industry, he said, "is so different today than it was two years ago." It's currently "impossible" to determine what the revised costs may be.

Although the proposed 1.2 Bcf/d megaproject has been delayed time and again, Broiles said the Imperial-led producer group, which includes Shell Canada Ltd., ExxonMobil Corp. and ConocoPhillips Canada, has actually "made much progress this year" on the pipe. The National Energy Board hearings, which began earlier this year (see NGI, Feb. 6), still are expected to conclude in 2007, and the producers have been "encouraged" with the completion of several aboriginal agreements concerning land access.

Estimated costs have continued to escalate in the past three years. In 2003, the producers group pegged the pipe and associated field development costs at C$5 billion. By 2004, costs had risen to C$7 billion, with the pipe expected to cost around C$3.8 billion and the remainder spent on facility and field development.

To improve costs, Broiles said Imperial is considering shipping pipeline construction material by sea rather than transporting materials through the Mackenzie Valley. Costs also may be cut by stretching construction of the planned 750-mile pipeline over three summers instead of two -- but that would delay the pipeline ramp-up past the 2011 planned completion. Broiles said Imperial is still committed to a 2011 date.

Shell Canada's Ian Kilgore, senior vice president of exploration and production, said he expected the Mackenzie pipeline to be "subject to some of the inflation pressures that all megaprojects are." Speaking at the symposium, Kilgore added, "We haven't got our hands on the final number, but it has to be a worry."

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