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Canadian Government Steps Up to Support Mackenzie Project

Talks on the future of the stalled Mackenzie Gas Project have resumed with a pledge by the Canadian government to provide support by building "infrastructure" such as roads and landing strips required for construction.

But the head of the cabinet committee responsible for the federal role in the Northwest Territories development, Environment Minister Jim Prentice, stopped short of reversing previous vows not to make the government a part-owner. Prentice reported that the cabinet presented an offer at a private meeting in Calgary with Mackenzie project sponsors Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada. At a brief news conference he refused to elaborate on an official description of the government proposal.

The minister's statement said "the offer includes a contribution to infrastructure and pre-construction costs and a sharing of risks and returns."

The project consortium also refused to elaborate on the discussions, with senior partner Imperial saying only that the group is encouraged by the government's willingness to continue working with it.

Veteran observers of the on-again, off-again project -- which dates back to the 1970s and has been in planning and regulatory stages in its current form since 1999 (see NGI, Dec. 8, 2008) -- detected no sign of major change in the government's position. The pledge to share risks and rewards dates back to the last talks involving the current Conservative administration in Ottawa, and before them to the previous Liberal government.

Both regimes have repeatedly emphasized that they do not want to become owners of the proposed Mackenzie Valley Pipeline or the associated production, processing and gathering facilities in the Mackenzie Delta. The sponsoring consortium has also previously and repeatedly insisted that government ownership is not being sought.

Risk-sharing has previously been explained by participants in the project as a reference to gas production royalties, which go to the federal government as the owner of Arctic resources pending a "devolution" agreement currently under negotiation with the territorial government.

The idea is to defer all but token royalties on production until project capital costs are recovered, thereby generating a government contribution in the form of foregone revenues for the early years of gas production and deliveries. That approach would be a northern counterpart to one related to Alberta oilsands royalties, which stimulated a surge in development until the mid-2008 slump in crude prices.

Prentice hinted that royalty adjustments remain a live idea. His brief statement said, "The Mackenzie Gas Project is a key priority of the government of Canada's northern strategy and is central to realizing the full economic and social potential of Canada's North. Consistent with its role as the owner of the resource, the government of Canada is prepared to engage in the project with respect to the financial framework."

But both regimes have repeatedly pledged support through infrastructure development and assistance to aboriginal communities along the 1,200-kilometer (750-mile) route of the proposed pipeline from the Beaufort Sea coast to the northern top of the TransCanada-NOVA grid in Alberta.

The assurances have also included willingness at least to listen to requests for support from the Aboriginal Pipeline Group, a Northwest Territories native coalition with a one-third ownership interest in the pipeline. The group has repeatedly sought government loans or credit guarantees to cover its eventual share in construction costs.

The project has stalled since cost estimates rose to C$16.2 billion (US$13 billion) nearly two years ago. The price tag is about equally split between the long-distance pipeline and the Mackenzie Delta production, processing and gathering facilities. The official completion target date has also been pushed back to the middle of the next decade at the earliest.

The project is also held up by repeated delays in an environmental and socioeconomic review under way by a joint review panel representing a dozen territorial, aboriginal and federal agencies. The latest postponement set the target date for completion of the panel's report back to December 2009.

That delay in turn sets a final regulatory decision back until well into 2010. Procedures left to complete include formal reviews of the panel report, a final argument stage of the northern pipeline hearings before the National Energy Board (NEB), an NEB decision including approval conditions, and then a review and final ruling by the federal cabinet.

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