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Mackenzie Gas Pipeline Partners Suspend Funding

ConocoPhillips, one of the four partners in the long-planned C$16.2 billion Mackenzie Gas Project (MGP), said Friday the co-venturers have suspended funding because of "a continued decline in market conditions and the lack of acceptable commercial terms."

The massive gas project, which in some form or fashion has been on the drawing board for decades, would run 1,196 kilometers (743 miles) from the Mackenzie Valley of the Northwest Territories (NWT) south to connect Canada's Arctic gas fields to established markets in North America.

ConocoPhillips disclosed the news in an interim update on 1Q2012 performance. The Houston-based producer, which has been involved in developing the pipeline and gathering system, has a 75% stake in the Parsons Lake natural gas field, one of the primary fields in the Mackenzie Delta, which would have anchored the pipeline development. Based on the suspended funding, ConocoPhillips expects to record a noncash impairment on project costs of about $525 million after tax in 1Q2012.

There were other signs last week that the project might be in trouble. Stakeholder Aboriginal Pipeline Group (APG), which represents the interests of the aboriginal peoples of the NWT, and which would have the opportunity to acquire up to a one-third interest in the MGP, last week said it was downsizing its activities.

"We remain committed to work out a deal with the federal government," APG Chairman Fred Carmichael said. "We are exploring other options to make this project economic, but until such time as the gas prices improve, we have to take some steps just to downsize, and that's where we're at."

Last month Imperial Oil Ltd. CEO Bruce March, who has led the effort to build the MGP, said he wasn't ready to throw in the towel despite the slump in prices and pressure from shale gas resources.

During an investor presentation in March he said the partners in the dormant gasline project remained "hopeful" of building the proposed 1.2 Bcf/d pipeline.

"It's fair to say that developments in North American natural gas, certainly, are understood and there are lessons learned there and it certainly factors in our thinking going forward," said March. "It is not so much what the gas price is today, it is really what it would be from 2018 to 2020. Our company predicts the demand for natural gas in North America will grow significantly and even around the world."

The MGP would not be economically viable at today's gas prices, March said. Federal officials last year ratified the National Energy Board's (NEB) favorable decision regarding the MGP, which then launched up to five years of discussions and negotiations between the partners, provinces and regulators, on policies to make the project a reality (see NGI, March 14, 2011).

The MGP project in its present configuration it was filed with the NEB in 2004. Because of the lengthy regulatory process, NEB doesn't expect it to impact the country's energy forecasts until 2020 (see NGI, Nov. 28, 2011).

The new start-up date of 2018 was set in mid-March 2010, when an updated MGP economic feasibility report noted that shale development in the United States and Canada was "helping total domestic production to meet gas consumption requirements, and production from that source will likely contribute to an even greater extent in the future. However, even with the delivery of gas to the North American grid via pipelines from the Mackenzie Delta and Alaska, LNG [liquefied natural gas] imports will still be needed to balance supply and demand" (see NGI, March 22, 2010).

Imperial has until the end of 2013 to make a decision about whether to move forward. To build the pipeline would require partnership cooperation in developing three anchor natural gas fields around Inuvik: Taglu, Parsons Lake and Niglintgak, which are seated on the shore of the Beaufort Sea.

Under the proposed outline, Imperial would operate the MGP, as well as construct and operate the Mackenzie gathering system. It also owns and would operate the Taglu natural gas field. ConocoPhillips Canada (North) Ltd. would build Parsons Lake production facilities. ExxonMobil Corp., which is a 70% owner of Imperial, also holds a 25% interest in Parsons Lake. Shell Canada Ltd., the Niglintgak gas field operator, would build those facilities. Shell had put its minority (11.4%) stake in MGP up for sale last summer; there's been no word on whether it still plans to seek a buyer (see NGI, July 25, 2011).

There are other sticking points for the MGP besides low gas prices. The Dehcho First Nation, whose territories represent nearly half (40%) of the MGP route, hasn't yet signed a contract with MGP to approve the pipe's passage.

The Dehcho are "not in a rush to sign on to the project, nor are we in a rush to sign on with the APG," said Grand Chief Sam Gargan. "We want to have an agreement in place before the project moves with the federal government on our land and resources and our jurisdiction." The Dehcho plans to continue to negotiate about land rights with Canadian officials, as well as with Imperial about proposed benefit packages.

Despite low gas prices, the Mackenzie Delta and the surrounding region have not suffered from a lack of suitors. Over the last five years BP plc, Chevron, ConocoPhillips, as well as Imperial and ExxonMobil, have bought thousands of Mackenzie Delta and Beaufort Sea drilling leases in exchange for exploration commitments. The 2011 edition of an annual northern rights auction by the federal government spread the action into the central Mackenzie Valley region around the Norman Wells inlet to Canada's most northerly oil pipeline. Northern Canada is gas-prone, but the discoveries are frequently rich in liquids. The MGP scheme includes liquids extraction and delivery.

Exploration is to begin this summer by Canadian subsidiaries of Statoil SA and Chevron Corp. offshore of the Mackenzie Delta. Separately, Chevron Canada Ltd. also is partnering with a unit of Repsol YPF to explore Canada's Orphan and Flemish Pass basins (see NGI, Jan. 16).

Imperial Senior Vice President of Resources Glenn Scott told investors last month that discussions are under way with some producers about possible oil and gas resource development in the central part of the Mackenzie Valley. There are "synergies and opportunities" to develop a tight oil and gas play that may help move the MGP forward.

"We have been studying that opportunity for some time," Scott said. The decision to proceed with the MGP would make the central part of the Mackenzie Valley more "attractive" for producers, but "we're a long way from that." Drilling tests still need to be conducted, he said, to determine the reservoir's viability before a development plan is put in place.

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