The political decks have been cleared for the long-awaited construction application for a Mackenzie Valley natural gas pipeline with a land and economic-assistance agreement entered into by the Canadian government with the last resisting aboriginal group. While some financial and tax details remain to be worked out, project sponsors predicted an in-service date of 2008 for the estimated C$4 billion (US$2.6 billion) line from the far north to northwestern Alberta.

The federal government gave the Deh Cho First Nations a deal that combines environmental protection and participation in industry across their ancestral lands in the southern Northwest Territories. The Deh Cho Land Withdrawal and Interim Resource Management Agreement provides government financial help for the aboriginal group to back its one-third share in the project.

The agreement more than tripled the amount of Deh Cho turf set aside as natural habitat to about 40,000 square miles — half of the group’s recognized traditional homeland and 6% of the entire Northwest Territories. It also formally enables Deh Cho leaders to keep on working with the gas industry and other territorial aboriginal communities on a pipeline route across the preserved region.

The economic provisions include a commitment to auction drilling rights, a C$150,000-a-year (US$100,000) grant to the Deh Cho for a resource management office and up to C$1 million (US$667,000) a year in resource royalties for community economic initiatives.

The senior industry partner in the Canadian Arctic gas project promptly repeated a prediction that it could be built in time for gas from the Mackenzie Delta to reach southern markets in 2008. At Imperial Oil Ltd.’s annual meeting in Toronto, Chairman Tim Hearn also reported the company at last saw — four days after the Deh Cho settlement was announced — the territorial Aboriginal Pipeline Group’s long-awaited deal for independent finance to cover its one-third interest in the pipeline. No details were disclosed. The Deh Cho belong to the group. The identity of the financial backer remains an official secret. Speculation centers on TransCanada PipeLines Ltd., but the company refuses comment, saying it is restricted by a confidentiality agreement with the native pipeline coalition.

The proposed pipeline would start at the outlet of a facility located near Inuvik and carry an initial 1 Bcf/d and up to 15,000 b/d of liquid byproducts south to connections with the established pipeline infrastructure in northwestern Alberta. The pipeline’s first phase will draw on the 6 Tcf of reserves found by frontier drilling since the 1960s in the Mackenzie Delta and the shallow waters of the Beaufort Sea..

The estimated proportion of the initial shipping need for each of the producers in the Arctic Gas Consortium is Imperial 50%, Conoco 25%, Shell 17% and ExxonMobil 8%. The aboriginal group’s target participation ownership in the initial pipeline capacity is one-third and is incremental to the producers’ initial capacity. Pipeline access for additional gas would be provided to other producers at commercial rates and terms that are subject to National Energy Board review and approval.

At Shell Canada President Tim Faithfull described the Deh Cho deal and the aboriginal financial agreement as encouraging progress. Shell agreed that a 2008 target for completing the northern project looks realistic, but said a construction application could still take until fall to file because more negotiations will have to be concluded with native authorities and possibly their financial partner.

Faithfull added that the northern project also needs to resolve a murky Canadian tax issue. He said changes proposed to the federal regime for gas producers threaten to raise costs of northern and offshore production.

Faithful disclosed that the problem has arisen in negotiations on swapping reduced corporate tax rates for a system known as the “resource allowance.” The allowance compensates producers for a 1974 federal action that ended a traditional right of oil and gas producers to deduct royalties paid to Canadian provincial governments from corporate taxable income. Federal proposals to change the system, made early this year in response to industry appeals for tax-rate cuts to match reductions granted to other economic sectors, so far effectively penalize new, relatively high-cost northern and offshore production, Faithfull said.

While the tax discussions continue, the industry will start obtaining access to drilling prospects in Deh Cho territory. The region is a highly regarded exploration prospect, as the closest part of the Northwest Territories to the established pipeline grid and already home to a spectacular late-1990s gas discovery near Fort Liard by a consortium led by the Canadian subsidiary of ChevronTexaco Corp., Chevron Canada Resources.

The Deh Cho agreement pledges the aboriginal group and the federal government to collaborate on holding their first auction of oil and gas exploration licences within one year, then to make new areas available every two years. Natives will be consulted every step of the way.

Farther north on the Mackenzie Delta, a drilling consortium of Chevron, BP Canada and Burlington Resources Canada highlighted the gas attractions of the Northwest Territories by announcing a find called North Langley K-30. Chevron Canada president Alex Archila said the well, 81 miles northwest of Inuvik, flowed 18 MMcf/d in restricted production tests that “encountered exactly what we had projected we would find. It reaffirms our confidence in the exploration potential and commercial viability of the region.”

The environmental aspects of the new agreement immediately earned the native group a global cheer in the form of an international conservation award, called Gift to the Earth, from the World Wildlife Fund. The fund’s northern conservation director, Bill Carpenter, called the package “a tremendous achievement in an area coming under significant pressure for industrial development. Arctic director Peter Ewins described the deal as “a fundamental and very welcome shift in policy for the federal government.” It represents “a major expression of the government’s support for taking a conservation-first approach, which is rooted in northern aboriginal land claims and traditional values.”

Final decisions have been put off to as-yet undetermined future dates on boundaries for the Deh Cho territory to be set aside as nature preserve. Areas designated so far as candidates for permanent withdrawal from development will be set aside in a land bank to be set up by federal cabinet orders. The deposits of territory will be held for five years while the Deh Cho complete a land-use planning and management structure currently under development.

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