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Canadian Lease Sale Focused on Gas and Liquids-Prone Mackenzie Valley

In the bush around the Norman Wells inlet to the most northerly oil conduit on the continent, six producers have snapped up 8,998 square kilometers (3,473 square miles) of drilling rights leases by pledging to spend C$534 million on exploration over the next nine years.

In the same annual auction by the federal Department of Aboriginal Affairs and Northern Development, only 2,112 square kilometers (815 square miles) sold on the still pipeline-less Mackenzie Delta and fetched just C$2 million from a single company. The buyer was a new name in the area: Arctic Energy and Minerals Ltd., a private operation that has disclosed no details of its ownership, industry affiliations or intentions.

The large outlay of cash invested in new exploration couldn't come at a better time as Canada has seen a fairly steady decline of marketed gas volumes over the last eight years. According to the National Energy Board (NEB), Canadian marketed natural gas production has dropped 20% since 2004.

Like the Delta, the central Mackenzie Valley, where all of the auction action focused, is gas-prone. The Norman Wells oil field, midway along the Mackenzie River from the southern Northwest Territories to the Beaufort Sea, has been one of a kind since its discovery in 1921.

But like Delta gas, the more southerly variety is believed to be rich in liquids. The Mackenzie Gas Project -- approved in December by the National Energy Board but just beginning three or more years of further negotiations scheduled with federal, territorial and aboriginal authorities -- includes a liquids extraction and transportation system.

Five of the six successful bidders for central Mackenzie rights -- Shell Canada, Imperial Oil, ExxonMobil Canada, Husky Oil and ConocoPhillips Canada -- followed industry custom by refusing to disclose exploration targets or discuss expectations. But the sixth -- MGM Energy, a specialist in arctic operations -- let the cat out of the bag.

"The lands acquired...are prospective for multiple Devonian-aged shale plays which the company believes are liquids rich at a depth of 750 to 2,500 meters (2,460-8,200 feet) and Paleozoic structural plays," MGM said in an investor relations release. "These plays are located within 10 to 30 kilometers (six to 18 miles) of existing oil pipeline infrastructure. MGM Energy, along with its partners, will begin developing a program to evaluate the prospects."

MGM president Harry Sykes, a former president of ConocoPhillips Canada, added a touch of enthusiasm with a statement that "We are excited to be part of this emerging liquids rich shale play in the Central Mackenzie Valley. We currently intend to provide an update of our plans for these lands by the end of the third quarter of 2011."

Enbridge Inc.'s 26-year-old pipeline from Norman Wells 870 kilometers (522 miles) south to Alberta is open for business, with about half of its capacity available to producers as soon as they make discoveries. Since Imperial started modern production at Norman Wells in 1985, natural depletion has cut the field's output from more than 30,000 bbl daily down into the 15,000-bbl range.

Husky led the central Mackenzie pack by scooping up 1,748 square kilometers (675 square miles) of drilling rights in trade for C$376 million in work commitments. It was the latest move in an extended exploration program in the region. The firm last year abandoned four unsuccessful wells but has also booked a "significant discovery license" in the region -- a formal step that declares a success, creates a right to hold onto a designated area for future production, and entitles the company to keep all details confidential prior to development.

Among industry veterans, the newly sold drilling leases evoke memories of a historical legacy rich in American and Canadian drama. The properties are near, and in some cases intersect, the Canol Heritage Trail.

Frequented by tough hikers who can cope with northern biting insects, the path follows the right-of-way left by the Canol Pipeline that the U.S. Army deployed thousands of soldiers and tradesmen to build regardless of cost during the Second World War from Norman Wells west across 1,000 kilometers (600 miles) of bush and mountains to the Yukon capital of Whitehorse. The project was completed in tandem with the Alaska Highway as part of a northern defense strategy against invasion by the Japanese. Unlike the road, the pipeline did not survive into peacetime. The pieces, including the refinery, were scavenged for use in Alberta following its breakthrough oil discovery near Edmonton at Leduc in 1947.

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