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Producer Pulls Back, Waiting for Mackenzie Pipeline

Calgary-based producer MGM Energy Corp. has struck an agreement with Chevron Canada Ltd. and BP Canada to restructure a farmout agreement, allowing it to delay drilling and seismic activity due to repeated holdups in progress on the Mackenzie Gas Project, MGM said last Tuesday.

"With these changes we are no longer required to spend substantial amounts of money on the Chevron/BP farmout (apart from our obligation under the Inuvialuit Concessions) until a decision has been taken to build the Mackenzie Valley pipeline," said MGM President Henry Sykes. "Given the complete lack of progress on the regulatory process -- in particular the Joint Review Panel -- and the lack of a fiscal agreement between the pipeline proponents and the government of Canada, we believe that deferral of spending on the farmout lands is in the best interests of our shareholders."

The decades-old Mackenzie Gas Project, expected to cost nearly US$14 billion, has been fraught with delays (see NGI, April 13).

"While we regret the near-term impact that this [decision] will have on Northern people and businesses, we expect to recommence activity on the farmout lands as soon as the regulatory and fiscal processes result in a decision to build the pipeline," Sykes said.

The restructured agreement makes MGM the operator of the joint venture with Chevron Canada and BP Canada effective immediately.

Under the original farmout agreement, MGM was to drill three final wells by April 2010 to earn 50% of the existing Chevron and BP discoveries and farmout lands. Now the company is required to drill three wells within three winter drilling seasons after a decision to construct the pipeline is made. The three wells may be appraisal wells or development wells at the option of MGM.

Recently an executive with ConocoPhillips Canada, a partner in the Mackenzie Gas Project, expressed confidence that the pipeline would move forward (see NGI, April 6).

The holdup is a parallel environmental and socioeconomic review by a Joint Review Panel representing about a dozen federal, aboriginal and Northwest Territories agencies. The panel's hearings dragged on for months longer than National Energy Board sessions related to the project, and the panel's report has been repeatedly delayed, currently until late 2009 but still with no firm date set for completion (see NGI, March 9).

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