As the last leg of Canada's northern pipeline regulatory epic begins, partners in the Mackenzie Gas Project (MGP) are signaling that they are still contenders to go all the way into construction.
In paper duels over issues for final oral arguments, which the National Energy Board (NEB) has scheduled for April, MGP senior partner Imperial Oil insists a fresh study of the Arctic natural gas development's economic feasibility is unnecessary. Opponents of the project, led by Alternatives North, a Northwest Territories conservationist group, maintain that gas supply and price changes have overtaken the project since its mid-2004 construction applications.
"To understand whether the project is in the public interest, a clear and transparent understanding of the project economics is required," say the critics in the territorial capital of Yellowknife. "An uneconomical project may create increased demand for a fiscal support package from the federal government."
The skeptics point to the emergence of shale gas production far closer to markets than the MGP's wells on the Mackenzie Delta and its 1,220-kilometer (730-mile) pipeline to hook up to the top of the established international delivery grid in northwestern Alberta.
"U.S. natural gas reserve estimates are now 27% higher than when the application for the MGP was filed," say the critics, citing estimates by agencies such as the U.S. Energy Information Administration. "The enormous potential for shale gas has contributed to a significant decline in the price of natural gas," add the northern skeptics, citing a 75% drop in commodity market trading ranges to US$4.00/MMBtu from $13 between mid-2008 and the fall of 2009.
On behalf of the MGP group, which also includes Shell Canada, ConocoPhillips Canada and ExxonMobil Canada, Imperial (itself majority owned by ExxonMobil) urges the NEB to let the consortium keep its economic options open. In the regulatory fencing, no fresh disclosures are made about years of intermittent preliminary discussions on fiscal terms with the federal government, which have been sheltered behind a strict confidentiality agreement.
Project and government officials have to date only acknowledged that talks have been held and a favorable tax, royalty, cost and community support regime is being sought. About the only option ruled out so far -- consistently, by the current Conservative administration in Ottawa and its Liberal predecessor -- is outright government ownership of the proposed Mackenzie Valley Pipeline, which accounts for half the MGP's last cost estimate of C$16.2 billion (US$15.2 billion).
The main result to date is a federal commitment to provide C$500 million (US$470 million) in community adaptation assistance to largely Aboriginal settlements along the pipeline route if construction proceeds.
Both sides in the fiscal talks say they can only get down to substantial negotiations after a final NEB ruling, scheduled for September, enables estimates to be made of costs for carrying out approval conditions. The current project schedule sets a target of late 2016 as the earliest possible pipeline in-service date, allowing for four construction seasons and about two years of fiscal negotiations and decisions by the partners.
"The essential issue being raised by Alternatives North is whether the future natural gas price in the North American market would be sufficient to enable Mackenzie natural gas to compete successfully with other supply sources," Imperial observes in a written submission to the NEB. "This is not an issue for the NEB to consider. Each Mackenzie Gas Project proponent must ultimately make a determination of the project economics, based on its own assessment of all relevant economic considerations, including its own assessment of future natural gas prices."
The regulatory side of the economic question -- whether the pipeline is "feasible" because markets and supplies alike are big enough to ensure the facilities are used -- continues to be answered in the affirmative, Imperial says. The project economics, whether the development is likely to be adequately profitable, is a very different question based on the partners' separate, internal readings of the long-range gas outlook, the company adds.
"The best evidence of economic feasibility is the fact that, before construction of the Mackenzie Valley pipeline, binding firm service agreements would need to be in place that would obligate creditworthy shippers to pay demand charges, regardless of whether natural gas is actually transported."
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