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Piecemeal Plan Could be Mackenzie Pipeline Solution

There could be more than one way to build a Canadian northern pipeline, a young company with a long pedigree in the field is telling investors and the National Energy Board (NEB).

MGM Energy Corp. has arrived on the scene with a new idea for taking arctic natural gas more by stealth than by storm. In a 135-page debut information circular to investors, MGM faces up to a cold reality in Canada's Northwest Territories for companies struggling to connect decades-old discoveries to markets.

The Mackenzie Gas Project -- weighed down by costs of C$7.5 billion (US$6.4 billion) that are poised to rise again as contested regulatory reviews enter their second year with no quick end in sight -- could be shelved, MGM admits. But the big project is not the only way to start building an industry on northern resources, the circular adds.

"If construction of the Mackenzie Valley pipeline and related gathering system is deferred, delayed or not approved, MGM will examine its available options to transport its natural gas to market, including the staged construction by MGM of an alternate pipeline and gathering system."

MGM did not call public attention to that section of its autobiography during a roving road show for prospective investors this week. Nor did senior executives rush to answer telephone inquiries with explanations liable to invite more probing in already tangled regulatory proceedings.

Like all other companies that own arctic gas, and the Northwest Territories government, MGM officially supports the Mackenzie megaproject as the first choice for a direct way to start large-scale development across the entire region from Alberta's northern order to the Beaufort Sea. But the second choice for tackling the arctic gas frontier is genuine and the firm is serious, MGM investor relations officer Scott Carrothers indicated in a brief interview.

The idea is to grow in smaller but cheaper stages. As a bonus the gradual approach might be more palatable to aboriginal settlements where many residents have made it plain they still fear the big project 30 years after its first incarnation died after an inquiry into likely effects on an ill-prepared northern population.

MGM's idea is to start by tapping gas fields halfway down the Mackenzie Valley in the Colville Lake region, where the population is accustomed to industry activity and hoping for production on territory ceded to local ownership by an aboriginal land-claim settlement.

The area is near Canada's most northerly pipeline, which Enbridge Inc. built in 1985 to connect Imperial Oil Ltd.'s Norman Wells field to the previous top of the North American energy grid at Zama in northwestern Alberta. Only oil flows on the 870-kilometer (540-mile) Norman Wells pipeline. But a gas line could be installed in the right-of-way, Carrothers said.

Firms that own Colville Lake gas could team up and ask Enbridge to do the job, he added. The final link to the bigger drilling targets on the Mackenzie Delta could be built as an extension or an addition, when the industry and aboriginal communities are ready.

Edmonton-based Enbridge Pipelines has been moving into arctic gas since the late 1990s when it made a start by building the 500-customer Inuvik Gas Project to distribute fuel to 500 arctic energy-consumer locations from Mackenzie Delta wells.

MGM only started up officially on Jan. 12, but its founder was not born yesterday. The parent organization is Paramount Resources Ltd., a 27-year veteran of northern gas that pioneered current production, including short new pipelines in the southwestern Northwest Territories. MGM is a "spinout" that inherits Colville Lake and Mackenzie Delta interests from Paramount, and is run by the parent's expert specialists. As MGM courted investors, Calgary's Peters & Co. energy shares boutique touted it in a special report as "a 'must-own' entity in any long-term oil and gas portfolio."

Pipeline uncertainties make the new firm a "high-risk investment," but it has "a 'first-mover' advantage" for scooping up known northern discoveries and new drilling targets, Peters said.

After 10 initial wells, Paramount has reported up to 362 Bcf of reserves in the central Mackenzie Valley region. Petro-Canada and BP Energy Canada have reported 400 Bcf of gas discoveries in the area. The drilling play is young. Northern exploration is secretive. But central Mackenzie Valley reserves disclosures to date add up to a tantalizing initial 762 Bcf, worth about C$5 billion (US$4.2 billion) at current prices on the low end of the gas market cycle.

The Paramount-MGM team also has a record of working well with the region's powerful aboriginal communities. The enterprise is accustomed to working in areas that have native majorities with a high degree of resource control and self-government. The operation's Colville Lake package includes a gas development agreement with the Sahtu native region's K'ahsho Got'ine Nation.

The Mackenzie Gas Project is still the Northwest Territories' first choice for the pipeline and shows signs of regaining momentum, Industry Minister Brendan Bell said in an interview after senior partner Imperial Oil signed a benefits agreement with his government.

But Bell also agreed there may be more than one way to start an arctic gas industry. "I'm not surprised," he said after hearing of the MGM idea. "We're not opposed," Bell added. "If there's no Mackenzie Gas Project built I would expect all these industry groups to look at an alternative. It would be a less efficient solution, but I wouldn't expect them just to pack up and go home."

Before the NEB during its Mackenzie project hearings, a Paramount witness panel alluded to the economy model alternative and emphasized another element of its thinking. The company asked the NEB to put a condition on any approval that would ensure others can take over Imperial's share in the northern pipeline if it gets cold feet.

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