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Mackenzie Gas Project Approval Ratified

Canada's arctic natural gas development scheme has advanced a step by receiving final regulatory approval, after the federal cabinet in Ottawa ratified the favorable decision in December by the National Energy Board (NEB) (see Daily GPI, Dec. 20, 2010).

The formality kicks off up to five years of discussions and negotiations on policies needed to make the $16.25 billion scheme happen between the Mackenzie Gas Project (MGP) and federal, Northwest Territories and aboriginal authorities.

The approval's sunset clause gives the MGP until Dec. 31, 2015 to make decisions and start construction without further regulatory proceedings. A planning clause gives project sponsors Imperial Oil, Shell Canada, ConocoPhillips Canada, ExxonMobil Canada and the Aboriginal Pipeline Group an interim deadline of Dec. 31, 2013 to file an updated cost estimate and report on a decision to construct.

The consortium made no immediate commitments but received the cabinet endorsement with formal thanks, pledged to go to work on the policy talks, and indicated that there are no project spoilers in the 264 engineering, safety, environmental, employment and community effects conditions that the NEB attached to the approval.

The policy discussions are expected to be prolonged and focus on financial issues such as proposals for a net-profit gas royalty scheme akin to Alberta's pro-development oilsands regime, which sets initial rates at a token level until plant construction costs are paid off, and then collects government revenues as a share of revenues after operating expenses.

Other options on the table include calls for a government guarantee of borrowing by the Aboriginal group to cover its one-third ownership and cost share in the 1,200-kilometer (750-mile) pipeline, plus potential expense sharing for infrastructure such as roads, barge ports and worker housing. At the same time, the Mackenzie consortium will seek thousands of local land-use and environmental permits.

TransCanada Corp., which advanced the Aboriginal venture $140 million in loans to cover its share of the project's regulatory approval costs, has an option to buy into the pipeline and is expected to play an active role in the forthcoming talks. Northern gas development, in Alaska as well as on the Mackenzie Delta, plays a large role in long-range plans to refill TransCanada's established pipeline network and reverse current toll increases generated by deteriorating traffic due to depleting conventional production, rising Alberta industrial consumption by thermal oilsands projects and competition from shale gas supplies in the United States.

Among Canadian financial analysts, conventional wisdom writes off the MGP as overtaken by market changes since its construction application nearly seven years ago. Current gas prices are rated as half or less of the levels forecast to make arctic development even modestly profitable.

But the conventional wisdom is challenged by economics and resource consulting firms that are not primarily focused on current market conditions and corporate share prices such as Ziff Energy Group of Calgary and Houston. The main difference is in the factions' views on the role of shale gas.

Unlike the financial houses -- but like TransCanada -- Ziff sees shale gas as replacing conventional sources rather than as an add on liable to keep on inflating the current gas supply bubble and permanently cap prices at currently depressed levels.

In a 25-year forecast, submitted to the NEB in support of the KM LNG proposal for Canada's first liquefied natural gas export terminal, the consulting firm sees North American shale supplies more than tripling to 34 Bcf/d as of 2035 from the current 10 Bcf/d. But Ziff also foresees a sharp drop in conventional production, down to 21 Bcf/d from 36 Bcf/d, caused by reserves depletion and reduced drilling resulting from consensus expectations of a prolonged spell of soft prices.

The conventional gas contraction is expected to be severe in Canada, where shale development is expected to fail to fill the gap and total supplies including LNG imports are forecast to drop into a range of 12-13 Bcf/d from the current 17 Bcf/d.

Arctic gas will begin flowing, from the Mackenzie Delta or Alaska, towards the end of this decade, Ziff predicts. Northern supplies are projected to grow into seven per cent or 6.3 Bcf/d of forecast North American production of 90 Bcf/d as of 2035 "The pipelines are the costliest component of each (northern) project. Once they are built, the gas will have a lower marginal cost and will continue to flow. Expansion projects will be economic," said the Ziff forecast, which adds that it is less contrarian than it looks because it is consistent with the long-range outlooks of the northern gas development sponsors.

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