The chief of Imperial Oil Ltd., which has been spearheading an effort to build the Mackenzie Gas Project (MGP) to transport natural gas from Canada’s Arctic region, isn’t ready to throw in the towel despite the slump in prices and pressure from shale gas resources. It’s all about the long term, he said.

CEO Bruce March said during an investor presentation last month that the partners in the dormant gasline project remain “hopeful” of building the proposed 1.2 Bcf/d MGP, which has an estimated price tag of C$16.2 billion. The MGP would run along a 1,196-kilometer (743-mile) route through the Mackenzie Valley of Canada’s Northwest Territories (NWT) to connect northern onshore gas fields with North American markets.

“It’s fair to say that developments in North American natural gas, certainly, are understood and there are lessons learned there and it certainly factors in our thinking going forward,” said March. “It is not so much what the gas price is today, it is really what it would be from 2018 to 2020. Our company predicts the demand for natural gas in North America will grow significantly and even around the world.”

The MGP would not be economically viable at today’s gas prices, March said. Federal officials last year ratified the National Energy Board’s (NEB) favorable decision regarding the MGP, which then launched up to five years of discussions and negotiations between the partners, provinces and regulators, on policies to make the project a reality (see Daily GPI, March 14, 2011).

The MGP project has been on and off the drawing board in some form for decades, but in its present configuration it was filed with the NEB in 2004. Because of the lengthy regulatory process, NEB didn’t include it in regulatory energy forecasts until 2020 (see Daily GPI, Nov. 28, 2011).

The new start-up date of 2018 was set in mid-March 2010, when an updated MGP economic feasibility report noted that shale development in the United States and Canada was “helping total domestic production to meet gas consumption requirements, and production from that source will likely contribute to an even greater extent in the future. However, even with the delivery of gas to the North American grid via pipelines from the Mackenzie Delta and Alaska, LNG [liquefied natural gas] imports will still be needed to balance supply and demand” (see Daily GPI, March 17, 2010).

Imperial, with a 34.4% stake, has until the end of 2013 to make a decision about whether to move forward. To build the pipeline would require partnership cooperation in developing three anchor natural gas fields around Inuvik: Taglu, Parsons Lake and Niglintgak, which are seated on the shore of the Beaufort Sea.

The basic proposal remains the same:

“We remain committed to work out a deal with the federal government,” APG Chairman Fred Carmichael said. “We are exploring other options to make this project economic, but until such time as the gas prices improve, we have to take some steps just to downsize, and that’s where we’re at.”

In addition to being co-owners of the MGP with the APG, the producer group also would be joint owners of the gathering system, a gas processing facility near Inuvik that would separate natural gas liquids, and a liquids pipeline from the facility near Inuvik to Norman Wells.

There are other sticking points for the MGP besides low gas prices. The Dehcho First Nation, whose territories represent nearly half (40%) of the MGP route, hasn’t yet signed a contract with MGP to approve the pipe’s passage.

The Dehcho are “not in a rush to sign on to the project, nor are we in a rush to sign on with the APG,” said Grand Chief Sam Gargan. “We want to have an agreement in place before the project moves with the federal government on our land and resources and our jurisdiction.” The Dehcho plans to continue to negotiate about land rights with Canadian officials, as well as with Imperial about proposed benefit packages.

Despite low gas prices, the Mackenzie Delta and the surrounding region have not suffered from a lack of suitors. Over the last five years BP plc, Chevron, ConocoPhillips, as well as Imperial and ExxonMobil, have bought thousands of Mackenzie Delta and Beaufort Sea drilling leases in exchange for exploration commitments. The 2011 edition of an annual northern rights auction by the federal government spread the action into the central Mackenzie Valley region around the Norman Wells inlet to Canada’s most northerly oil pipeline. While Northern Canada is gas-prone, but the discoveries are frequently rich in liquids. The MGP scheme includes liquids extraction and delivery.

Exploring for gas in Northern Canada continues to draw interest. Exploration is to begin this summer by Canadian subsidiaries of Statoil SA and Chevron Corp. offshore of the Mackenzie Delta. Separately, Chevron Canada Ltd. also is partnering with a unit of Repsol YPF to explore Canada’s Orphan and Flemish Pass basins (see Daily GPI, Jan. 23).

Imperial Senior Vice President of Resources Glenn Scott told investors last month that discussions are under way with some producers about possible oil and gas resource development in the central part of the Mackenzie Valley. There are “synergies and opportunities” to develop a tight oil and gas play that may help move the MGP forward.

“We have been studying that opportunity for some time,” Scott said. The decision to proceed with the MGP would make the central part of the Mackenzie Valley more “attractive” for producers, but “we’re a long way from that.” Drilling tests still need to be conducted, he said, to determine the reservoir’s viability before a development plan is put in place.

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