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Producers Staking Out the Northwest Territories

Producers Staking Out the Northwest Territories

Fresh life is being breathed into a decades-old Canadian vision of a mammoth production and pipeline project to tap Arctic natural gas reserves. For the first time in nearly a decade, the production community, with help from a U.S. producer, is reviving exploration on its formerly most dramatic frontier. A Canadian government auction of drilling rights drew takers for 2,934 square kilometers (1,132 square miles) of the Mackenzie Delta-Beaufort Sea region. Initial work is expected to start within a year. The Northwest Territories awarded the rights as four nine-year resource hunting licences, in exchange for C$183 million (US$122 million) in work commitments by four producers with a penchant for chasing big gas targets.

Poco Petroleums Ltd. and its new owner, Burlington Resources Inc., pledged C$77.9 million (US$52 million) for two parcels totaling 1,455 square kilometres (562 square miles), with each company holding a 50% interest. Petro-Canada and Anderson Resources Ltd. teamed up to take two parcels totaling 1,480 square kilometres (570 square miles) for work commitments of C$105.2 million (US$70 million), with the ownership split 60% Petrocan and 40% Anderson.

Burlington chairman Bobby Shackouls put the producers' explanations in a nutshell: "This move into the highly prospective Mackenzie Delta area is an excellent opportunity." In Burlington's case, he called the step into the Canadian Arctic "a prime example of the value-added growth exposure we are looking for and intend to continue upon completion of our acquisition of Poco Petroleums."

It was the first time in a decade the Arctic has been portrayed in such glowing terms. It was anything but the first time high hopes have been pinned on Canada's far north.

On paper, at least, the Arctic vision never really died after battered oil and gas prices put an end to high-rolling exploration on Canada's northern frontier in the mid-1980s. Imperial Oil Ltd., Shell Canada Ltd. and Gulf Canada Resources Ltd. still hold a valid licence from the National Energy Board to export 13 Tcf of Delta gas they discovered in the 1960s, '70s and early-'80s. The licence, granted in 1989 after high-profile hearings in Inuvik, stays live until Oct. 31 of 2000. The exports can proceed for 20 years if the companies start making deliveries to the United States. There were tentative takers who signed precedent agreements, although not final contracts, at the time. While not all potential buyers agreed to be identified, the list disclosed included Enron, Texas Eastern, Pacific Interstate Transmission, ANR Pipeline and Pacific Gas & Electric (through former Canadian buying subsidiary Alberta & Southern Gas).

No one believes a Mackenzie Valley pipeline can be built before the export licences expire. A "hypothetical" transmission system developed for the hearings described a development on the scale of C$4.5-billion (US$3-billion) Alliance Pipeline Project. The line would be a C$5 billion, 1.4 Bcf/d route stretching from the Delta to an inlet to the Foothills and TransCanada-Nova systems at Caroline, about an hour's drive northwest of the Canadian gas capital of Calgary.

But there is no sign that the NEB would change its mind about the northern gas being available for export if it were asked to extend the licences. In approving Alliance and Maritimes & Northeast Pipeline - and in multiple export licence hearings, at times over resistance by Canadian nationalists and environmentalists - the NEB has upheld the open market policy that had one of its first major airings in the Arctic case.

The policy continues to say gas can be exported unless Canadian buyers demonstrate they are unable to obtain supplies on terms comparable to U.S. sales contracts. No Canadian takers have emerged yet for Arctic gas, although discussions were said to be under way with undisclosed potential buyers at the time of the Inuvik hearings. But there is still considerable interest on the wider, international market and, in fact, 16 corporate sponsors paid for a major study of reviving northern gas development by the Calgary office of the international consulting firm of Purvin & Gertz Inc.

The study, while being kept confidential in detail, concluded there were possibilities for Arctic gas and a project could work if benchmark Henry Hub prices reach US$2.50 per MMBtu on a sustained basis. That figure echoes the economics of Arctic gas described in the NEB export licence decision. At that time, the supply cost of Delta gas delivered to Caroline was projected to start at $2.68 then fall steadily as up-front costs of production and pipeline facilities dropped. In five-year steps, Arctic gas supply costs were projected to drop to $2.13, then $1.90, then $1.59, and end up at $1.35 in the last quarter of the 20-year licences.

Since the Arctic licence decision, there have been both negative and positive developments in the north - weighted toward the positive.

On the negative side, a new appraisal of Delta-Beaufort discoveries, released by the NEB late last year, lowered estimates of their size due to studies with improved seismic-survey techniques. But the worst news was on the oil side. Estimates of the biggest oil find, Amauligak, were cut down to 235 million barrels - a far cry from hopes for a billion-barrel cornerstone of an oil megaproject that the 1984 drilling success ignited.

Estimates of gas associated with Arctic oil likewise dropped. But even though estimates of separately discovered Delta-Beaufort natural gas also have been trimmed, they still are rated in the range of 9-12 Tcf. Burlington and Poco stressed that their new exploration acreage lies beside the two largest Canadian Arctic land discoveries: Niglintgak and Taglu, which the NEB continues to estimate at reserves 2.5 Tcf plus 60 million barrels of liquid byproducts and oil. The board also continues to rate the region as highly prospective, with potential to yield 53 Tcf of gas and five billion barrels of liquid byproducts and oil.

On the positive side, events since the NEB's Arctic gas export licence decision have confirmed a trend that showed at the Inuvik hearings. Native opposition to industrial development, which halted the first version of the Arctic pipeline megaproject in the 1970s, has turned into acceptance and even enthusiasm so long as benefits are spread around. The years since the hearings have cleared up the principal political obstacle that showed there: unsettled native land claims. Settlements have been reached covering much of the most contested territory. The native-dominated territorial government has also sent a message that the north is ready for development by accepting a royalty regime billed as "one of the most competitive in the world": 1% of gross revenues for first production, rising by 1% steps every 18 months to a maximum 5%, then after payment of all project costs the greater of 5% of gross revenues or 30% of net revenues.

Gordon Jaremko, Calgary

©Copyright 1999 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

ISSN © 2577-9877 | ISSN © 1532-1266
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