A chilly warning that sponsors of Canada’s northern pipeline posted to their stockholders in May, during the 2012 spring round of corporate annual meetings, has turned out to be true: do not expect any government to rescue the frozen scheme, said Imperial Oil Ltd., senior partner in the Mackenzie Gas Project (MGP).
On an annual tour of the Yukon, Nunavut and Northwest Territories this week, Prime Minister Stephen Harper confirmed that Imperial was reading the federal government’s intentions correctly.
“The proponents themselves have to make a decision on whether these projects are commercially viable,” said Canada’s Conservative chief executive in Norman Wells, where Imperial operates North America’s most northerly producing oil field.
“Our government’s fundamental approach to oil and gas development is to see that occur on essentially a commercial basis,” said the prime minister.
Harper was repeating a policy that was already embedded in Ottawa when the Liberals held power, Jean Chretien was prime minister, natural gas prices were at their peak and the Mackenzie project was just entering the regulatory approval process in 2005. The Liberal deputy prime minister seven years ago, Albertan Anne McLellan, laid out the national attitude in an open letter to Imperial that remains the most complete public outline of federal government thinking on northern oil and gas to date.
Like Harper, Chretien was a declared northern development enthusiast. But that did not mean any federal administration was prepared to participate by reverting to previous Canadian practice of government grants or part-ownership as tools of national economic policy. The last beneficiary of the bygone direct aid tradition remains federal participation in the 1990s construction of the Hibernia oil production platform on the Grand Banks of Newfoundland as the nation’s first offshore development and a job creation program for a severely depressed region.
“The government of Canada is not prepared to subsidize the construction of the MGP,” wrote McLellan.
At most, indirect aid would be considered, she added. The most active potential intervention under discussion was a possible loan guarantee for the northern Aboriginal Pipeline Group as a means to reduce interest rates on borrowing to cover its costs of taking a one-third interest in the project.
Otherwise, McLellan indicated that assistance would be indirect in the form of concessions on “fiscal terms” such as a break on production royalties that would enable the project sponsors to recover well and processing plant costs before full rates went into effect.
In 2005 “various forms of federal investment” were also described as options, but the Liberal regime did not describe the possibilities and emphasized that any commitments would be judged on commercial merits, meaning there had to be sound prospects for involvement to be profitable. The government was “prepared to consider assuming some of the project downside risks, provided it is able to increase its share in the potential financial rewards,” McLellan wrote.
Harper also sounded a consistent Canadian government theme when he said the only outright expenditures to promote arctic development could be for public service “infrastructure,” such as roads and barge docks, that would benefit all aspects of northern communities, including future industrial projects.
The biggest federal commitment to the northern pipeline — which was made by the Liberals and later sustained by the Conservatives — remains creation of a $500 million fund for community services, with uses of the money left largely up to local leaders to determine. Both federal administrations put the same caveat on the pledge: the fund will only be made available if and when MGP construction proceeds.
At Imperial’s annual meeting company President Bruce March disclosed that negotiations with the federal government have not advanced since 2009. Most project work has also stopped, except for efforts to conclude community access and benefit agreements with largely aboriginal settlements along the pipeline route.
March repeated that the MGP faces formidable obstacles: an almost tripled cost estimate of C$16.2 billion (U.S. dollar at par) and depressed gas prices fostered by the emergence of shale supply surpluses across North America since the arctic scheme was developed a dozen years ago.
The Imperial executive also sounded a common theme among industry and Conservative leaders: regret that Canada’s northern regulatory maze proved to be harder and slower to navigate than even pessimists suspected when the MGP filed its construction application in mid-2004.
Approval took about 80 months, which turned out to be more than enough time for gas supply, demand and financial conditions to overtake the project. The ordeal inspired regulatory reform legislation that the Conservatives enacted last spring over vehement objections by environmental and aboriginal groups.
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