While the Alaska pipeline will cost three times more than the Mackenzie Valley Pipeline to build and is at least twice as complex with several more governments involved and with very rugged terrain to build through in Northern Alaska, TransCanada PipeLines CEO Hal Kvisle is more pessimistic about the eventual development of the much smaller, technically easy Mackenzie Valley project.

The actual Mackenzie Valley pipeline itself is comparable in cost, complexity and distance to a typical annual construction project on the TransCanada system during the 1990s, Kvisle said during a luncheon presentation at the Interstate Natural Gas Association of America in Washington, DC. “We had several years in the 1990s when we built more pipeline than that.”

The problem is that aboriginal land claims are unsettled in the Northwest Territories and the area the pipeline would traverse includes a number of tribal lands and other areas that are a source of constant confrontation between the tribes and the government of Canada. Sorting out all of those things and getting access to land and permits to build could be a much longer process than many expect.

Many analysts have predicted that the 800-mile, 0.8-1.9 Bcf/d Mackenzie Valley project would into service a full five years sooner than the 1,800-mile, 4-6 Bcf/d Alaska project. Imperial Oil Ltd., the Mackenzie Valley pipeline consortium’s lead partner, said last month that it is likely to begin regulatory filings by this summer, and natural gas could flow from the long-awaited pipe by 2009 (see Daily GPI, March 10). TransCanada will have a 5% ownership in the Mackenzie project and certain rights of first refusal if other project partners decide to exit.

But the often volatile negotiations among project sponsors, aboriginal groups and regulatory agencies has led to the project to be constantly on-again, off-again. “Discussions range from going well one day of the week to hitting roadblocks and log jams at other times,” said Kvisle. “It’s a long and slow process and access to land, access to right-of-way and local benefits issues are the Achilles heal of this project.”

Kvisle said the National Energy Board (NEB) process for getting something like the Mackenzie Valley pipeline built is “really incredibly cumbersome. Literally three or four dozen hearings are required in order to build a relatively simple piece of pipe down the valley,” he said.

“The NEB is frustrated with their inability to control the process. There has been a proliferation of regulatory boards and approval authorities in Canada.

“There’s a complete void of government policy [in the Mackenzie Valley] as to how the access to land should occur,” he said.

There are only a few thousand people that live in the Mackenzie Valley itself, and those few thousand people effectively under the current arrangement today have the ability to stop the pipeline project or slow it down significantly.

“It’s just a stalemate right now,” said Kvisle. “I’m not blaming anyone. But over the last 20 years the log jam has just gotten worse, and it’s becoming very difficult to gain access.”

TransCanada’s approach to the project has been to try and figure out ways of including the aboriginal people as economic beneficiaries of the project. To that end, it has agreed to put up initial funding for the aboriginal groups to be a full one-third partner in the predevelopment work required for the project. When the time comes to build the pipeline, either TransCanada or others will have to determine how to help the aboriginal groups to finance their one-third ownership of the project. “We think that is the route that will ultimately lead to success in the north and make these projects go ahead.”

Despite frequently mentioned hurdles the Alaska pipeline sponsors face, the prospects for getting it through the regulatory process might actually be better. There is special enabling legislation in Canada already in place. “It actually makes it easier to get the Alaska Pipeline built from a regulatory perspective in Canada,” Kvisle noted. Meanwhile, the current U.S. energy bill also contains is enabling legislation that would significantly help the construction of a Alaska project.

The continuing presence of high gas prices in the market is another major factor. “Two or three years ago, we didn’t know whether the run-up in prices was just a major blip and that they would come back down,” said Kvisle. “We have now been through three years of relatively stable higher gas price. We don’t need a $7 Henry Hub price for the Alaska project to go ahead, but neither will that project work if the price was $2.75.”

The real problem for the Alaska pipeline is not figuring out who is going to build it and how regulatory negotiations will unfold; rather it is figuring out who is going to hold the shipping commitments for 4-6 Bcf/d of gas for 20 or 30 years. According to Kvisle, the burden ultimately will have to fall on the shoulders of the major producers. They are the ones who will have to step up and accept responsibility.

But in the end, Kvisle noted, the industry may find that it is easier and cheaper to bring in more liquefied natural gas (LNG). “We would obviously be very disappointed at TransCanada if that’s the way it went.” But that’s a possibility, he noted.

He said the company remains focused on the Northeast coastline for a potential LNG terminal location despite recently being rebuffed by the town of Harpswell, ME. Kvisle indicated that it would be unlikely for TransCanada to look anywhere else because of the favorable economics in the Northeast for LNG and the company’s familiarity with the regional market.

He ruled out the Gulf Coast mainly because of the $1/MMBtu pipeline cost to get the regasified LNG to market. The shipping cost is equal whether LNG is delivered to the Northeast or the Gulf Coast so why tack on another $1/MMBtu in pipeline transportation requirements? he asked.

The East Coast of Canada remains a possibility but developers run into the problem of pipeline capacity. There is very little excess capacity and adding pipeline is expensive. One potential outcome that would favor Atlantic Canadian LNG would be a decline in Sable gas reserves and production. The most likely location for a TransCanada LNG terminal in the region probably would be somewhere near Quebec City at the end of the TransQuebec and Maritimes pipeline so that gas could be shipped south on existing pipeline.

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