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Mackenzie Gas Project Gets OK, But Clock Is Ticking
Canada’s National Energy Board (NEB) has granted the Mackenzie Gas Project (MGP) consortium five years to negotiate favorable financial and policy terms with the federal government for its C$16.2 billion (US$16 billion) arctic production and pipeline scheme.
Over objections from critics and supporters alike — who urged the NEB to make the MGP fish or cut bait — the board agreed that its approval, handed down late Thursday, only begins a further and likely complicated stage in the marathon northern natural gas development program.
The go-ahead certificate’s “sunset clause” says it is valid until Dec. 31, 2015 when the approval will expire unless a start has been made on construction. A “planning clause” gives the project sponsors — Imperial Oil, Shell Canada, ConocoPhillips Canada, ExxonMobil Canada and the Aboriginal Pipeline Group — until Dec. 31, 2013 to file an updated cost estimate and provide a report on their decision to construct.
The approval includes 264 engineering, safety, environmental, employment and community effects conditions. But the sunset clause and decision target date were the most contentious issues during final arguments on the project before the NEB eight months ago.
In its current incarnation, as a revival of an aborted 1970s scheme, the MGP is a decade old. Development supporters and opponents alike suggested it was time to require the current sponsors to make up their minds to go ahead or step aside for another, more decisive group by giving them a firm 2013 deadline for starting construction. The NEB ruling accepts the MGP consortium’s timing requests as a reasonable allowance for sorting through the economic and political uncertainties that surround the project.
The MGP partners were combing through the two-volume NEB ruling and made no immediate response. But the consortium has already outlined a three-year work program that will be required to prepare for construction and reach the point of making a final decision to go ahead.
The schedule starts in 2010-2011 with re-staffing dormant project teams by each of the partners, selecting a prime contractor and recruiting its personnel, and reviving field work required by applications for thousands of permits required along the Mackenzie pipeline’s 1,200-kilometer (750-mile) right-of-way. For 2011-2012 the agenda includes carrying out field programs such as surveys, preliminary engineering, finalizing the route and making permit applications. In 2012-2013, permit decisions will be sought while additional engineering is completed so that an updated cost estimate can be produced in preparation for the final decision.
While the technical work proceeds, prolonged negotiations are expected to resume between the MGP and the federal and territorial governments on fiscal terms. In Ottawa, the former Liberal administration and the current Conservative cabinet alike have repeatedly ruled out direct government ownership of the Mackenzie pipeline or investment in the Delta production system. But all concerned have left doors open to devising a forgiving net-profit royalty regime akin to systems that have lit fires under oilsands and shale gas development in Alberta and British Columbia, plus support for the northern Aboriginal coalition that holds a one-third ownership share in the Arctic pipeline project.
The NEB’s approval ruling acknowledges that the MGP’s sponsors face a tall order in trying to decide whether or when northern Canadian gas development will be economic. The planners need crystal balls with power to look ahead for decades.
Echoing expert studies submitted in support of the project, the NEB said, “We are satisfied that that forecast growth in the North American market would be sufficient to absorb the expected gas volumes from the Mackenzie Valley pipeline.” Deliveries are planned to start at 1.2 Bcf/d, then rise to a maximum 1.9 Bcf/d with eventual additions of compressor power.
But having a market to soak up the new production is different than making the operation profitable, the NEB acknowledged.
“For the Mackenzie Valley pipeline to be successful the natural gas moved through it would need to compete with other sources of gas supply in the North American market. In final argument some parties raised concerns [by pointing, especially, at proliferating shale gas supplies] that the evidence does not prove that Mackenzie gas could successfully compete. We note that it is impossible to know how markets and circumstances will change over time,” the approval ruling says.
With 2018 established as the earliest possible time to start deliveries — following three years of construction begun just before the 2015 sunset clause expiry date — and a formal lifespan of 25 years, the pipeline will operate until 2043 or longer, the NEB observed.
“Economic conditions will inevitably change over that time as they have in the past several years. Supply and demand forecasts and gas prices will continue to change over time. We do not agree that these are reasons to deny the project. Our approval gives Mackenzie gas an opportunity to compete. Denial would block that opportunity indefinitely.”
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