After waiting for 30 years, the pro-industry faction in Canada’s Northwest Territories refuses to let rising costs and prolonged regulatory dueling freeze the hopes for an arctic natural gas production and pipeline development.
Territorial Industry Minister Brendan Bell trekked from Yellowknife in the Northwest Territories to Houston to make the case for keeping the shaky Mackenzie Gas Project (MGP) alive to an international industry crowd at the annual Offshore Technology Conference.
In an interview, Bell indicated his pitch touched political hot buttons and appealed to gas business leaders to take a long-range, wide-horizons view of Arctic gas.
North America cannot afford to risk energy security by relying on tanker imports of liquefied natural gas (LNG) from the Middle East and Russia, Bell insisted. Prospects of growing LNG exports, including Canadian terminal projects intended as entry ports for relaying tanker cargoes into the United States, already fueled international discussions about creating a gas counterpart to OPEC, Bell pointed out.
He said he urged the entire industry — including MGP sponsors Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada — to look beyond the modest immediate supply gain that the Canadian arctic project would achieve.
The development only looks uneconomic at its recently increased cost estimate of C$16.2 billion (US$14.5 billion) if assessments are confined to the 6 Tcf of reserves in its initial three Mackenzie Delta “anchor fields,” Bell suggested. “This cost-volume relationship of C$16 billion and 6 Tcf misses the point because it is too narrow in focus.”
He urged the consortium to take into account the 100 Tcf or more of potential untapped Canadian arctic supplies projected in estimates by authorities such as the Geological Survey of Canada and the National Energy Board (NEB).
Canadian governments are prepared to think big and contribute to the project, Bell said. On top of providing already announced industrialization aid to touchy northern aboriginal communities, territorial and federal leaders have made it known they are ready to consider expanded involvement short only of outright subsidies, he added. Additional help with “infrastructure” such as roads and freight facilities is eminently possible, Bell said.
There could also be political willingness to create a government ownership share in the pipeline if the industry consortium wanted to spread its risks by accepting a new partner, Bell said.
The gas producers have to want such a step, he added, acknowledging that MGP consortium leader Imperial has repeatedly rejected a partnership with governments even though other gas producers in the arctic group are understood to be willing to talk. Governments are already involved indirectly by an offer to guarantee construction loan financing for the territorial Aboriginal Pipeline Group’s one-third interest in the proposed Mackenzie Valley pipeline, Bell pointed out.
The northern cabinet minister also appealed over the heads of the Canadian MGP partners to their U.S. corporate parents with interests in Alaskan gas reserves and pipeline proposals. Construction of the Mackenzie pipeline would automatically establish an Alaskan option, Bell suggested. He said the option would be to drop the Alaska Highway pipeline route in favor of a link only about one-fourth as long across the 400-mile gap between the Prudhoe Bay region and the Inuvik inlet into the Canadian line on the Mackenzie Delta.
The option could be to revive old proposals for an “over-the-top” pipeline beneath the Beaufort Sea along the northern coastlines of Alaska and the Northwest Territories, Bell said. He acknowledged that Alaska officially prohibits a subsea Beaufort pipeline but suggested there would be nothing new about adapting a policy to an economic necessity.
<>Arctic gas pipeline financing estimates generated for the territorial government show that, as a rule of thumb, the Alaska project costs about three times as much as the Mackenzie scheme, Bell disclosed. If the Mackenzie proposal is too expensive for some of the largest Canadian gas producers, the Alaska Highway plan must look no better to the American industry at the US$44 billion price tag implied by the estimated cost relationship, Bell said.
While Bell was making his pitch a research firm was releasing its latest estimates for the cost of the Mackenzie project. Tristone Capital, Calgary, says its revised estimates show the Mackenzie project would require up to C$2 billion (US$1.8 billion) in government aid or incentives to get back on its feet.
The investment firm suggested the new cost estimate — C$16.2 billion (US$14.5 billion), up 116% from the previous forecast of C$7.5 billion (US$6.7 billion) — translates into uncompetitive per-unit expenses for tapping Canadian arctic supplies.
Development costs of the 6.1 Tcf of reserves in the MGP’s three Mackenzie Delta “anchor fields” work out to about US$5.78 per MMBtu — or 8.4% more than importing liquefied natural gas, Tristone estimated. “There is no economic incentive to build the Mackenzie Valley pipeline,” the report said.
MGP senior partner Imperial Oil invited comparisons with LNG at roving hearings by the project’s environmental Joint Review Panel of federal, Northwest Territories and aboriginal authorities. The LNG receiving terminal being built in New Brunswick by Canaport LNG, next to an Irving Oil Ltd. refinery will start bringing in 1.2 Bcf/d in late 2008 with a project cost of $1.1 billion (including the cost of a pipeline connecting to the Maritimes & Northeast system), or only 7% of the cost of the Mackenzie pipeline.
Recent filings with the NEB have estimated tolls on the Mackenzie line at between US$2.58-2.71/MMBtu. From there the gas still must be carried by other long lines to the market centers, and there are the additional costs of gathering over the hundreds of miles of the Arctic region (see Daily GPI, April 10).
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