While there are no loan guarantees or other direct subsidies, Canada’s Arctic natural gas project is studded with extras spawned by political aspects of opening up a new supply region with a touchy population.

The Mackenzie Gas Project includes an industrial counterpart to the C$500 million (US$400 million) in federal “socio-economic fund” grants that Deputy Prime Minister Anne McLellan announced in July to secure co-operation from Northwest Territories communities.

The industrial extras, outlined in new evidence given to the National Energy Board in a continuing preliminary “paper hearing” on the project, cover costs of Native part-ownership by the northern First Nations’ Aboriginal Pipeline Group. Unless protests lodged with the NEB by Alberta gas drilling and production firms succeed, all companies that expand into the Arctic will pay premium shipping tolls to support the group’s one-third interest in the proposed Mackenzie Valley pipeline.

The planned extra charges are described as essential to sustain Native involvement by the industry partners holding two-thirds ownership of the project — Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada. The extras include a premium of 2.2 percentage points over the return on equity allowed to other pipelines regulated by the NEB, a continuing bonus to be paid by tacking it onto tolls.

Special allowance is also made for covering costs of above-average interest rates that banks are expected to charge the aboriginal group as an industry novice when it borrows construction loans. The Native group needs to raise C$1.6 billion (US$1.3 billion) to pay for its share in the pipeline. The 1,220-kilometer (760-mile) line to Alberta accounts for C$4.8 billion (US$3.8 billion) or nearly 70% of the Arctic gas project price tag. The rest of the total C$7 billion, or about C$2.2 billion, is for the owners’ initial production system on the Mackenzie Delta.

No firm predictions are made for the total value of extra pipeline charges over the project’s lifespan of decades. The rate-of-return premium would currently yield a profit margin about 22% higher than the average for Canadian pipelines. Bank financing has yet to be negotiated by the aboriginal partners. Actively resisting the project’s premium costs before the NEB are Anadarko Canada, BP Canada, Chevron Canada, Devon Canada, EnCana Corp., Nytis Exploration and Petro-Canada, Apache Canada, Paramount Resources and Mosbacher Operating Ltd.

Besides reductions in the planned rate of return and allowed borrowing costs, the industry interveners are seeking assurances that the Mackenzie project will be responsible for building new branch lines as gas development spreads. The Northwest Territories and Yukon governments make similar requests. The consortium’s pitch for NEB approval underlines the project’s wider role as an engine of development for northern Canada.

“The Mackenzie Valley Pipeline is a unique project,” the project sponsors told the NEB. “It is a basin-opening pipeline being developed jointly by producers and the Aboriginal Pipeline Group representing the Aboriginal peoples of the Northwest Territories.” The pioneer project “will yield significant benefits, not only for the owners, but for other gas producers, for gas consumers, for governments and for the public. None of these benefits would be realized if the toll and tariff requests of interveners were to be adopted, because the project would not proceed.”

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