Rising expectations for completion of the proposed Mackenzie Valley Pipeline are lighting a fire under natural gas exploration along the 1,220-kilometer (760-mile) route through Canada’s Northwest Territories from the coast of the Beaufort Sea to Alberta. A week after the pipeline’s sponsors set a 2006 target for starting pipeline construction, 10 gas producers scooped up a total of 776 square miles of drilling rights in five leases in the valley and on the Mackenzie Delta.
The producers secured the rights by making a combined C$125 million (US$92.5 million) in commitments to do exploration work over the next four to five years. Canada’s northern leasing system is designed to generate activity by auctioning drilling prospects for prices expressed as work commitments, with winning bidders required to put up deposits of 25% of their total pledges.
The response to the 2004 edition of an annual territorial drilling rights auction was the strongest in memory for Richard Casey, land tenure manager at the federal agency responsible, the northern oil and gas directorate in the Department of Indian and Northern Affairs. “We certainly anticipated that in the next few years we will see more interest because of the pipeline,” Casey said. “We’re certainly gearing for that ourselves.”
The winning bidders in the auction all came from outside the inner circle of owners of 1970s gas discoveries on the Mackenzie Delta in the Mackenzie pipeline consortium, which are Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada. But this group has repeatedly declared it hopes others will succeed at new drilling and be ready to start production in time to fill up the pipeline by the time of its scheduled entry into service in late 2009.
The construction application to be submitted this summer will be crafted to incorporate production from outside the core Delta producer group, Imperial northern development chief Randy Ottenbreit told an industry conference in Calgary earlier this month. The initial pipeline installation package is designed to be economic at traffic as low as 800 MMcf/d from lowest-cost production development available, three Delta fields owned by the sponsor consortium at short distances from the system’s inlet at Inuvik. But the design also allows for deliveries of up to 1.9 Bcf/d with additions of compressor capacity. The plan anticipates startup deliveries of 1.5 Bcf/d if other producers step forward by the scheduled 2006 beginning of construction.
In the rights auction, Chevron Canada Resources and BP Canada Energy teamed up to secure a 216-square-mile Delta drilling lease for a commitment to C$62 million (US$46 million) in exploration work. Delta leases allow their holders five years to keep their commitments. In the relatively more accessible Mackenzie Valley, the period is four years, although in all cases the terms can be extended if the companies show they are carrying out the activity and only being delayed by circumstances beyond control such as the region’s notoriously nasty climate.
In the Mackenzie Valley, Northrock Resources (a wholly-owned Canadian subsidiary of Unocal Corp., Husky Oil, EOG Resources, International Frontier Resources and Pacific Rodera Energy secured a 350-square-mile exploration lease for a work commitment of C$24.8 million (US18.3 million). Petro-Canada picked up a 106-square-mile exploration block for C$22 million (US$16.3 million). Paramount Resources secured a 310-square-mile lease for C$8.1 million (US$6 million), and partnered up with Apache Canada to acquire a 142-square-mile prospect that also cost C$8.1 million (US$6 million) in work commitments.
While none of the producers are predicting exactly when the Mackenzie pipeline consortium will be able to get its system built and some have doubts about the current schedule, all make it plain the project is a key ingredient of the outlook.
“If there was no pipeline on the horizon, that would paint a different picture,” Northrock president Dave Pearce said.
While less costly and historically more likely to succeed than drilling offshore of Nova Scotia, exploration wells in the Northwest Territories still rank at the high end of the Canadian producer risk spectrum. A Mackenzie Valley well drilled by Northrock last winter cost C$18.8 million (US$14 million). The effort likely paid off. Results will be kept confidential for two years, but “you can infer by the bid (for more acreage) that we’re encouraged,” Pearce said. He described the northern exploration effort as a matter of getting into position to new gas on the market as soon as the opportunity opens up.
Northrock-Unocal will not be too alarmed if the Mackenzie group runs into problems with the notoriously complicated northern Canada regulatory regime. The Mackenzie Valley is still a frontier where operations are remote and take time, Pearce said.
“The pipeline isn’t too far off even if it is delayed a while.” Petro-Canada sees the north as a long-range growth area, spokesman Michelle Harries said. “This is a future basin for natural gas. We want to be well positioned in that area for when the northern pipeline is built.”
The Mackenzie consortium, while the only group with a public plan for a northern Canadian pipeline, is not the sole potential developer of new gas transportation service, Paramount president Jim Riddell said. Other options are under discussion privately, with industry sources hinting at possibilities of building a shorter connection between the central Mackenzie Valley and the Alberta or British Columbia pipeline grids but refusing to go into details.
After three winters of activity in the central Mackenzie Valley, Riddell said his company rates the region as highly attractive. At Paramount, which is also active in development in the already connected Liard area of the southwestern corner of the Northwest Territories, “we believe there’s going to be something built to provide added transportation.”
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