Confirming rumors that have circulated since late April, proponents of the Mackenzie gas pipeline project announced last Wednesday that TransCanada PipeLines Ltd. has stepped in to be the financial backer of the Aboriginal Pipeline Group (APG), which holds a one-third interest in the pipeline and production project, in exchange for an option to buy a share of the pipeline.

The move is seen as a major step toward getting a vast resource of untapped gas down to the Lower 48, which is currently facing tight supply and dwindling exploration prospects. However, there also appears to be a race forming between northern gas and a renewed push for expanded LNG supplies, according to a new report issued by Standard & Poor’s Ratings Services (S&P). Now may be the time to revisit the prospect of accessing the Arctic region for new supplies of natural gas, or face the possibility that liquefied natural gas projects may again pull the cord on a pipeline moving forward, S&P said.

With the funding and participation agreements between the producers, the APG and TransCanada in place, a preliminary information package (PIP) for the C$5 billion Mackenzie Gas Project is in the process of being submitted to relevant regulatory authorities.

TransCanada PipeLines Ltd., eager for new traffic to fill spare capacity in its system, made the deal possible by lending the APG C$80 million (U.S.$60 million) to cover its share of preliminary “project definition” costs. The loan enables the coalition of Northwest Territories First Nations to maintain one-third ownership of the pipeline through the planning and regulatory process – a condition on their support for the project that the industry partners in turn made a requirement for proceeding. In April, NGI reported speculation that TransCanada was getting its foot in the door through APG (see NGI, April 28).

The Arctic gas plan, pieced together last October but held back to complete the complicated joint-venture negotiations, calls for initial output of 800 MMcf/d by the Mackenzie Delta producer group: Imperial Oil, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada. The aboriginal group is responsible for drumming up an additional 400-500 MMcf/d, bringing the opening traffic on the pipeline to 1.2-1.3 Bcf/d.

“TransCanada is pleased to bring its broad pipeline expertise and resources to support advancement of the Mackenzie Valley pipeline,” said TransCanada CEO Hal Kvisle. “Natural gas from northern Canada will help meet anticipated increases in demand and will help keep our existing pipeline facilities full, which is good for both shippers and users of natural gas.”

The Mackenzie Gas Project would involve natural gas production facilities, compression and gathering pipelines in the Mackenzie Delta area, and a pipeline system in the Mackenzie River valley. The proposed pipeline would start at the outlet of a facility located near Inuvik and carry an initial 1 Bcf/d and up to 15,000 b/d of liquid byproducts south to connections with the established pipeline infrastructure in northwestern Alberta. The pipeline’s first phase will draw on the 6 Tcf of reserves found by frontier drilling since the 1960s in the Mackenzie Delta and the shallow waters of the Beaufort Sea.

The proponents heralded the filing of the PIP as a key step in the process leading to the submission of applications for the development of the fields and pipeline facilities for the Mackenzie Gas Project. On the project’s current course, the backers said they expect to file regulatory applications in 2004.

“This is a very significant step forward for the Mackenzie Gas Project,” said K.C. Williams, CEO of Imperial Oil Resources, on behalf of the proponents. “The commercial agreements reached are a win for all parties and conclude a lengthy, but constructive process. These agreements enable the APG to become a full participant in the Mackenzie Valley Pipeline, and allow the project proponents to move forward with submitting the PIP and advancing other work required to support preparation and filing of regulatory applications.”

While calling the agreement “very significant,” all sides remained wary of hurdles that the project still has to clear and stopped short of declaring its completion a sure thing. A carefully-worded announcement distributed by Imperial as the senior producer partner said: “Developing the Mackenzie Delta natural gas reserves and constructing a Mackenzie Valley Pipeline is a complex undertaking that requires a multi-year, phased effort, and may result in gas production starting between 2008 and 2010.”

Signed by all parties, the agreements include the following:

“These agreements address APG financing, enhance the rights of the APG as defined in the 2001 Memorandum of Understanding and chart a course for the project to move forward in a way that will create real and lasting benefits for the people of the North,” said APG chair Fred Carmichael.

The agreements also stipulate that natural gas liquids produced as part of the Mackenzie Gas Project will connect with the existing Norman Wells liquids pipeline to Zama, AB.

The PIP includes preliminary information on environmental studies, public communication and consultation, the proposed pipeline route, size and capacity ranges, and developments for the Taglu, Parsons Lake and Niglintgak fields. It is being submitted to the boards, committees and agencies responsible for assessing and regulating energy developments in the Northwest Territories.

While a cooperation plan by the agencies initially anticipated final approvals would take four years or more to complete, federal Indian Affairs and Northern Development Minister Robert Nault has since predicted the process can be accelerated to take only 24 to 30 months. His department set up a Pipeline Readiness Office in the territorial capital of Yellowknife in February.

The deal carries the project past the first and biggest in a series of hurdles that Imperial has insisted must all be cleared before it can be completed. Recalling the demise of the first Canadian Arctic pipeline proposal in the 1970s, the producer consortium insisted that northern participation and support had to be enlisted. Seven more hurdles were seen ahead: a favorable gas-market outlook, verification of adequate reserves on the Delta without costly venturing into the Beaufort Sea, sound returns for the owners, safe and environmentally acceptable operations, timely regulatory approvals, stable government fiscal terms, and support from financial markets.

S&P analyst Todd A. Shipman said that the long-term question for natural gas supply and the inherent credit questions will be where the gas is coming from to meet new demand.

“What is possibly the last major basin of natural gas supplies in North America that has yet to be exploited rests in the Alaskan and Canadian frontier,” said Shipman. “The gas reserves in Alaska’s North Slope and Canada’s Mackenzie Delta have been trapped or stranded, depending on your point of view, by economic and political constraints since they were discovered…in the 1960s.” Detailing the storyline that has played out on the proposed Arctic pipeline from Alaska and/or Canada, Shipman pointed out that it is unlikely that the pipe debate will be resolved anytime soon.

“Standard & Poor’s believes that political considerations will weigh as heavily as any of the…concerns, which makes predictions about which proposal will prevail very difficult.” Easier to foresee, he said, is that “eventually, some consortium will feel comfortable enough about the sustainable level of natural gas prices to proceed, and then the focus would shift to the competition to develop the pipeline projects to create greater take-away capacity out of Alberta.”

The credit implications of the huge new infrastructure needed would be manifold, said Shipman. “The effect on natural gas prices would be the most noticeable consequence of such a project, as the prospect of a large new source of gas could lower prices.” To justify construction, a sustainable price is required, he said, and “yet the act of construction itself could cause prices to drop below the necessary price level — a classic Catch-22.”

Ironically, he also noted that a decision to proceed with a frontier pipe also could kill or delay the plans other companies have to pursue LNG projects, “the other major hope for a significant new source for natural gas in North America. That is, if a major push into LNG does not do the same to Arctic gas first.”

For specific companies, said the analyst, “a frontier pipeline project would be so massive that a decision to participate in one could be a credit event for some of the smaller companies that could get involved.” However, the effect on any particular company would depend on the project’s strength, the size of the commitment and the nature of the project’s financing.

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