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Mackenzie Valley’s new price tag: $20-billion (and rising)

pipelines

JEFFREY JONES

CALGARY — The Globe and Mail

Imperial Oil Ltd. told regulators the estimated cost of its long-delayed Mackenzie Valley Project has surged more than 40 per cent to at least $20-billion since its last tally almost seven years ago, and that it has no idea when North American gas markets might turn around to rescue the project from limbo.

A top energy industry official said the Mackenzie plan – once held out as a powerful economic driver for Northern Canada, before its approval process stretched out for years – represents a cautionary tale for other proposals to get Canadian oil and gas to new markets. Those include liquefied natural gas developments and the Northern Gateway oil pipeline to the B.C. coast, which also face the potential for significant regulatory or legal delays.

As part of the National Energy Board’s 2011 approval of Mackenzie, Imperial was required to give an updated cost estimate by the end of this year. The company said that the pipeline and gas-gathering-system portion of the Mackenzie project is now expected to cost $16.1-billion. That puts the entire development, including three natural gas fields in the Mackenzie Delta on the Beaufort Sea coast, at $20-billion or more, up from $16.2-billion.

“This estimate reflects increased capital costs for material and labour since our last filing in 2007,” said the company, which leads four partners in the Mackenzie consortium.

“The Mackenzie Gas Project proponents have not yet made a decision to construct the project because of the current natural gas market conditions,” it added.

Imperial chief executive Rich Kruger told The Globe and Mail in October that gas markets had shifted dramatically since the project was proposed early in the last decade. The shale-gas revolution, through the application of hydraulic fracturing and horizontal drilling, has unlocked massive reserves, triggering a flood of supplies much closer to major consuming markets and driving gas prices below break-even levels for a pipeline to southern markets from the Mackenzie Delta.

Now, the company is studying the potential for Mackenzie gas to fit into a broader strategy to feed liquefied natural gas export plants on Canada’s West Coast, though that could be years off.

Mackenzie’s regulatory approval took six years, long enough for the gas industry’s transformation to take hold and render the 1,196-kilometre pipeline, which already had thin estimated returns, uneconomic. As a result, Imperial’s report to the NEB was largely a formality.

Proponents of multibillion-dollar West Coast LNG projects have held off making final investment decisions while they seek favourable contract terms for the supply among potential buyers in Asia. Enbridge Inc.’s $7.9-billion Northern Gateway pipeline won conditional clearance from a federal panel last week, though some First Nations in British Columbia have pledged to hold it up through court challenges.

Delays could hinder those plans just as they did Mackenzie, said David Collyer, president of the Canadian Association of Petroleum Producers.

“There are windows in which these things can happen and in which there is momentum to make them happen. If we miss those windows, many factors come into play and its difficult to resurrect these projects,” Mr. Collyer said.

“And I would say Mackenzie was an example of a very difficult process of getting alignment among all the stakeholders to move that project forward, including First Nations. We don’t have the luxury, oftentimes, of waiting until everybody’s ready. The market isn’t very empathetic to our challenges in Canada in terms of getting things off the ground.”

Part of the problem with Mackenzie stemmed from the difficulties the industry has in predicting when new technology may come into play to change a market, as was the case with shale gas, Mr. Collyer said.

With Northern Gateway, the industry faces a tough task in trying to attract First Nations back to the table to rebuild relationships and discuss access issues, something that Mr. Collyer said takes time and careful effort.

The federal cabinet is due to make a final decision on the contentious project by the middle of 2014, with a startup target of 2018.

“When there’s an opportunity to create the pie, sometimes we’re better off to get behind that opportunity and create the economic wealth rather than being unduly focused on how we carve it up before we get a project off the ground,” he said.

Imperial’s partners in the Mackenzie project are Royal Dutch Shell PLC, ConocoPhillips, Exxon Mobil Corp. and the native-owned Aboriginal Pipeline Group. (Imperial is controlled by Exxon Mobil.)

In 2011, Shell put its 950-billion-cubic-foot Niglintgak gas field, one of the three Mackenzie Delta anchor fields, and its 11.4-per-cent stake in the pipeline up for sale, but it never struck a deal to part with the assets.

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