Editor’s Notebook: Northern Light

August 2011, Vol. 238 No. 8

Sometimes it’s hard to know when bad news is really a blessing in disguise, at least for some.

Shell has announced plans to dump its 11.4% stake in the proposed Mackenzie natural gas production and pipeline project, thus dealing another crippling, if not fatal, blow to the long-discussed northern Canada venture.

Being that I love pipelines, I was prepared to write another column pillorying the Canadian government and local residents for the continued delays that have seen estimated costs for the 760-mile pipeline escalate from $6 billion in 2000 to $7.5 billion in 2006 to $16.2 billion today.

But then I began thinking that maybe this ultimately worked in the industry’s best interest. First, let’s briefly summarize the 40-year history of the Mackenzie project.

The basic plan was to build a pipeline from Inuvik in the Northwest Territories capable of transporting up to 1.2 Bcf/d of natural gas from three supply fields in the Mackenzie Delta to northwestern Alberta, where it would tie into the TransCanada system. The fields contain an estimated 6 Tcf and the pipeline could eventually be expanded to handle future onshore and offshore production.

The consortium, which began looking seriously at building a northern pipeline in 2000, includes Imperial Oil; its parent ExxonMobil; Shell; ConocoPhillips; and the Aboriginal Pipeline Group.

Applications were filed in 2004 with expectations of operations beginning in 2009. Instead, the project entered a black hole of regulatory and legislative delays from which it never recovered. I asked now-retired TransCanada CEO Hal Kvisle about Mackenzie at our 2010 Pipeline Opportunities Conference. He was beyond frustration, pointing out that TransCanada had already sunk about $600 million into the paperwork.

Much of the responsibility for the holdup can be shared by many: the Joint Review Panel, a federally appointed group whose job was expected to take 10 months but instead spent five years studying every socio-economic and environmental aspect of the project. The Panel finally approved the project in December 2009, listing 176 recommendations in its 679-page report. One year later the National Energy Board (NEB), which has seemed to be in awe of the project’s size and challenges, put its expected stamp on the project. The regulators added 80 more recommendations which some analysts said will raise the cost to $20 billion.

The Aboriginal Pipeline Group, which negotiated a one-third stake in the pipeline, also shares responsibility. The Group includes the Gwich’in Tribal Council, the Inuvialuit and Sahtu nations. The problem was that an entity called the Dehcho First Nations has steadfastly held out from signing the necessary impact and benefit agreements, and it controls an important section of right-of-way where the pipeline would be built.

So, the NEB said construction must begin by the end of 2015 for the approvals to remain valid, thus likely pushing start-up to 2018. Then the regulators handed the project over to the Federal Cabinet, which analysts say must help out financially either with cash or a huge loan guarantee, something the Cabinet has never expressed an interest in doing – considering this is a private sector undertaking. Then it would still require two more years of engineering and geo-technical work ahead of a final investment decision, according to some published reports.

Of course it’s the market that will determine the future of both the Mackenzie and Alaska Gas Pipeline for that matter. And today that market is awash in cheap unconventional natural gas derived from the shale boom. With gas selling at $4 per Mcf, no one can reasonably sign off on a multibillion-dollar project that only promises to get more expensive.

Who wins? The oil companies, because they’re off the hook unless the feds surprise us all.

Who loses? People like Fred Carmichael, chairman of the Aboriginal Pipeline Group and leader of the Gwich’in Tribal Council. In one of the early Joint Review Panel hearings, he clearly understood the importance of the project: “We can protect this land until hell freezes over, but if we do not have an economic base our people will perish.”

Now they get nothing.

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