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Point of no return

North Slope and Delta gas exploration plans face u-turn due to economics and corporate politics

THE TWO most expensive gas-pipeline proposals in North American history are entering a make-or-break phase this year. But a growing list of problems need solutions if the vast, untapped gas resources of Alaska's North Slope and Canada's Mackenzie Delta are to be developed, writes WJ Simpson.

Over the past year, the negatives have multiplied, not least the capital costs – now estimated at $25bn for a 4.5bn cubic feet a day (cf/d) line across Alaska and Western Canada to the US' Lower-48 states; and C$10bn ($8.5bn) for a 1.2bn cf/d system along the Mackenzie River Valley to southern Canada and the US.

Compounding the problems are demands from gas producers for government financial support and the prospect of cheaper imported liquefied natural gas (LNG) usurping the Arctic projects. There is also pressure in both the US and Canada to guarantee "fair and reasonable" access to the pipeline networks for exploration companies other than those that own the anchor gasfields underpinning the two projects.

And, in Canada, additional obstacles include opposition from aboriginal communities seeking land-claims settlements along the pipeline right-of-way and from environmental groups concerned about the effect of a pipeline on northern permafrost. This is already starting to melt as average temperatures rise.

Plans in turmoil

The plan to deliver 35 trillion cf of North Slope gas to US Midwest markets was turned on its head last year when a deal the former Alaskan governor, Frank Murkowski, had reached with the three main producers – ExxonMobil, BP and ConocoPhillips – was defeated in the state legislature amid criticism that it put the companies ahead of the public interest.

That setback was compounded when Sarah Palin was elected state governor in November, based partly on her support for an all-Alaska project that would see gas piped from the North Slope to Valdez, liquefied and carried by tanker to the US west coast.

She has since said the original overland route remains on the table if it offers the best deal for the state. After two days of meetings in December with 12 companies and petroleum industry groups she said a state negotiating team, involving her government, the industry and the public, will be appointed to decide the best option, although no deadlines will be set for that process.

However, Palin sounded a tough note, telling the North Slope producers they will not be allowed to "warehouse" the gas while they pursue ventures in other parts of the world.

Apart from the three main owners, she met Royal Dutch Shell, Chevron and BG, and pipeline companies TransCanada, Enbridge and MidAmerican Energy Holdings, which have all expressed an interest in commercialising North Slope gas. The universal message from those outside the core owners' consortium was that none would risk exploration capital in Alaska unless they had guaranteed access to whatever pipeline route is chosen.

Palin said: "They told us this is a do-able project, although they also want state assistance." However, the nature and extent of that assistance was not disclosed.

For the Mackenzie project, decision-making is expected to reach an early point of no-return when lead partner Imperial Oil (69.6% owned by ExxonMobil) completes a budget update that observers expect will see construction costs climb from C$7.5bn to around C$10bn. A growing number of observers believe Imperial will give up in the face of costs and regulatory delays that have pushed the likely start-up date from 2008 to 2011-2012.

If that happens, there is no sign that the other partners, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada, would have the desire or financial means to carry the load, even if they were given the chance to buy Imperial's 3 trillion cf of reserves.

Imperial asked the federal government in 2005 for C$1.2bn in tax and royalty incentives, a figure that is certain to rise under the new budget, posing a challenge for the federal administration of prime minister Stephen Harper, which is fundamentally opposed to public aid for business.

Thin economics

An Imperial spokesman says the Mackenzie economics have been "thin" from the outset and have become even more marginal because of cost pressures and delays in public hearings.

He was not prepared to agree with an independent study by Pacific Analytics, a management consultancy, which said the project, even without royalty and tax breaks, could generate an average internal rate of return of 29% a year (including 41.8% for the Taglu field) under known cost estimates and would still yield 21.5% if capital costs rose by 30%.

Brendan Bell, resources minister in the Northwest Territories, told Canada's National Energy Board (NEB) in December that the 100-120 trillion cf of Mackenzie Delta-Beaufort Sea gas will "inevitably" become stranded if this window of opportunity closes. He claimed a number of experts believe the economic value of the gas could disappear within 20 years if North America overcomes opposition to LNG and starts importing large volumes.

Bell said the Mackenzie project is the essential catalyst to promoting exploration of the Arctic basin, but the "vision can be realised only" if regulators approve a project that caters to more than just the interests of the Imperial partnership.

However, the NEB sided with Imperial last year and refused to place the Mackenzie gas-gathering pipelines and the main pipeline under its jurisdiction, leaving independent explorers with no assurance that their resources, of 175m cf/d, would have access to the main pipeline.

Devon Canada's vice-president, Michel Scott, says his company is "tired" of trying to negotiate an agreement with Imperial and is close to deciding, after investing C$250m on Arctic exploration, it might be "simpler to leave the basin".
BP Canada Energy, Chevron Canada and EnCana have also scaled back their drilling programmes pending NEB approval of the overall project and the operating rules.

TransCanada goes trans-continental

Widely rated as a leading contender to operate both the Alaska and Mackenzie gas pipelines, TransCanada is already expanding beyond its Canadian stronghold to take on a larger role as a North American pipeline company.

In December, ending months of speculation, it acquired gas pipeline and storage assets owned by El Paso for $4.07bn in cash and assumed debt. The package includes 10,500 miles of pipelines and 6.8bn cubic feet a day (cf/d) of storage capacity owned by El Paso unit ANR; and 2,100 miles of pipelines and 2.5bn cf/d of storage capacity from El Paso's 50% stake in Great Lakes Gas Transmission.

When concluded, the deal will give TransCanada a pipeline network spanning 40,000 miles, with links to all the large gas-supply basins in North America. It will also control 360bn cf of storage capacity, or 12% of the North American market. Chief executive Hal Kvisle says TransCanada's goal is to become the "leading North American energy infrastructure" company.

The transaction followed the company's filing of a $2.1bn application with US and Canadian regulators to build a 1,800 mile pipeline to deliver 435,000 barrels a day of Alberta oil-sands production to US Midwest markets. The Keystone project, due for completion in 2009, is TransCanada's first serious bid to embark on oil transportation after 55 years as a gas carrier.


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