Mackenzie Gas Project – loose ends
Ian Doig, Doig’s Digest
May 2010 - Mercifully the public hearing portion of this regulatory process is over. In Inuvik, on April 22, 2010, the National Energy Board (NEB) completed its public hearings into the Mackenzie Gas Project applications filed on October 7, 2004. In doing so, the regulator kept to its schedule released on October 7, 2009, which also called for its findings to be released in September 2010 – five months down the road.
Now the satire of what has been played out over the last decade is visible for all to see. What initially started out as an economic project for the applicants to monetize assets held in the Mackenzie Delta has become a mission to save the egos of politicians that had overexposed themselves. Utilizing Canadian entrepreneurial values to their fullest, Ottawa is now attempting to use this project to reward those who made bad business decisions and penalize those who made the correct ones.
Let it be recorded that the Henry Hub natural gas price on April 22nd was (US) $4.13 per MMBtu when the NEB closed its hearings. Although we don’t have the exact selling price on October 7, 2004, we do know that the 2004 average selling price was $5.90 per MMBtu. The irony of the timing didn’t go unnoticed as the NEB wrapped up its public hearing portion. In 2004, when the applicants submitted their applications and hype was fermenting, the call was that the Mackenzie Gas Project would be on stream in 2009. Thus, with present natural gas prices, the project would now be shut down with force majeures flying around at a faster rate than production (be it either the 0.83 Bcf/d or 1.2 Bcf/d variety) was supposed to be flowing. Hopefully this fact will be recorded at the next meeting of the Mackenzie Gas Project Whiners Club, whose members have spent the major portion of their time in the last few years complaining about regulatory delays.
To shed even more light on the insincerity of the Imperial Oil Limited et al group, in September the NEB will release its decision on applications submitted six years earlier only to find out that the same applicants, are asking for another six years before deciding whether they actually want to proceed.
So as the hearing wound down in Inuvik, the realization is that the decision really becomes secondary. A decade of work was exposed: the applicants were badly prepared and couldn’t deal with obstacles as they cropped up; the regulators were equally badly prepared and couldn’t deal with what was before them; and investors, in true Canadian tradition, were pleading for help for having made bad decisions. Amazingly, none of this threesome has admitted to making any mistakes and all have been able to identify the real culprit – others.
In the following we deal with some of the loose ends from the NEB’s final 10 days of hearings: Dehcho First Nations, drainage, fiscal package, pipeline’s rate base, regulatory costs and sunset clause. None of these issues are new – all were known and raised previously. However, just like the earlier Joint Review Panel’s report containing 176 recommendations, some of these issues are outside the NEB’s mandate to deal with.
Dehcho First Nations Two immovables are moving in opposite directions. Again, we learn that the main reason for the Aboriginal Pipeline Group (APG) becoming a full member of the Mackenzie Gas Project back in June 2003 has been a failure. The APG still hasn’t been able to obtain the “Rights to Passage” along the whole 1,220-kilometer route of the proposed Mackenzie Valley Pipeline. As it has since Day 1 of this Mackenzie Delta Round III, the Dehcho First Nations, representing approximately 40% of the route, still sits outside the fence. Unfortunately, this divide through the lands in the Dehcho Territory won’t be bridged until Imperial Oil changes its negotiating stance.
Drainage The NEB is left to referee a drainage issue affecting adjoining lands to the Niglintgak and Parsons Lake fields. This matter involving Chevron Canada Limited and Mosbacher Operating Ltd. with interests in the adjoining acreages vs. Shell Canada Limited at Niglintgak and ConocoPhillips Canada and ExxonMobil Canada at Parsons Lake has been around ever since this reopening of the Mackenzie Delta and hasn’t been settled. Chevron Canada and Mosbacher Operating have submitted evidence that their lands are geophysically and geologically linked to the lands that will be produced. On the other hand, Shell Canada and ConocoPhillips Canada say that there is no connection between the lands and further state that if they agreed to the request, it would be taking money out of their shareholder’s pockets. It sure would have been nice to have heard someone amongst this group of lawyers, energy experts and even Board members as they sat in Yellowknife to have mentioned to Shell Canada and ConocoPhillips Canada that the discoveries of their two fields were directly related to another group of stakeholders – Canadian taxpayers who somehow weren’t represented. It’s harder to take when you realize that it’s doubtful if ConocoPhillips Canada will be around when Mackenzie Delta production commences and Shell Canada is sending strong signals that it wants out of the Canadian frontier, period.
Fiscal Package The fiscal package to support this development didn’t make an appearance during the
NEB’s wrap-up session. In spite of repeated promises by Ottawa that it would have this package in place last year, indications are that it won’t even be part of the NEB’s decision when released in September. So all we have to go on is a four-year estimate that has the Mackenzie Gas Pipeline, $7.8 billion ($2006); Mackenzie Gathering System, $3.5 billion; and field infrastructure, $4.9 billion. The total is $16.2 billion, which was a 95% increase over the application’s earlier estimates of $8.3 billion made in October 2004 ($2003). All this is happening when tucked away in the Board’s operating manual is a condition that it take a look at the economics of projects before it.
Pipeline’s Rate Base Imperial Oil wants the NEB to set the terms and conditions associated with future pipeline extensions and laterals and to state how these future costs will fit into the Mackenzie Valley Pipeline rate base. To set the tone, the company says No to the Yukon Government’s proposal for having a pipeline from Eagle Plains included in the pipeline’s rate base. More and more it seems as if Imperial Oil is attempting to create its own private pipeline with other shippers beyond the 0.83 Bcf/d mark having to pay their own costs. In essence this becomes a “basin closing” environment. It resembles another offshore Nova Scotia situation where a bad policy decision allowed a common carrier situation to be ignored, which, in turn, has worked against offshore exploration. Hopefully, before too long, someone remembers the natural gas resources in the Arctic Islands. In another display of versatility, Imperial Oil and TransCanada at the southern part of the system, are attempting to have Alberta producers pick up the tolling charges related to a third of the distance of the Mackenzie Valley Pipeline.
Regulatory Costs The non-construction costs of this project also keep going up. Last month, TransCanada
Corporation, whose role in the project has been to supply money to the APG, stated that the Mackenzie Gas Project has, so far, cost $3.2 billion, which includes the cost of tied-up capital and maintaining regulatory teams. This means an increase of $2 billion in the last five years. At that time when dark clouds were gathering around this development, Imperial Oil had information in its annual report suggesting that costs were then at the $1 billion level. It now seems as though the companies are asking for the proceeds from a national lottery or tax relief for events that these overpriced regulatory teams should have seen coming. This likely explains why the ripcord hasn’t been pulled. The companies would have taken massive write-downs if they had bailed out before a decision. It’s not as if they couldn’t afford the losses but it certainly would have opened up shareholders questions as to why their managements hadn’t read the tea leaves better. The question is, if TransCanada is weeping about costs of $3.2 billion to an exercise it wasn’t a party to in the first place, why isn’t it showing the same concern for Canadian taxpayers who have also spent, at least, another $3.2 billion on this same exercise?
Sunset Clause One month after Imperial Oil announced in mid-March that it could be in a position by late
2013 to decide whether to proceed with the Mackenzie Gas Project or not, it has changed its mind, yet again. In Yellowknife, in mid-April, the company requested that the NEB propose a sunset clause to its Certificate of Public Convenience and Necessity that will expire on December 31, 2016. Thus, the earliest possible start-up of this project under the 2013 date, which was 2018, gets moved to 2021 under the new ultimatum. So, watchers will have to wait another 75 months after the NEB issues its Decision in September 2010 to learn whether an effort they and the regulators have spent to better part of a decade reviewing will in fact move forward.
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