Decision day for $16B Mackenzie pipeline; NEB set to issue ruling on project

F ederal regulators are set to hand down their decision on the $16.2-billion Mackenzie Valley natural gas project, marking an end to decades of planning, grandiose dreams and equally large disappointments.

The National Energy Board's ruling will be released today, outlining the reasons for its decision on the project, which would bring one billion cubic feet per day of Arctic natural gas through the Northwest Territories to southern markets currently saturated with shale gas.

The decision will put to rest or light a fire under what many have called a pipe dream in the face of poor prices and mountains of red tape that stretch back to the 1970s.

"The basic challenge of our project has always been that gas from Mackenzie has to compete on a supply cost basis with other sources of supply," said Imperial spokesman Pius Rolheiser. "Whether that supply is liquefied natural gas, whether it is Alaska gas, whether it is shale gas -- it needs to compete on a supply cost basis to get it to the burner tip in your house."

The pipeline would stretch from the shores of the Beaufort Sea, hugging the western portion of the territory along the Mackenzie Valley, to feed one billion cubic feet per day of natural gas into Alberta's network of pipes and larger markets.

Imperial has applied to extend a sunset decision clause on the pipeline to 2015 from 2013, saying it needs the time to procure some 6,000 permits ahead of construction.

Since first conceived in the mid-1970s, the groundbreaking project has been shelved by a moratorium and resuscitated by climbing natural gas prices. The project then was delayed by a review process that took four years instead of two and now is challenged by cheaper natural gas sources.

Imperial says it will still need another four to five years to determine if the massive project is worth sanctioning. At that time the consortium, which includes ExxonMobil Corp., ConocoPhillips, Royal Dutch Shell PLC and the Aboriginal Pipeline Group, will take a closer look at its economics.

Millions of dollars already have been spent on the ambitious project that would tap into approximately six trillion cubic feet of recoverable natural gas reserves lodged beneath the Arctic tundra.

"I'm very pleased that the NEB report is coming down today," said Bob McLeod, territorial minister of industry, tourism and investment. "I feel we have never been closer to getting this pipeline moving forward and I look forward to reading the report."

If developed, the pipeline and investment in three associated gas fields will bring desperately needed employment and infrastructure to a territory that depends on the federal government for more than 70 per cent of its income.

"The people in the North are waiting for this project to start up again since it's pretty dismal as far as any type of work is concerned," said Orland Hansen, with the Aboriginal Pipeline Group. "What we hope to do is to impress the people in power about the huge benefits that would come with this project."

The APG, which includes Inuvialuit, Gwich'in and Sahtu nations, holds a 30 per cent stake in the pipeline, backed by TransCanada Corp.

Absent but in discussions are the DehCho, which hold 40 per cent of the lands the pipeline will go through in southwest N.W.T., and the only one of the group to yet resolve its land claims with the feds.

In 1978, unresolved land claims prompted a moratorium on oil and gas development in N.W.T.

Soft prices conspired to kept the project off-line until surging demand sparked new interest in natural gas in the late 1990s.

Prices for the cleaner-burning fuel soared as natural gas-powered generation projects sprang up across North America.

At the turn of the new millennium, competition for the resource was so fierce among Canadian and U.S. rivals in Alaska, analysts likened the Arctic natural gas arena to a mosh pit.

However, the promise of high natural gas prices and short supply that lured producers to the harsh N.W.T. landscapes has been drowned by cheap, accessible shale gas.

"Looking out three to five years, I would say the economics of such a project would be challenging," said analyst Martin King, with FirstEnergy Capital Corp. "The whole project will be very, very challenged to actually come up with some kind of attractive, positive return to the pipeline group."

Most analysts agree conventional natural gas exploration and development producers require a $6 US price to break even, a scenario not likely to occur for at least five years.

Natural gas futures averaged $4.40 US this year, compared to a peak of $13 US in 2008. Next year, analysts predict the average will drop further, to around $3.90 US, with forward pricing curves indicating natural gas might reach $6 US in January 2016.

The soft scenario likely will trend flat into the end of the decade -- when the pipeline would be coming into service -- and could make it difficult to justify exploiting the reserves without a major rejigging of budgets, King said.

Businesses in the Northwest Territories hope opportunities for economic independence from Ottawa don't fade as a competing Alaska pipeline gains steam.

The TransCanada Alaska line would ship three times as much natural gas to Alberta via the Yukon, has been backed by the state government and will draw on reserves already in production.

Imperial long has called on firm fiscal commitments from Ottawa to forward the project, saying the support would be critical to finance the line.

"We would need to have sufficient confidence in a fiscal framework agreement with the federal government to allow us to make the decision to restaff the project, to resume engineering work, field work, permitting," Rolheiser said.

In January 2009, then minister Jim Prentice breathed new life in the Mackenzie project when he announced the federal government would provide support, primarily backing infrastructure projects. Further discussions were held behind closed doors, then ceased in April to await the NEB's decision.

"We are excited for that moment to finally arrive and for us to restart discussions," said APG's Hansen.