$16.2 billion MacKenzie pipeline placed on hold

The construction of the $16.2 billion Mackenzie Valley pipeline is being put on hold, as proponents of the proposed project close or reduce the size of several offices.

“The project proponents have decided to reduce spending on the project and that is in line with anticipated project activity, which is being reduced as well,” said Imperial Oil spokesperson Jon Harding.

“The proponents have decided to close offices in Norman Wells and Fort Simpson, Northwest Territories, as well as reduce the size of its office in Inuvik.”

The MacKenzie Gas Pipeline Project involves the construction of a 1,700-kilometre pipeline to transport gas reserves near the Beaufort Sea Coast in the Arctic, through the Mackenzie Valley, to northwestern Alberta and south to the United States.

The pipeline proposal is backed by a consortium led by Imperial Oil Ltd., and includes ExxonMobil Corp., ConocoPhillips, Royal Dutch Shell PLC and the Aboriginal Pipeline Group (APG), which represents the Inuvialuit, the Gwich’in and the Sahtu nations.

“In the first quarter of 2012, the co-venturers elected to suspend funding of the project due to a continued decline in market conditions and the lack of acceptable commercial terms,” said ConocoPhillips in a financial update for the first quarter of 2012.

“The company expects to record a noncash impairment for the carrying value of the undeveloped leasehold and capitalized project development costs of approximately $525 million after-tax, during the first quarter of 2012,” the report said.

ConocoPhillips has a 75 per cent interest in the Parsons Lake natural gas field, one of the primary fields in the Mackenzie Delta, which would have anchored the pipeline development.

TransCanada Corp., wrote down $127 million after-tax during the fourth quarter of 2011 on the project.

The announcement by ConocoPhilips led some people to believe the project was being cancelled.

“There have been a number of rumours circulating lately that APG is closing its office and shutting down,” said APG chair Fred Carmichael.

“I want to assure everyone that we are not shutting down. We will, however, be taking steps to downsize our operation. With our partners, we have made a business decision to delay the restart of the project due to the continuing low price of natural gas (below $2 per 1,000 cubic feet).”

The decision by the partners to cut capital investment in 2012 was driven by an abundant and cheap supply of shale gas that has pulled down prices and cost escalations.

Natural gas prices have dropped to below US$2 on ample supply and lower demand, but some analysts predict that a US$6 level is required to make the project economically feasible.

These factors have reduced the commercial viability of the project, which must compete with new sources of supply in North America.

“The Aboriginal Pipeline Group has not quit on this project – we intend to explore all available options to make this pipeline happen and intend to continually seek opportunities to push the re-start button – as early as possible,” said Carmichael.

“We will continue to work towards signing an agreement with the Federal Government, one that will ensure we have their continued support, and which protects our NEB (National Energy Board) certificate.”

In early 2011, the federal government announced that cabinet had approved the applications for the construction and operation of the pipeline, while the NEB issued a Certificate of Public Convenience and Necessity.

“The fact is we do have a Certificate of Public Convenience from the NEB and it continues to be valid,” said Harding.

“There are conditions attached to the certificate for it to remain valid, but project activities could be ramped up, if market conditions change.”

Despite the fact Imperial received approval for the project, there still needs to be a decision whether or not to build the pipeline by Dec. 31, 2013.

A considerable amount of engineering and planning work has been done, but this was halted in 2007 pending approval.

The proponents still need to negotiate a fiscal framework for the project, in order to make a decision to re-staff the project team and reinitiate engineering and field work.

A fiscal framework typically involves the regulatory environment, gas prices, taxes and royalties, which are factors that determine the pipelines feasibility.

The federal government promised several years ago to provide funding for roads, airstrips and other infrastructure in the Northwest Territories.