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THE WALL STREET JOURNAL: Exxon May Find Pipeline Self-Competing

Proposed Alaska Gas-Transmission Facility
May Affect Imperial’s Mackenzie Delta Project
June 13, 2006; Page A18

In its efforts to procure affordable steel and labor for multibillion-dollar Arctic natural-gas projects, Exxon Mobil Corp. may soon be competing with itself.

Canada’s Imperial Oil Ltd., in which Exxon Mobil owns a 69% stake, is leading a consortium of energy companies attempting to build an 840-mile pipeline from the Mackenzie Delta in Canada’s western Arctic to energy-hungry markets in the U.S. and Canada. But delays and rising costs have complicated the project, leading Imperial to consider building some portions of the pipeline abroad — a potentially tricky move politically as the company seeks help from Canada’s government to complete the project.

Meanwhile, a competing 2,100-mile pipeline — being considered by a different, Exxon-led consortium — that would pipe four times as much gas from Alaska to the same southern markets has gained momentum in recent months. Further Mackenzie pipeline delays could force the two projects to compete for already costly manpower and materials. Should the Alaska pipeline be completed first, it could add enough gas to U.S. markets to complicate Imperial’s efforts to make the Mackenzie pipeline pay off.

“I don’t think in this labor and input-cost environment they can go out at the same time,” says Chris Theale, an analyst with Tristone Capital Advisers LLC.

Exxon’s pipeline predicament illustrates the tough choices oil and gas companies face as they consider major projects, even in a time of higher energy prices, growing global demand and flush industry profits. Increasing prices for items ranging from steel to drilling equipment to skilled workers has raised costs. The cost of hot-rolled steel, for example, more than doubled since 2001.

Such rising costs could be stumbling blocks to bringing new energy supplies to market. Budgets have ballooned at important new projects like Sakhalin Island in Russia’s far east and at the Baku-Tbilisi-Ceyhan Pipeline in the Caucasus region of Asia.

Natural gas heats most U.S. homes, generates about 20% of the electricity in the U.S. and is a raw material for products ranging from plastics to fertilizer. North American natural-gas prices have fallen sharply in recent months, but the U.S. Energy Information Administration still expects demand to rise roughly 18% by 2017 from 2004 levels.

The Arctic gas also could be instrumental in powering efforts to tap Alberta’s oil sands, an attractive source for vast amounts of new crude oil.

Imperial’s Mackenzie pipeline once appeared fast-tracked. But regulatory approval now isn’t expected until late next year. Two native groups haven’t agreed to sign over land-access rights along a big swath of the route. With costs rising, the Mackenzie consortium — whose partners also include Royal Dutch Shell PLC unit Shell Canada Ltd., ConocoPhillips and others — last year raised projected capital costs by 50% to C$7.5 billion (US$6.8 billion) from about C$5 billion forecast in 2002

“The project is loaded with challenges,” says Randy Broiles, Imperial executive vice president, who adds that a further sharp increase in projected costs could be in the cards.

Neither Exxon nor its Imperial affiliate fully controls either project’s fate. The other companies backing the projects, as well as Canadian and Alaskan lawmakers, are eager to get supplies to market.

To be sure, Imperial has cited its potential competition over resources with the Exxon-led Alaska project to help it win aid from Canada’s government, which included in its proposed budget a C$500 million fund to help mitigate any negative social and economic impacts of the Mackenzie project on northern natives.
Imperial said it makes its decisions separately from Exxon. An Exxon spokeswoman said the company would like to see “all of its projects advance.”

Some analysts say it could help to have a smaller northern pipeline built before the larger, riskier Alaska project as a kind of pilot project. Pipes must withstand stresses from big temperature fluctuations and cross major rivers.

To control costs, Mr. Broiles said, Imperial’s consortium is considering sourcing at least some pipeline sections and equipment offshore, in Asian countries such as South Korea, instead of in Alberta as originally planned. Costs for ship-and-barge transportation of prefabricated modules across the Pacific Ocean and up the Mackenzie River aren’t likely to exceed costs for moving smaller sections from Alberta by rail and road, he said. While offshore construction may not be welcome with Canadian authorities, Mr. Broiles said it could prove more palatable than the possibility of shelving the project.

He said he also is hoping the government will help by easing restrictions on recruiting foreign construction workers.

The first deliveries of as much as 1.2 billion cubic feet a day of Mackenzie-borne gas would most likely take place in 2011 or 2012. Any further delays would push the timetable close to the projected 2014-2015 start-up expected for the Alaska project, which would deliver between four billion and five billion cubic feet a day of natural gas to the same markets. Analysts predict that direct competition could result in delay of the smaller Mackenzie project for an additional 10 to 15 years.

Adding to the threat of a time squeeze, Exxon faces political pressure in Alaska to move its larger project forward. Several state lawmakers recently have accused the company of plotting to keep Alaskan gas in the ground until some of its other gas projects, including Mackenzie, come into service. The Exxon spokeswoman said the company “has always been willing to sell Alaska natural gas under the right terms and conditions.” An Imperial spokesman said it would be advantageous if Mackenzie went first but said it believes both could be supported.

Write to Tamsin Carlisle at [email protected]

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