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Petroleum News: Mackenzie natural gas pipeline project assailed from all sides

Week of December 31, 2006

Proponents of the Mackenzie Gas Project have invested about C$500 million in the venture so far, but a confluence of rising costs, weakening economics and aboriginal resistance that has slowed down the regulatory process could still undo that commitment, TransCanada Chief Executive Officer Hal Kvisle has warned.

In a year-end interview he delivered one of the bleakest assessments yet of the proposal to finally start shipping gas from Canada’s Arctic region to southern markets.

“At some point, the Mackenzie project gets just too complicated and it’s not worth the grief to go ahead and do it,” he told the Financial Post.

Kvisle said the issue Canada has to resolve is figuring out a way to prevent the project from “getting mired down and bogged down in government policy and other social issues.”

The National Energy Board wrapped up almost a year of hearings in mid-December, but parallel hearings by a Joint Review Panel on environmental and socio-economic matters have become entangled in a land claim by the Dene Tha First Nation of Alberta, while the Deh Cho First Nations are in the midst of tense negotiations with the Canadian government over a land claims settlement.

As well, there are unresolved concerns in Northwest Territories aboriginal communities that are supporters of the project.

Meanwhile, the Mackenzie partners led by Imperial Oil are updating their budget which was last estimated at C$7.5 billion, but has since been hit with inflation that is expected to see the numbers climb well above C$9 billion when they are disclosed early in 2007.

TransCanada entered the project in mid-2003 when it provided an C$80 million loan to the Aboriginal Pipeline Group to cover one-third of preliminary engineering and environmental studies.

If APG is able to arrange gas volumes from independent producers it is eligible to take a one-third ownership stake in the Mackenzie pipeline.

The deal sets TransCanada up as the leading contender to carry gas from the Mackenzie Delta to northern Alberta, where it would be expected to enter TransCanada’s pipeline network.

In addition, TransCanada has an option to buy 5 percent of the project and acquire up to 50 percent of any portions offered for sale by the four gas-producing partners – Imperial (almost 70 percent owned by ExxonMobil), ExxonMobil Canada, Shell Canada and ConocoPhillips Canada.

Kvisle said his company has been working with the partnership to use new pipeline construction technologies, such as welding practices TransCanada has tested with BP, to reduce overall costs by eliminating pricey safety testing methods.

He indicated that avoiding hydrostatic testing could trim C$100 million from the budget.

But Kvisle made no effort to disguise his concern about the complexity of the Mackenzie project from a technical, regulatory, political and social standpoint.

—Gary Park

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