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National Post (Canada): Ottawa eyes takeover

Oil companies tell government $16.2-billion Mackenzie Pipeline is dead; Deal could salvage stalled plan to invest in north

Claudia Cattaneo and jon Harding, National Post
Published: Friday, May 18, 2007

CALGARY – The federal government is exploring taking control of the $16.2-billion Mackenzie Gas Project and buying out the Imperial Oil Ltd.-led consortium that has backed it so far as a way to salvage the major northern infrastructure development.

Sources close to negotiations underway in Ottawa said the oil companies have advised the government the project is effectively dead, and are considering the merits of the government owning the pipeline with TransCanada Corp. and the Aboriginal Pipeline Group (APG), an aboriginal enterprise. TransCanada, Canada’s largest pipeline company, which has financed the APG so far, may be the builder.

Jim Prentice, Minister of Indian Affairs and Northern Development, recently received federal Cabinet approval to explore the option of Ottawa taking a controlling stake in the project, the sources said.

Oil companies backing the project said in March that the 1,222-kilometre pipeline linking gas fields in the Mackenzie Delta to Alberta’s natural gas pipeline grid would cost $16.2-billion, up from $7.5-billion only two years ago, thanks to inflationary pressures that have beset energy projects around the world.

The consortium then asked Ottawa for huge tax concessions, but at a May 2 meeting in Calgary Mr. Prentice slammed the door on the idea of subsidizing the oil companies. Imperial then said it would shut down the project, sources said.

Since then, Ottawa has not only resurrected a proposal to be a partner in the project, but is exploring taking control away from Imperial. The massive venture would provide a new source of natural gas for North America and be a springboard for development of the North. It would also open the prospective frontier to gas exploration.

Under the plan under consideration, Ottawa would buy out Imperial and its partners, Houston-based ConocoPhillips and international conglomerate Royal Dutch Shell PLC, by reimbursing them for costs already incurred on the project plus interest.

Imperial, Conoco and Shell are now formulating a plan to let the government into the project. A deal is expected to take several months to be finalized, sources said.

The partners have spent about $600-million so far on regulatory reviews and preliminary work. Ottawa has promised $500-million to communities along the pipeline path to alleviate the social impacts of the massive development that would require 22,000 people to build.

The pipeline would then be open to all oil companies to ship their natural gas. They would be charged tolls for using the space.

“Certainly, if the government were to step in and take a significant equity stake in this pipeline, it’s a very good thing for APG and we would strongly support it,” said Bob Reid, president of the APG.

“The producers are willing to explore anything that will make this project more economic and more likely to proceed. The alternative is that it closes down. In its present form, at $16.2-billion, the project is simply not economic for the producers.”

The change in control would be a big blow for Imperial, which has led the revival of the pipeline after it was shelved three decades ago due to aboriginal opposition.
Canada’s largest integrated oil company, 69%-owned by Irving, Tex.-based Exxon Mobil Corp., has frustrated aboriginal groups and companies outside of the partnership that have been exploring in the Northwest Territories. They have complained about repeated delays, about the difficulty for competitors to access the project’s important gathering system, and about Imperial’s secrecy and obsession with control.

“Imperial could step back as the leader,” said a source. “It’s one of the things under discussion. They could step back as the project manager right away and have someone else step in or they could step back during the operating phase.”

Fred Carmichael, a Gwich’in aboriginal leader and chairman of the APG who out of frustration recently called on Imperial to step aside, said the company’s profit expectations are very high and others may be happy with more reasonable returns.

“It’s an investment in the North, it helps ensure the project is basin-opening [for development] and early indications are that it would certainly help the APG with financing its share of the project,” he said.

Pius Rolheiser, spokesman for Imperial, would not comment on the developments, which he said are part of confidential negotiations.

Imperial said in documents filed with the National Energy Board this week that companies outside the joint venture would not get access to the pipeline until 2018, three years after it begins operations, after it builds compression to increase its capacity.

The project would plunge the federal government back in the energy sector after selling out of Petro-Canada in 2004. But even in Calgary, where federal government participation in energy has been a sore point, the idea of government throwing the hard-luck project a lifeline is applauded.

“We support whatever is necessary to ensure that a project so vital to so many people continues to progress in a reasonable fashion,” said Henry Sykes, president of MGM Energy Corp., a top explorer in the Arctic. “The federal government, and governments throughout Canada, have a long history of building infrastructure and as long as it can be done on a basis that is reasonable to Canadian taxpayers, I don’t see why this should be any different.”

© National Post 2007

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