NATURAL GAS
Low prices put $16.2B Mackenzie Valley pipeline on hold
Partners in the proposed Mackenzie Valley pipeline have put the $16.2-billion project on hold, slashing budgets and eliminating staff in response to continued poor price outlooks and lack of commercial support.
Imperial Oil, the lead producer in the project with a 34 per cent interest, will close offices in Norman Wells and Fort Simpson, Northwest Territories, this year, and has reduced the size of its office in Inuvik, N.W.T., spokesman Jon Harding said Thursday.
Cheap shale gas that pulled down prices, and cost escalations played into the partners’ decision to cut capital on the pipeline project, he said.
“All of this has reduced the commercial viability of the project, and a project that must be competitive with new sources of supply in North America,” Harding said.
Imperial, Conocophillips Canada, Shell Canada, Exxonmobil and the Aboriginal Pipeline Group form the pipeline consortium which has been promoting the project for the past decade.
Last year Shell put its stake on the line, which would see Canadian Arctic natural gas flow south via Alberta to markets in the United States, on the block but it has yet to announce a buyer.
Conocophillips Canada, which has a 15 per cent stake in the project, announced Thursday it was ratcheting back capital toward the pipeline, which would transport 1.2 billion cubic feet per day of natural gas.
“Why now? We saw a further decline in the price of gas and the future price of gas, and we just haven’t been able to get the right fiscal structure for the project,” said spokesman Tim Bryant. “With those two things combined, we thought it was time to take an impairment.”
Conocophillips’ Houstonbased parent expects to record a non-cash impairment of $525 million US after tax for the first quarter on the pipeline costs.
Besides being a partner in the Mackenzie pipeline, the producer has a 75 per cent interest in the Parsons Lake gas field, one of three “anchor fields” for the development.
All the partners passed the project budget for 2012, which focused on cutting staff involved in the project, especially up north, with the Aboriginal Pipeline Group following suit, said O.D. Hansen, APG manager of regulatory services.
“Our activities surely have become less but we’re not quitting. We’re waiting for prices to rebound,” Hansen said.
On Monday the group issued a news release saying the project was not dead, and would be restarted when natural gas prices recover.
Natural gas futures closed Thursday at $2.091 U.S. per million British thermal unit in New York. Price outlooks fail to reach a $6 U.S. level analysts predicted was required to make the project economically feasible until at least 2020.
For the people of the N.W.T., the suspension of new capital for the Mackenzie project spells yet another economic heartbreak. Income from the project, from developing the natural gas fields to building the infrastructure, represented an estimated $68 billion over the 25year lifespan of the pipeline, and thousands of jobs for locals.
“This has a significant impact for the Beaufort part of the Northwest Territories, where there have been a lot of businesses that have invested in equipment and so on in anticipation of the pipeline,” said Premier Bob Mcleod. “This is the most significant project ever for N.W.T. Looking at the potential reserves for oil and gas alone is tremendously significant, in the hundreds of billions of dollars if it’s all developed.”
The dream to tap into the Arctic’s estimated 1.9 trillion cubic feet in natural gas resources was first conceived in the 1970s. The project was put on hold soon after by the Berger inquest, then revived almost 30 years later when natural gas demand was set to outstrip supply.
A protracted regulatory process stretching over seven years saw the promise fade as shale gas burst into the North American scene. Abundant volumes in regions already connected to pipeline networks pulled prices down steadily from highs of $15 U.S. in December 2005 to a low of $2.091 U.S. on Thursday.
“The forecasts don’t look great,” Bryant said. “The big strike against the project is the oversupply of gas in North America. We can’t build a multibillion dollar project into that kind of environment.”
The partners have been wrangling over funding support with the federal government for three years. Ottawa said then it would provide funding for roads, airstrips and other infrastructure in the Northwest Territories. Imperial, a subsidiary of Exxonmobil, has until the end of 2013 to provide federal regulators with updated project costs and report on a decision to build the pipeline.