Former Canadian official: State gas line faces numerous hurdles

Posted: Tuesday, April 15, 2008

CALGARY, Alberta - Anyone who thinks an Alaska natural gas pipeline will see fewer hurdles than the long-stagnant Mackenzie Gas Project is sadly mistaken, says the man who used to run the Northwest Territories' natural resources department.

"People have tried to make the story that the Mackenzie gas project is dogged by all kinds of regulatory problems, whereas an Alaskan project will be smooth sailing," said Doug Matthews, a Calgary energy consultant who, before retiring, spent 25 years in the region.

"The sailing might be a lot less smooth than people have let on."

Oil and gas giants BP and ConocoPhillips submitted a bid last week to build a multibillion-dollar pipeline that would carry natural gas from Alaska's North Slope to the Lower 48. Their proposal, dubbed "Denali," competes with a similar pipeline plan put forward by TransCanada Corp.

Matthews foresees "quite a tussle" between TransCanada's proposal and the Denali pipeline, because of a three-decade-old agreement that essentially gives TransCanada, Canada's largest natural gas shipper, first dibs on any project in the Far North.

"I think the Denali project is going to have a lot of regulatory hurdles to get through. TransCanada has always made much of this treaty that gives them certain rights," said Matthews, who said the legislation does not carry as much weight as TransCanada has let on.

"There might be a competitive fight between TransCanada and the BP-Conoco proposal, which could end up in court to get resolved and that, in turn, could slow down the pace of the Alaska project."

While the competition seems heated now, analysts say there eventually will have to be some sort of collaboration between the producers, the pipeline operator and the state of Alaska.

"What I see happening there is everybody's going to get a piece," said FirstEnergy Capital analyst Stephen Paget, adding an agreement might be a few years off.

"I think it will be tough for any company that wants to participate to be truly denied a share."

Desjardins Securities analyst Daniel Shteyn said the BP-ConocoPhillips announcement is just "gamesmanship" on the part of the two companies, which along with Exxon Mobil Corp., are major North Slope natural gas producers.

"They are trying to jockey against the state of Alaska to maximize their negotiating leverage in terms of the fiscal framework," he said. "Ultimately I believe that what will happen in Alaska will be some sort of a settlement between the three key stakeholder parties."

Further east, the planned 1,220-kilometer Mackenzie pipeline project has been mired in regulatory setbacks for decades and has seen its price tag balloon from $7.5 billion Canadian dollars to $16.2 billion in about two years. The $16.2 billion estimate was made by Imperial Oil Ltd. 13 months ago, and many observers expect the project could now cost close to $20 billion.

Companies vying for the right to build the Alaska project should brace themselves for similar cost overruns. So far TransCanada has pinned its Alaska proposal at $26 billion Canadian and Denali will cost about $30 billion U.S.

"What we're finding now, of course, is that inflation appears to be coming back with a vengeance in the U.S. and in Canada," Matthews said.

"So I would expect that $30 billion is going to get bigger rather than smaller."

Amid grumbling from the government and producers over Mackenzie's soaring cost, there has been talk that control may shift from a consortium led by Imperial, Canada's largest oil producer and the Canadian subsidiary of Exxon Mobil, to TransCanada and the Aboriginal Pipeline Group.

Getting local aboriginal communities on board has been a major challenge for Mackenzie, and Matthews said those involved in Alaska should prepare themselves for similarly heated negotiations with the state's Native groups.

Communities in the Northwest Territories successfully used their leverage over the project to advance their land claims process and groups in Alaska will likely do the same.

"Aboriginal people talk to each other for goodness sake," Matthews said. "Why wouldn't any other group do exactly the same thing? It's a successful strategy. It may be frustrating but you can't blame the groups for doing it."

Some have argued that if the Mackenzie project is not built before the Alaska project, it probably will not be built at all.

"If anything, the Mackenzie process will be given a little bit of a boost by what's happening across the border in Alaska because if the Mackenzie project keeps on sitting in deep freeze, then Alaska's going to proceed and Mackenzie's going to be left behind," said Shteyn, the Desjardins analyst.

Whether it's from Alaska or the Northwest Territories, the pressure is on TransCanada to get more natural gas into its existing mainline system, which ships western gas to eastern markets in Canada and the U.S. Midwest states. The gas it currently relies on comes from Alberta, where reserves are declining.

"The fewer molecules of gas that transit that pipeline, the higher the cost the remaining molecules have to bear because the costs are essentially fixed," Matthews said.

"So if you have a declining throughput, then the cost of shipping gas through to Ontario goes up for the remaining gas," he added. "If TransCanada doesn't get those Alaskan volumes onto its system, I would argue they could be in real severe financial stress."

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