Oil Sands Truth: Shut Down the Tar Sands

“The oilsands will get their gas no matter what. It‘s everyone else who needs to worry.‘‘

Dec 6, 2007 1:00:00 PM MST
TransCanada, Imperial led group to benefit from rumoured Mackenzie restructuring (TransCanada-Mackenzie)

CALGARY _ Analysts say a reworking of the Mackenzie Gas Project will be a boon for all involved, with pipeline operator TransCanada Corp. (TSX:TRP) likely to see major returns and the Imperial Oil-led consortium (TSX:IMO) of producers relieved of much of the cost burdens that have threatened to kill the entire energy project.

A revamp for the proposed natural gas development in the Northwest Territories is expected to be announced later this month.

“If it ever proceeds, the utives will be giving themselves high-fives,‘‘ Daniel Shteyn, an analyst with Desjardins Securities, said Thursday.

A published report Wednesday said Imperial Oil, Exxon Mobil, Conoco Phillips and Royal Dutch Shell have agreed to cede control of the project to TransCanada, the country‘s largest natural gas shipper, and the Aboriginal Pipeline Group, an organization that represents native communities in the North.

TransCanada would have a 60 per cent stake and the APG would have 40 per cent, the report said. The company and the group have declined to comment.

Many of North America‘s largest energy companies have proposed various projects to carry natural gas discovered from the Far North to southern markets in Canada and the United States. The main projects have focused on Canada‘s Mackenzie Delta, where major gas deposits have been discovered, and the North Slope of Alaska, the largest oil producing region of the United States, and an area with large gas deposits.

With natural gas prices low and the prospect of increased competition from a growing liquefied natural gas industry looming from overseas producers, many experts predict there may be room for only one major Far North gas pipeline project _ either in Alaska or the Mackenzie River valley, or a combined pipeline.

First Energy Capital analyst Stephen Paget said he was at TransCanada‘s investor day session last month, when the company hinted at a deal with the Imperial group that would please everyone.

“A greater stake for TransCanada in the pipeline would suit the resource owners because it meant they had less capital risk,‘‘ he said in an interview.

The project has been stagnant since the spring, when it was announced the pricetag had soared to $16.2 billion _ more than double the previous estimate. The companies had suggested the project was dead and that they wanted the federal government to take control of pipeline.

But if the restructuring goes ahead, the producers will see their portion of the cost cut in half. They would only have to worry about production, with TransCanada taking care of the pipeline.

“TransCanada is in the business of operating pipelines. That‘s what they do best. Presumably the capital cost control would be there, even better than Imperial Oil could do,‘‘ Shteyn said.

More importantly, Ottawa would be more likely to be on board if TransCanada and the APG take the helm.

“I think it would be politically easier for the government to support a TransCanada-led consortium than if the project was led by Imperial Oil at a time of $100 per barrel oil prices,‘‘ Shteyn said.

Big integrated oil companies such as Imperial, which runs a network of Esso-branded gasoline stations across Canada, have posted huge profits as they benefit from oil prices that came close to US$100 a few weeks ago. On Thursday, the futures price of crude was over $90.

In a note to investors, Shteyn bumped up TransCanada‘s target share price from $43 to $45 and re-iterated his “buy‘‘ recommendation.

“From TransCanada‘s perspective, if this project proceeds, it will be a massive capital deployment opportunity for them which would significant value for the shareholders,‘‘ he said.

TransCanada shares were up slightly to $40.17 on the Toronto Stock Exchange in Thursday trading.

Last week TransCanada made a bid to the Alaskan government to build another natural gas pipeline that would compete with a proposal by ConocoPhillips. That project, which is expected to cost $42 billion, would tap into about 22 trillion cubic feet of natural gas in Alaska‘s North Slope and would feed into the U.S. energy market.

If that mega-project moves forward, it might stir up the political will needed to get the Mackenzie pipeline off the ground, First Energy‘s Paget said.

“The Canadians will not want to see Alaska gas passing through Canada when Canadian Arctic gas is stranded,‘‘ he said.

The Mackenzie project is slated to be completed about four years before the Alaskan one so they won‘t have competing construction seasons, Paget added.

Last month a TransCanada subsidiary asked for permission to build a nearly $1 billion, 300-kilometre natural gas pipeline that would run from gas-producing areas northwestern Alberta to oilsands operations in the province‘s northeast.

The North Central Corridor, which the company had been considering for 11 years before making its application, could theoretically link up with the Mackenzie Pipeline‘s proposed terminus, bringing Arctic gas to the natural gas hungry oilsands.

Natural gas is a key power source for oilsands developments. It is used as fuel to heat the steam that liquefies tar-like bitumen in steam-assisted gravity drainage projects. It‘s also a source of heat and hydrogen in mining and in upgrading bitumen into synthetic crude oil.

The big producers involved in the Mackenzie Gas Project could feed their own oilsands assets with their natural gas assets, Paget said.

“The oilsands will get their gas no matter what. It‘s everyone else who needs to worry.‘‘

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