Mackenzie delays prompt MGM to put Arctic drilling plans on ice this winter
By Lauren Krugel (CP)
September 17, 2009
CALGARY — MGM Energy Corp. (TSX:MGM), a junior company focused on exploiting natural gas in the high Arctic, is putting its drilling plans on ice this winter as uncertainty persists around the development of the Mackenzie pipeline.
"With really nothing going ahead, we just couldn't justify spending the money and drilling the wells," Henry Sykes, president of the Calgary-based company told an energy conference hosted by Calgary brokerage Peters & Co. Wednesday.
The cost of drilling would have been around $15 to $20 million, he said.
So Sykes said it's preferable to pay a $10 million penalty to the Inuvialiut Regional Corporation, a native economic development group, for not developing the concessions by August 2010.
None of MGM's discoveries in the far North are currently able to get to market due to a lack of pipeline infrastructure in the region.
The 1,220-kilometre Mackenzie pipeline, if built, would carry natural gas from the Mackenzie Delta in the Northwest Territories south to the Alberta border, where it would connect with TransCanada Corp.'s (TSX:TRP) Alberta system.
It was last estimated to cost $16.2 billion.
The pipeline's backers include Imperial Oil Ltd. (TSX:IMO), ConocoPhillips (NYSE:COP), Royal Dutch Shell (NYSE:RDS) and the Aboriginal Pipeline Group.
Calgary-based TransCanada, this country's largest shipper of natural gas to eastern markets in Canada and the United States, is involved in Mackenzie through its $500 million investment in the APG.
The proposed Mackenzie project has long been held back by regulatory delays and cost concerns, and faces the prospect of being overshadowed by a bigger pipeline planned for Alaska.
However, Sykes expressed optimism that the pipeline could move forward at a brisker pace once a joint review panel finally hands down its long-awaited report in December.
And development of the Alaska project is still years behind Mackenzie, Sykes told the conference.
"There has been a lot of action there, but I'm not so sure it's as much heat as smoke," he said.
However, there's a danger "we could possibly squander what lead we have left," Sykes cautioned.
"We used to have a lead of probably four to five years on Alaska, now I think that lead's probably down to two years."
In Alaska, TransCanada and rival group Denali Gas Pipeline, backed by ConocoPhillips and BP, are competing to move natural gas from the North Slope to Alberta.
Last year, the state awarded TransCanada a license to develop the North Slope pipeline. ExxonMobil Corp. (NYSE:XOM), the single biggest holder of gas reserves on the Alaskan North Slope, recently joined that project.
In the meantime, MGM is considering exploring for oil in the central Mackenzie Valley.
Enbridge Inc. (TSX:ENB) has a pipeline from Norman Wells in the Northwest Territories to Zama in northwestern Alberta, which has the potential to carry any oil MGM finds to market.
"If they find oil in the central Mackenzie Valley, the chances of getting that to market are probably better than their chances right now of getting gas from the Delta to market," said Doug Matthews, an energy consultant who used to head up the Northwest Territories' natural resources division.
Companies have been more eager to chase oil developments lately, because prices of that commodity are so much stronger than natural gas.
Benchmark crude for October delivery settled up $1.58 at US$72.51 a barrel on the New York Mercantile Exchange. That's only half the all-time high it reached in the summer of 2008, but double what it was toward the end of last year.
Natural gas prices, on the other hand, settled at $3.76 per 1,000 cubic feet, nowhere near the levels producers need to make their development economically viable.
Mackenzie probably needs prices of $7 or $8 to get industry interested, Matthews said.
Arctic gas is also competing with emerging sources of shale gas in Canada and the lower 48 U.S. States.
"I don't even know how you can even begin to compete with a reserve that large and that much closer to market," Matthews said.
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