Oil Sands Truth: Shut Down the Tar Sands

Is the Mackenzie Pipeline dead?

Is the Mackenzie Pipeline dead?
Peter Foster
National Post
August 18, 2009

Here’s a thorny question to pose as Prime Minister Stephen Harper moves
about the Canadian North this week promoting Arctic sovereignty and
use-it-or-lose it development: is the Mackenzie Valley natural gas
pipeline dead?

A year ago, Imperial’s CEO Bruce March declared that he was as optimistic
about Mackenzie development as he had been “in five or six years.” As
recently as January, Minister of the Environment Jim Prentice was talking
about getting “framework issues” resolved and moving forward. But whatever
fiscal terms the government has offered, Imperial and its partners
apparently don’t like them.

Sean Parnell, the successor to Sarah Palin as Governor of Alaska, has
declared that pushing a pipeline for North Slope gas will be his top
priority. That would kill the Mackenzie line dead. But the prospects for
both Alaska and Mackenzie Delta gas are seriously threatened by major new
gas finds — and even more major prospects — in the south.

Just as the whole economic logic of northern natural gas pipelines was
undermined in the 1970s and 1980s by the removal of perverse legislation
in the United States — which opened up exploration and production in the
lower 48 — so the rug may be pulled from under northern gas again, only
this time by technology.

Three years ago, natural gas production in the United States looked to be
in permanent decline. But then, as a recent report from global
intelligence company Stratfor notes, things changed big time. Production
was boosted by high prices and cheap credit. Wellhead prices almost
quadrupled between 2002 and 2008, but the really big development was in
technology, specifically for cracking open “tight” natural gas formations.

“Hydraulic fracturing,” of “fracing,” involves injecting high pressure
water into underground rock formations to shatter them. The resultant
fissures are held open by granular matter pumped in with the water,
allowing the gas to escape. Advances in this technology, which is in fact
decades old, have, along with other techniques such as horizontal
drilling, revitalized old exploration areas and opened up new ones. The
Wall Street Journal recently noted that shale gas finds “have moved the
U.S. natural-gas market from scarcity to abundance.”

The “Potential Gas Committee,” a group of academics and industry
specialists linked to the Colorado School of Mines, earlier this year
reported the biggest increase in natural-gas reserves in its 44-year
history. Estimated U.S. reserves rose by a whopping one third, from 1,532
trillion cubic feet (TCF) in 2006 to 2,074 TCF in 2008.

The Stratfor study suggests that the United Sates might even become an
exporter of natural gas, possibly even to Europe, which would for obvious
reasons love sources of supply apart from Russia and Iran.

This is not such good news for Canada, however, which is the major
supplier to the gas import market. Such developments help explain,
however, why the Kitimat project in B.C., which was originally meant to
facilitate imports of liquefied natural gas, is suddenly being
reformulated as an export terminal.

Significantly, one of the most exciting new areas for shale gas is the
Horn River Basin in northern British Columbia. EnCana executive
vice-president Michael Graham has called the Horn River field possibly
“the best shale play in North America.” Exxon Mobil is throwing itself
into shale exploration not merely at areas such as Horn River but in
Europe and elsewhere.

Development of this relatively high-priced non-conventional gas was
brought to a grinding halt as prices slumped with the recession this past
year. Nevertheless, the existence of these vast reserves places a natural
price cap on the North American market. The question is whether that price
makes Arctic gas too expensive. Since Exxon is Imperial Oil’s parent, and
is also a direct partner in the Mackenzie pipeline, it understands better
than anybody the impact of such developments on the viability of Arctic
gas, but its lips are sealed tighter than one of those shale formations.

Currently, prices are hovering not far above US$3 a thousand cubic feet, a
level which induces thoughts of suicide in gas producers, but the
important price is the one that will prevail when northern pipelines come
onstream. EnCana, North America’s leading gas producer, recently hauled
down its long-term price expectations from the range of US$7 to US$8 per
million British thermal units (BTUs) — which is approximately the same as
a thousand cubic feet — to US$6 to US$7 per million BTUs, but others, such
as Ron Brenneman, the retiring head of Petro-Canada, expect prices to stay
below US$6. As he told the Financial Post’s Claudia Cattaneo recently “We
know enough about these shale gas plays to understand the potential and
the cost associated with development. Any time you see a little bump in
natural-gas prices, which we will see periodically, you will see a
corresponding increase in activity and, therefore, supply, and it will
smooth itself out again. If you look at the forward curve right now for
natural-gas prices… I think it’s going to stay under $6, and at that level
you can’t justify conventional developments in Western Canada.”

Much less, presumably, in the Arctic. So it will be fascinating to hear if
Mr. Harper even mentions pipelines this week.


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