Mackenzie pipeline uneconomic, Imperial CEO says

By DAVE EBNER
Globe and Mail
Friday, October 7, 2005

CALGARY -- The proposed $7-billion Mackenzie Valley natural gas pipeline doesn't make economic sense unless Ottawa signs another special fiscal deal for the backers, the chief executive officer of Imperial Oil Ltd. says.

"We're not asking for handouts, we're not asking for giveaways," Tim Hearn, Imperial president and CEO, told reporters after a speech yesterday at the Calgary Chamber of Commerce.

"That is not what we're working on. We're trying to find a framework, because today, under current conditions, we don't have an economic project, and we're working to make sure we can find one."

Mr. Hearn wasn't specific about what Calgary-based Imperial wants, though he did mention "how various costs are recovered."

"We're looking at cash flow timing things, and how we may construct the framework in such a way that it will make it economic."

While Mr. Hearn says he doesn't believe Imperial can make money on a Mackenzie line under current fiscal rules, others suspect the line could be quite profitable, especially compared with the project's competition.

Mackenzie Valley would be more profitable than a proposal for a gas line out of Alaska and other projects looking to import liquefied natural gas (LNG) to North America from Qatar, said brokerage Tristone Capital Inc. in a lengthy report in May on the subject.

"Pipelines appear economic," Tristone concluded, noting that Mackenzie would recover costs and produce a 10-per-cent return with natural gas at about $3.10 (U.S.) gas a thousand cubic feet.

Imperial -- majority owned by Exxon Mobil Corp. of Irving, Tex., the world's largest public oil company -- is using a long-term natural gas projection of $2.50 a thousand cubic feet. In the 1990s, gas averaged $2, which rose to $6 this decade before hurricane Katrina. It is now about $14.

"The world is not short of natural gas," Mr. Hearn said. "I'll guarantee you that if LNG comes into North America, you won't find $14 gas. I don't know where it'll be but it won't be $14."

Many market outlooks suggest that while LNG will probably pull down gas prices in North America, $5 a thousand cubic feet has been suggested by a majority of prognosticators as a reasonable long-term forecast.

Though Mr. Hearne said the project is not economic under current rules, he noted the company is committed to building the Mackenzie line and almost $400-million has already been spent.

Asked about Imperial's gas forecast, Mr. Hearn said: "I'm not going to comment on it." Asked why he believes the pipeline is not economic, Mr. Hearn said: "I'm not going to answer your question."

The Globe and Mail reported last week that Imperial is asking for significant breaks from Ottawa, requests that follow the federal government's offer in July of $500-million (Canadian) in social and economic funding for northerners.

Research conducted by the Sierra Club of Canada, an environmental lobbyist, indicated last week that Imperial's requests amount to a dollar tally of $2-billion.

However, several government sources said it is hard to quantify, given various natural gas price forecasts.

Imperial is the lead proponent of the Mackenzie pipeline, a group that includes Shell Canada Ltd. and ConocoPhillips Canada, among others.

In mid-September, Paul Smith, a senior vice-president at Imperial, said issues the company wants to negotiate with Ottawa included royalties.

"We didn't ask for royalty breaks," Mr. Hearn said yesterday.