Is the Mackenzie Pipeline dead?

COMMENT: It's an urban myth (or a lie conjured by those who would benefit) that the initiative to build the Mackenzie Pipeline was ever driven by the market. The market has never, and never will, justify building that pipeline.

Offshore oil development in BC? The market won't drive that one either. It'll only happen with a whack of subsidy.

Peter Foster
National Post
August 18, 2009

New technology has revitalized old gas exploration areas and opened new ones, putting the economic logic of northern pipelines in doubt

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,” or “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 States 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.