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Viewing cable 05OTTAWA3349, ARCTIC GAS PIPELINES REACH KEY DECISION POINTS
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Reference ID | Created | Released | Classification | Origin |
---|---|---|---|---|
05OTTAWA3349 | 2005-11-09 20:38 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Ottawa |
This record is a partial extract of the original cable. The full text of the original cable is not available.
092038Z Nov 05
UNCLAS SECTION 01 OF 04 OTTAWA 003349
SIPDIS
SENSITIVE
DEPT FOR WHA/CAN (HOLST, NELSON) AND INR (SALCEDO)
USDOC FOR 4310/MAC/ONA
DOE FOR INTERNATIONAL AFFAIRS: PUMPHREY, DEUTSCH
DOI FOR OFFICE OF THE SECRETARY: PEARCE
E.O. 12958: N/A
TAGS: ECON ENRG EINV CA
SUBJECT: ARCTIC GAS PIPELINES REACH KEY DECISION POINTS
REF: OTTAWA 2951
SUMMARY/INTRODUCTION
--------------------
¶1. (U) SENSITIVE, BUT UNCLASSIFIED. NOT FOR DISTRIBUTION
OUTSIDE USG CHANNELS.
¶2. (U) Summary/Introduction: Both of North America's
proposed major Arctic natural gas pipeline projects - Alaska
and Mackenzie - are approaching key milestones:
- On the Mackenzie project, Canada's National Energy Board
has asked proponents to indicate by November 18 whether they
are ready to proceed to public regulatory hearings early in
¶2006. This project would begin delivering about 1.2 billion
cubic feet per day (BCF/D) around 2011.
- On the Alaska project, the State of Alaska reached
agreement on October 21 with ConocoPhillips on key fiscal
issues and is near agreement with the two other big
producers, ExxonMobil and BP. This line would begin
delivering 4-5 BCF/D around 2016.
¶3. (U) Most players would like to see both projects proceed
on these timelines, in part because Mackenzie would help
create capacity for Alaska by training construction workers
and ramping up pipe production. Constructing both projects
at the same time, on the other hand, is not desirable
because it would strain these inputs, increase costs, and
could depress revenue after startup.
¶4. (SBU) According to various reports, the Government of
Canada would prefer not to address key decisions on Alaska
until Mackenzie is underway. However, the lead private
sector player on Mackenzie - Exxon-controlled Imperial Oil -
stopped work in April 2005, is frustrated by the difficulty
of reaching agreements with native groups, and is said by
some sources to be unenthusiastic about the project's
economics. While an ExxonMobil VP told Ambassador Wilkins
on October 24 that he is confident Mackenzie will go first,
and ExxonMobil President Rex Tillingsley said the same in a
speech on November 8, some other players now tell us that
there is significant risk that Mackenzie's time line will
slip further, to the point that it might not proceed before
Alaska, meaning in effect that Mackenzie would be put off
for ten to twenty years. We have not been able to evaluate
the likelihood of this scenario. Its main consequence for
U.S. interests might be that GOC decisions on Alaska would
be held up in 2006-07 while the GOC struggles to rescue the
Mackenzie project. END SUMMARY/INTRODUCTION.
MACKENZIE PROJECT: BACKGROUND
------------------------------
¶5. (SBU) Exxon-controlled, Calgary-based Imperial Oil
Limited is the lead player on the Mackenzie Natural Gas
Pipeline project, which would bring gas from the Mackenzie
River delta down the river's valley through the Northwest
Territories and into Alberta. This is a relatively
straightforward construction route with few natural
obstacles and only three government jurisdictions involved
(Canada, the NWT and Alberta). The proposed pipeline is a
fraction the size of the Alaska project - it would carry 1.2
BCF/D of gas initially, expandable to 1.9 BCF/D.
¶6. (SBU) The main complication is the presence of several
native groups along the route which have land claims in
different stages of resolution with the GOC. These groups
see the pipeline project as a unique opportunity to
negotiate various economic benefits from governments and/or
directly from industry. While the GOC's Indian and Northern
Affairs Canada (INAC) is responsible for aboriginal "first
nations" and for territorial governments, GOC policy is to
"devolve" authority to these subordinate levels.
¶7. (SBU) Under cover of "devolution," the GOC has tended to
minimize its on-the-ground involvement (i.e. other than
injecting cash), and this has further encouraged native
groups to demand that private firms provide quasi-
governmental infrastructure such as schools and hospitals.
Companies are understandably concerned that this trend may
be going too far, and in particular that the GOC is not
facing up to certain key issues (such as determining the
native groups' jurisdiction to impose property taxes).
¶8. (SBU) In April 2005, Imperial Oil and the two other firms
involved in the Mackenzie Valley Producers Group (Shell
Canada and ConocoPhillips Canada), frustrated by native
groups' demands and unenthusiastic about the project's
economics, stopped much of their exploratory work in the
Mackenzie River valley and delta. Nevertheless, Imperial
continues to incur legal, negotiating and regulatory costs
on the project. An industry insider estimated the current
sum of these costs at around C$400 million (C$1 currently
equals about 84 U.S. cents).
¶9. (SBU) Since then, gas prices have strengthened and the
GOC has offered C$500 million over ten years to address
"socio-economic concerns" along the pipeline route
(distribution mechanism yet to be determined). On the other
hand, it is not clear how much closer native groups are to
final settlements on "benefits and access" agreements with
the companies. As one company official told us, no native
leader can afford to be perceived as not extracting the
maximum possible from this once-in-a-lifetime negotiation,
and with each group cutting a separate deal, none can appear
to be getting less than another. This makes for difficult,
never-quite-finished bargaining. A lesser problem, another
said, was that government departments/agencies conduct their
review of the project's regulatory application not through
independent research, but by requesting further information
from the companies ("getting the project to do their work
for them"). This source said that while this problem is now
under control, in early 2005, seventy percent of regulatory
interventions originated with federal officials.
STATUS: HOPING FOR HEARINGS IN 2006, FIRST GAS IN 2011
--------------------------------------------- ----------
¶10. (SBU) Currently, the optimistic timeframe for the
Mackenzie project runs as follows:
-- In coming weeks, companies and native groups achieve (and
hopefully announce) further progress on "benefit and access
agreements."
-- By November 18, the companies (the Mackenzie Valley
Producers Group, represented by Imperial Oil) notify the
federal-territorial Joint Review Panel (JRP) that they are
ready to proceed to public review hearings.
-- The National Energy Board holds a Pre-hearing Planning
Conference (Conference) in the Northwest Territories during
the weeks of 5 and 12 December to inform residents of the
NEB's role and to shape the public hearing process. If the
companies do not indicate their readiness to the JRP, this
conference will not take place.
-- Public hearings would run approximately from January-
July 2006.
-- The GOC then adds its comments and the application
proceeds to the National Energy Board in late 2006.
-- Realistically, the first flow of gas would occur in
2011 "even if all goes well."
MACKENZIE: GETTING CLOSER TO THE EDGE?
---------------------------------------
¶11. (SBU) Some of our pipeline industry contacts say
that Imperial is already unenthusiastic about
Mackenzie's economics, due to native groups' demands
combined with parent firm ExxonMobil's relatively
conservative outlook for natural gas pricing in North
America five to ten years out. Mackenzie's expected
delivery of 1-2 BCF/day is equivalent to one or two LNG
terminals, meaning that Mackenzie's market opportunities
could be "filled in" by a couple of the LNG projects now
being contemplated. (The Alaska project, being larger,
is less vulnerable to such displacement). On the other
hand, ExxonMobil's Vice-President for the Americas
assured Ambassador Wilkins on October 24 that Mackenzie
will proceed before Alaska and that "as long as the
parties remain in dialog then the project remains on
track." Speaking in Calgary on November 8, ExxonMobil
President Rex Tillerson told the Canadian American
Business Council that "my expectation is that we'll
ultimately get across the finish line" with Mackenzie.
¶12. (SBU) Despite these assurances, some well-placed
interlocutors have told us that it is now entirely
possible that the Mackenzie project will be delayed
indefinitely, mainly due to its possible interplay with
the Alaska pipeline. While public statements continue
to say that Mackenzie will deliver gas "by the end of
the decade," at least three or four years ahead of
Alaska, pipeline industry sources say that nothing
earlier than 2011 is realistic. This narrows the window
over which the Mackenzie line can be expected to be
serving a tight natural gas market. Moreover, the
closer the two projects occur in time, the more they are
likely to compete for scarce skilled workers, large-
diameter steel pipe, and other inputs, thus rising
inflation in construction costs.
¶13. (SBU) Because the Arctic construction season is
short, if Mackenzie's timeline slips even by a few
months, this might push construction and completion out
by another year. The implication is that if JRP public
hearings do not begin by February, the risk in terms of
eventual market price for the gas, combined with an
increased risk that the timeline will overlap with
Alaska's, could incline Imperial to put off the
Mackenzie project - at least until the continental
market absorbs Alaskan (and possibly LNG) gas supplies,
and promise to tighten again - which could take another
ten to twenty years.
ALASKA PROJECT: THE VIEW FROM OTTAWA
-------------------------------------
¶14. (SBU) The Alaska project will reportedly continue to
be far down the GOC's list of priorities until Mackenzie
appears to be well underway. Also, the GOC's Natural
Resources ministry has suffered from a lack of
leadership which is not fully resolved (reftel). Even
were it to focus on the Alaska project, the GOC would
not want to risk appearing to facilitate it at the
expense of Mackenzie. To complicate matters, there is a
growing possibility of an election campaign in mid-
winter, and the government is already in campaign mode.
¶15. (SBU) We expected the State of Alaska's October 21
announcement of a "base fiscal contract agreement" with
ConocoPhillips to renew pressure on the Mackenzie
players to settle their differences and move toward
public hearings. The subsequent controversy in Juneau
(over whether the agreement protected the State's
interests) may have had the opposite effect, encouraging
native groups in the Mackenzie Valley to believe they
have a further opportunity to hold out.
¶16. (SBU) Canadian energy patch observers continue to
agree that the GOC is focused on ensuring that the
Mackenzie project not only gets built, but gets built
before Alaska. As the Alaska project draws closer to
reality, the GOC will have increasing difficulty
avoiding its fundamental dilemma. That dilemma is
whether/how to choose between two regulatory regimes:
the 1970's-era "National Pipeline Act" process (which
TransCanada PipeLines asserts gives that company
exclusive rights to develop the Canadian segment of the
project), or the more modern and open "National Energy
Board" process (which would allow proposals by other
possible lead players, including TCPL arch-rival
Enbridge Pipelines Inc.) Previous Prime Minister Jean
Chretien went on record as having a preference for the
NPA process. Various observers suggest that by
remaining silent on this issue, the GOC is sending a
signal that regulatory applications can be filed under
either process - in effect, "letting the market decide."
ExxonMobil's VP for the Americas told Ambassador Wilkins
that he considers the GOC's silence to be
acknowledgement that both processes remain available to
project developers.
WILKINS