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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