Economics, politics chill Arctic pipeline dreams

INUVIK, Northwest Territories (Reuters) - Driving by industrial yards along Inuvik's icy Navy Road, Jackie Jacobson, an aboriginal guide, hunter and politician, pointed out fleets of idle trucks and clusters of unused oil field equipment.

They are the tangible evidence of an economy in limbo, waiting for one of the world's biggest unbuilt energy projects -- the C$16.2 billion ($15.3 billion) Mackenzie natural gas pipeline -- to get underway.

After decades of setbacks, work on the pipeline has not started, and it's not entirely clear it ever will.

"If there's another big delay, I think there are a lot of businesses in Inuvik and the Northwest Territories that could fold," said Jacobson. "There are a lot of people invested into this project."

With a key regulatory report looming, the risks that are chilling Mackenzie -- and proposals to build a much larger line in Alaska -- have only increased. The implications go well beyond this town of 3,500 people above the Arctic Circle.

In the last two years alone, North American gas markets have been transformed by the development of a shale gas industry, giving energy companies access to massive deposits near major U.S. cities. All the while, the recession has cut demand for the fuel, depressing prices in the short term.

The Mackenzie line, first envisioned in the 1970s, is now not expected start up before 2014. That means the project, led by Exxon Mobil affiliate Imperial Oil Ltd, will bump up against the $30 billion-plus Alaska Pipeline. It's target is 2018.

The problem for Mackenzie could be a shortage of steel and skilled labor if Alaska gets started first.

What's unclear, however, is if either pipeline will ever break ground at a time when shale gas is proving to be a much cheaper alternative.

"The thing that the surge in unconventional gas (such as shale) does for both projects is it raises the risk of a situation where the market might not yield a sufficient price to pay out the investment," said Robert Ineson, senior director of global gas for IHS CERA.

Many argue that Arctic gas is still worth developing given expectations that North American demand for the fuel will surge. U.S. President Barack Obama is pushing for legislation to promote cleaner forms of energy than coal and oil to help meet goals to cut greenhouse gas emissions, and natural gas could be a key part of that.

But can the Mackenzie pipeline hold out that long?

CANADIAN TAXPAYER SUPPORT

The Canadian government is negotiating a fiscal support package, estimated to be worth in the billions of dollars, that Environment Minister Jim Prentice proposed a year ago.

The proposal, in which Ottawa would pay for associated infrastructure like roads and airstrips, as well as other financial measures, is aimed at helping make the pipeline economically viable in the short term as it opens up a new supply region on the expectation of longer term returns.

Prime Minister Stephen Harper has made much of the need to shore up Canada's sovereignty in the Arctic to protect huge undeveloped deposits of energy resources. But politically, he risks accusations in southern Canada that it would be handing over taxpayer dollars to rich oil companies as other parts of the economy struggle.

A recent newspaper report said the project was jeopardized by a federal cabinet committee's rejection of the package.

Prentice said talks were still going on, but he and the pipeline backers have been tight-lipped about what the sticking points are. "Obviously we've not reached an understanding at this point after a number of years of discussion," he said.

The first plans to ship gas from fields near Inuvik discovered in the early 1970s were shelved so native people could solve land claims.

In its most recent incarnation, with aboriginal backing, Imperial had targeted startup of operations this year, but an epic regulatory process went well beyond its timetable.

The line would move up to 1.9 billion cubic feet of gas a day to TransCanada's Alberta pipeline network via the Mackenzie River Valley. In Alberta, the gas would be routed to numerous Canadian and U.S. markets. The project's three anchor fields have reserves of 6 trillion cubic feet.

The next big step for the 1,220 km (760 mile) pipeline is expected this month, when Canada's Joint Review Panel is due to release a report into environmental and socioeconomic impacts.

The country's main oil and gas regulator, the National Energy Board, will use the document to help make a decision after April 2010 on whether the project can finally go ahead.

Using testimony from two years of public hearings in communities throughout the north, the panel is examining how the project, and a new industry, will affect the land and people's lives, and will make recommendations how to proceed.

Imperial Oil will scour it to see if it contains any unforeseen costs that could potentially be deal-breakers.

FRUSTRATION IN INUVIK

Over breakfast at Inuvik's Mackenzie Hotel, Fred Carmichael let his anger show. Carmichael, a career bush pilot who is chairman of the Aboriginal Pipeline Group (APG), was frustrated with the media, confidentiality agreements, delays and the potential for native people to be left out in the cold.

The APG, a partnership of native groups along the proposed Mackenzie Pipeline route, would own up to a third of the line.

"It's time for the decision-makers to make the frigging decision. That's what the people want. It's time to end the secrecy. It's been going on for far, far too long," he said.

Jacobson, a member of the Northwest Territories legislative assembly for the vast but sparsely-populated Nunakput constituency, said there was no question of the benefits.

He stresses the promise for a generation in the Arctic who now have scant opportunity to work near home, especially with the collapse of the fur industry, and whose families shoulder high costs of food and other basic needs.

It would give native people unprecedented ownership in major energy infrastructure, provide spinoff opportunities and be a catalyst to more exploration in the Beaufort Sea.

But not everyone agrees. Environmental groups testified during the hearings that the development would disturb swathes of northern land and disrupt traditional cultures.

Some, including the Sierra Club, are worried most of the gas would be used to fuel development of Alberta's oil sands.

The group is also concerned that rising water levels in the Mackenzie Delta due to climate change could be dangerous for gas fields and other facilities that are below sea level.

SHALE GAS MAY SIDELINE ARCTIC

Even if it gets the go ahead, the Mackenzie pipeline risks being outgunned by the Alaska Pipeline, which two rival groups are bidding to build. Also on the drawing board for three decades, it would ship at least 4 billion cubic feet a day of gas, supply that is now reinjected to the ground after being produced along with the North Slope oil.

In 2008, TransCanada Corp won the state's backing under the Alaska Gasline Inducement Act, a process that began with former Governor Sarah Palin's administration. That gives the company access to $500 million in state funding.

It is being challenged by a rival grouping called Denali, a partnership of BP Plc and ConocoPhillips, two of the three Alaskan North Slope gas producers.

The project is crucial to solving the state's revenue problems because it would employ the same skills and equipment now used to pump Prudhoe Bay oil, said Neal Fried, economist with the Alaska Department of Labor and Workforce Development.

"We are producing far less oil than we were. We're down to almost a third of what we were at its peak," Fried said. "The only thing that appears to be able to turn that around any time soon is something like a gas line."

There's no question about federal support. Washington has legislated $18 billion in loan guarantees for an Alaska pipeline, and has made recent moves to increase that to $30 billion as the cost estimate for the project has climbed.

The big question is who gets to build it.

In 2010, both groups plan to hold open seasons, essentially calls for potential shippers to show financial support in the form of commitments for space. It is unclear what the process will resolve, but it may set the stage for talks to reach an agreement rather than spend more years squabbling.

While both Arctic plans inch along, a threat is building in the form of drilling technology that can access vast reserves trapped in shale rock formations in places like Louisiana, Texas and Pennsylvania -- right on the doorstep of markets.

Shale gas is not without its own problems, notably fears that the fluids used to fracture rock deep under ground are contaminating ground water.

But such wells can now break even at gas prices of $4-$6 per thousand cubic feet, and costs are falling. That compares with a cost of $5.65 per thousand cubic feet for an Alaska pipeline, according to the U.S. Department of Energy. The fuel now fetches just over $5 on the New York Mercantile Exchange.

U.S. shale gas production is soaring and the Energy Information Administration estimates technically recoverable U.S. reserves total more than 1,744 trillion cubic feet, enough at current output rates to supply America for 90 years.

Benoit Beauchamp, executive director of the Arctic Institute of North America at the University of Calgary, said that was changing the North American gas market. "So short-term, yeah, it's pretty gloomy (for Arctic gas)."