IMPERIAL MOVES TO REGULATORY HEARINGS, BUT COMMITMENT TO

UNCLAS SECTION 01 OF 03 CALGARY 000723

SIPDIS

STATE FOR WHA/CAN, EB/ESC/ISC, EB/PPD

USDOE FOR IA (DEVITO, PUMPHREY, DEUTSCH)

MOSCOW FOR TOM HUFFAKER

E.O. 12958: N/A
TAGS: ENRG EPET ETRD PGOV CA
SUBJECT: IMPERIAL MOVES TO REGULATORY HEARINGS, BUT COMMITMENT TO
BUILD MACKENZIE PIPELINE WILL HAVE TO WAIT

REF: OTTAWA 3505


1. (SBU) Summary: After months of delay and uncertainty,
Imperial Oil and its partners in the proposed Mackenzie Valley
natural gas pipeline announced in November that they are ready
to move to public hearings. While Imperial claims the
announcement is "not a decision to build a pipeline", the move
represents the first real step forward since Imperial cancelled
preparatory work last spring, and opens the door for the
National Energy Board (NEB) to begin its series of public
hearings with stakeholders in the north. The NEB, in the
meantime, has begun a two week pre-hearing conference in the
Northwest Territories (NWT) that will provide information on the
hearing process as well as information on the NEB's role
throughout the lifecycle of the pipeline. Emphasizing
sensitivities surrounding the project, NEB Chairman Ken Vollman
recently told CG that the board was unable to discuss the
specific "merits" of the project, but offered a general outline
of the process and a timeline for conclusion of the hearings.
In a separate meeting with CG, Imperial Oil's Senior VP
expressed guarded optimism that the Mackenzie project will move
forward. End summary.

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Imperial Notes Mackenzie's Outstanding "Killer" Concerns
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2. (SBU) CG and Econ Assistant met with Imperial Oil Senior Vice
President Randy Broiles on December 6 to discuss the November 23
announcement that Imperial and its partners in the proposed C$7
billion Mackenzie Valley natural gas pipeline - ConocoPhillips,
ExxonMobil, Shell Canada, and the Aboriginal Pipeline Group
(APG) - are ready to proceed to public hearings and seek
regulatory approval from the Calgary-based National Energy Board
(NEB). Broiles said the announcement is a positive move forward
after partners halted work in April, but noted two "killer"
concerns that remain. Broiles, a native Texan who came on board
with Imperial in July 2005, said he has studied the project for
the last five months describing it as "weak" economically. He
noted that "forward" gas prices are the same today as two to
three years ago, but investment in the project has jumped some
20%-30% during that same time. Costs from contracts, to
equipment, to steel prices have risen, so all cost estimates for
the project have risen accordingly. Broiles also expressed some
concern with respect to the amount of gas reserves from the
three anchor fields (Taglu, Parsons Lake, and Niglintgak) on
which the project is based, suggesting that the reserves may not
be enough to support the 30-inch diameter pipeline, designed to
deliver 1.2 to 1.9 billion cubic feet of gas per day.


3. (SBU) Broiles said the second "killer" concern is the
outstanding access and benefits agreements with First Nations
located along the proposed 1220-kilometer route. Broiles said
agreements have been reached with the Inuvialuit (led by former
NWT Premier Nellie Cournoyer and which he describes as the most
business savvy group),the Gwich'In, the Sahtu, the K'ahsho
Got'ine and Tulita/Deline. The holdout in the equation is the
Deh Cho, the only group along the route to not have a potential
ownership stake and which, according to Broiles, is using the
fact that it has no land claim agreement with the federal
government as leverage through which to gain more benefits from
project partners. Broiles pointed out that Ottawa and Imperial
will negotiate simultaneously with the Deh Cho to reach land
claims and benefits agreements, but the land claims agreement
has clearly complicated and delayed dealings with Imperial. Deh
Cho lands cover some 40% of the pipeline's route.

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Imperial Welcomes Ottawa's "Fiscal" Assurances
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4. (SBU) But Broiles noted the developments that helped partners
reach their decision to move forward to the hearing process,
notably the welcome "assurances" partners received from the
federal government. Broiles, who stated that Ottawa has less of
an appetite for taxation and more for royalty changes, described
Deputy Prime Minister Anne McLellan's recent proposal one of
"preferred profit sharing". Broiles was referring to the
Minister's letter of November 18, which outlined a fiscal and
royalty structure proposal that would, firstly, see Ottawa
accept royalties in kind with a commitment to ship on the
pipeline; in other words, Ottawa would take its cut in gas
rather than cash. Secondly, Ottawa would step in to guarantee
shipping above the current 830 million cubic feet per day that
shippers are comfortable backing. Thirdly, Ottawa would review
a royalty regime where industry pays higher royalties when
volumes of gas and prices are high, and lower royalties if
volumes and prices dip. Lastly, Ottawa would offer to back the
line with federal cash. Broiles had considerable praise for
Minister McLellan stating that, were she to lose her seat in the
upcoming federal election, "she would be missed". Broiles
opined that, should that happen, support for the project would
not change under a Conservative Party government.


5. (SBU) Broiles said an "optimistic" timeline for having the
pipeline on-stream would be the end of 2011. Following some 18
months of hearings, construction would commence winter 2007
followed by two more years of winter construction. (As an
aside, Broiles estimates public hearing expenses at some $15-$20
million per month beginning in 2006, given the company's "teams"
(whether environmental and regulatory, etc.) that will be
required to attend each of the NEB and Joint Review Panel (JRP)
hearings throughout the NWT.) Broiles added that, should any
unforeseen information be required by either the NEB or JRP, it
could be enough to delay the project to perhaps give the
proposed Alaska Pipeline project an advantage. While Broiles
thinks that is essentially unlikely, he added it is not
impossible.


6. (SBU) On that note, Broiles spoke of the controversy
surrounding the proposed Alaska Pipeline project, including the
federal government's impending decision on whether the Canadian
portion of the line will fall under the jurisdiction of the NEB,
favored by the pipeline's backers: ConocoPhillips, ExxonMobil
and BP, or the Northern Pipeline Act (NPA),favored by
Calgary-based TransCanada, which claims route exclusivity under
a 1977 Canada-U.S. treaty. Broiles agreed with CG that the GOC
is waiting for Alaskan officials to resolve fiscal negotiations
with producers before making a decision. That decision will
inevitably be further delayed by the upcoming Canadian federal
election and a possible change in government. Broiles added
that, should the Alaska pipeline proceed before Mackenzie,
"costs will go sky high".

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NEB Protects Sensitivity of Mackenzie Valley Public Hearings
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7. (SBU) CG and Econ Assistant also met with Ken Vollman,
Chairman and Gaetan Caron, Vice Chairman of the NEB on December
2 for a general discussion on the Mackenzie Valley public
hearings. When post first contacted the NEB for an update on
the project, we were told that the NEB could not specifically
discuss its merits, given that the board was about to begin
formal hearings. Vollman explained that two sets of hearings
would be held in "a parallel fashion" beginning January 23,
2006: 1) regulatory hearings by the NEB, and 2) environmental
hearings by the JRP. Vollman noted that regulatory hearings
will address all issues other than environmental, including
questions regarding "adequate gas supply" for the pipeline;
whether contracts are in place; the design of the pipeline and
its size, ie., the current proposal is some 30%-40% larger than
what the natural gas fields can immediately supply; and
permafrost, which Vollman claims is perhaps one of the most
important issues to be addressed given that there is not much
good information currently available on constructing pipelines
that will be laid in a permafrost region. Vollman said he
expects the JRP hearings to be completed and a report sent to
the GOC by the end of 2006. NEB hearings would continue, and
their report would be presented to the GOC by mid-2007.
Following approval and, should the Producers' Group wish to
proceed with the project, construction would commence for the
2007-2008 winter season, as noted above by Imperial.


8. (SBU) With respect to the Alaska pipeline and an NPA versus
NEB jurisdiction, Vollman said that is strictly a policy
decision, and the GOC appears prepared to let Alaska "sort their
stuff out" first. Even after a Canadian federal election and a
possible new government, a decision is not likely to be
announced too quickly. That said, Vollman concedes that the
GOC, nevertheless, has been "positioning itself" with respect to
permitting and other administrative issues regarding the
proposal. Both Vollman and Caron agreed that the actual NEB
process would not be affected by movement, one way or the other,
by the Alaska pipeline.

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Comment
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9. (SBU) Imperial's recent announcement may not mean a
commitment to build, but all of our interlocutors and industry
observers concede that it is, indeed, positive movement
following last spring's setback. As Randy Broiles noted to us,
a final decision to proceed will not be made by Imperial until
it has had a chance to review the NEB's decision in 2007, the
cost implications of any conditions/requirements implicit in the
report. Tough challenges remain and they are formidable, most
notably the obstacles presented by the lone holdout - the Deh
Cho. While Imperial would have preferred to have all benefits
and access agreements in place before the end of the year, the
company acknowledges that it will likely take the "better part
of a year" to reach a final agreement.
AHMED