MacKenzie Gas Pipeline Approved By Canada's Energy Regulator

After a six-year review, Canada's National Energy Board Thursday approved plans to build a 740-mile pipeline to ship natural gas from the Arctic to points southward.

The decision removes a major hurdle for the C$16.2 billion ($16.1 billion) MacKenzie Gas Project, which proposes to bring natural gas from fields in Canada's Northwest Territories bordering the Arctic Ocean to other pipelines and refineries that serve the North American market.

Engineering and field work on the project has been frozen since 2007 as the regulatory-review process dragged on. The pipeline--the farthest along of three proposals to ship natural gas from the far north--would be able to carry as much as 1.2 billion cubic feet per day, and would go into service by 2018 at the earliest.

But even as project partners led by Calgary-based Imperial Oil Ltd. (IMO, IMO.T) proceed to the next stage of development, some industry watchers worry the project's economics no longer work out due to a recent glut of natural gas pulled from rocks known as shale. That glut has pushed natural-gas prices to just over $4 per million British thermal units--well below the $6 to $7 price range that project partners estimate they need to make the pipeline feasible.

Canada's energy regulator approved the project even as it acknowledged the steep drop in natural-gas prices since it was first proposed.

"We do not agree with those who say these are reasons to deny the project," it said in a lengthy report explaining its decision. "It is up to the companies to decide whether the project makes economic sense."

It added, however, that construction must begin by 2015--Imperial Oil had asked for a 2016 deadline, and said 2014 is the earliest it could begin construction.

Imperial Oil spokesman Pius Rolheiser said his company remains committed to pursuing the project, on the grounds that it believes demand for natural gas will grow and supply from other sources will decline.

However, Rolheiser said Imperial Oil won't be able to make an investment decision until the end of 2013, and needs to work out an agreement on taxes and royalties with the Canadian government--it would also need to re-staff the project and file for more than 6,000 required permits. Imperial Oil and its partners have already spent around C$750 million on preliminary engineering studies and regulatory matters.

"We've known from the outset that this is a complex project," Rolheiser said. "The central challenge has always been and remains that gas from the Mackenzie Delta needs to be competitive on a supply-cost basis with other sources of supply."

Gregory Ebel, chief executive of Spectra Energy Corp. (SE), a Houston, Texas-based company that operates Canadian natural-gas pipelines in British Columbia, said the Mackenzie project is "a very, very tough project given how far it is from market."

"The dynamics in the market are now significantly different from what they once were," said Greg Stringham, vice president for markets at the Canadian Association of Petroleum Producers. "It's really a challenging time for all natural gas now."

The MacKenzie Gas Project partners--which also include an aboriginal peoples' group as well as the Canadian arms of ConocoPhillips (COP), Royal Dutch Shell PLC (RDSA, RDSA.LN) and Exxon Mobil Corp. (XOM)--are counting on tightening natural-gas supplies and rising prices during the next several years to put their plans back on track.

"It's not the natural-gas price now--it's what it is when these wells come into service" in 2018, says Bob Reid, president of the Aboriginal Pipeline Group, which has a one-third stake in the pipeline and represents the interests of three native groups over whose land the pipeline will pass. "I'm confident we will make a decision to construct."

Meanwhile, two other natural-gas pipeline projects are also competing to bring another source of natural gas south, from Alaska's North Shore. TransCanada Corp. (TRP, TRP.T) and Exxon Mobil are asking natural-gas producers to support their project to ship up to 4.5 billion cubic feet per day over the rival Denali pipeline project supported by BP PLC (BP, BP.LN) and ConocoPhillips, and which is expected to be completed by the end of the decade.

-By Phred Dvorak and Edward Welsch, Dow Jones Newswires; 403-229-9095; edward.welsch@dowjones.com

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