Economics, politics chill Mackenzie pipeline dreams

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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 $16.2-billion Mackenzie natural gas pipeline - to get under way.

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. Its target is 2018.

The problem for Mackenzie could be a shortage of steel and skilled labour 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?

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.

Mr. 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 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.