Imperial Doubles Mackenzie Gas Project's Cost Target (Update3)
bloomberg.com
By Ian McKinnon
March 12 (Bloomberg) -- Imperial Oil Ltd., Canada's largest energy company, more than doubled the cost estimate for its Mackenzie natural-gas project to C$16.2 billion ($13.8 billion) and pushed back its target completion date by three years.
The new estimate, which includes C$3.5 billion for a gas- gathering system, C$7.8 billion for the Mackenzie Valley Pipeline and C$4.9 billion to develop gas fields, compares with an October 2004 target of C$7.5 billion, Imperial spokesman Pius Rolheiser said today in a telephone interview.
Better definition of Mackenzie's size and scope contributed to 40 percent of the cost increase, and 50 percent stemmed from rising equipment and labor expenses, Rolheiser said. The company also cited a slow regulatory approval process.
``Our confidence in the competitiveness of the project is not robust,'' Rolheiser said. ``Is the project challenged? Absolutely. Have we decided to scrap the project? Absolutely not.''
Production will start no sooner than 2014, Calgary-based Imperial said in a statement. The company, 70 percent-owned by Exxon Mobil Corp., had planned a 2011 start date.
Shares of Imperial fell 44 cents, or 1.1 percent, to C$41.51 at 12:35 p.m. in Toronto Stock Exchange trading. The stock has fallen 3.3 percent this year.
Soaring costs mean the project is unlikely to go forward, said Bill Gwozd, a vice president at Calgary consulting firm Ziff Energy Group.
Cost Concern
``On the surface, I'd suggest it's too expensive to develop at all,'' Gwozd said. ``You would have to be able to develop Mackenzie at or equal to the cost of developing liquefied natural gas.''
Liquefied-natural-gas projects cost between $5 billion and $8 billion per billion cubic feet of production, shipping and receiving capacity, Gwozd said.
The proposed 1,220-kilometer (758-mile) Mackenzie pipeline would carry 1.2 billion cubic feet of gas a day from fields in Canada's Northwest Territories to consumers by connecting to the North American pipeline grid in northern Alberta.
Other partners in the project include Exxon Mobil, Shell Canada Ltd., ConocoPhillips and the Aboriginal Pipeline Group, which represents some northern native bands.
Imperial has resumed negotiations with the federal government on terms for the project, Rolheiser said. Project sponsors asked for C$1.2 billion in incentives, former Deputy Prime Minister Anne McLellan said in a November 2005 letter.
Incentives Needed
The companies are looking at royalties, taxes and other measures, such as depreciation rates and shared infrastructure costs, to make the project more profitable, Imperial said.
Randy Broiles, a senior vice president at Imperial, declined to disclose target investment returns for the project or the estimates of gas prices on which plans are predicated.
``We expect doubled-digit return on this kind of investment, and we're not anywhere near that right now,'' Broiles told investors on a conference call.
As for government incentives, he said, ``Suffice it to say that the need now is greater than it was in 2005.''
The companies involved in the Mackenzie project looked at various scenarios, including rerouting the pipeline, and the original plan remains the most attractive, Broiles said. The partners have spent about C$600 million on the project, he said.
Under Review
``If the Canadian government wants to commercialize the resources up North, they will have to pony up some cash and they'll have to pony up some breaks to encourage the producers to make this type of investment,'' Ziff's Gwozd said.
Canadian regulators are reviewing the proposal, and a decision isn't expected until at least 2008, Rolheiser said. If the plan is approved, the companies will review any attached conditions before deciding on whether to proceed with the investment, he said.
Some northern native bands have opposed the project, contributing to regulatory delays. Signed agreements with the bands are needed before the project goes ahead, Rolheiser said.
The three onshore fields anchoring the project contain an estimated 6 trillion cubic feet of gas reserves, project sponsors said previously. The Taglu field, which contains an estimated 3 trillion cubic feet of gas, is owned and operated by Imperial, according to the company's Web site. The two other fields are called Parsons Lake and Niglintgak.
(For a replay of Imperial's conference call, dial +1-877- 289-8525 and enter 21222543 followed by the number sign.)
To contact the reporter on this story: Ian McKinnon in Calgary at imckinnon1@bloomberg.net .
Last Updated: March 12, 2007 12:35 EDT |
