US embassy cable - 05CALGARY723

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, Mackenzie pipeline, Petrolium 
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