Oil giant says project isn't viable without federal assistance
Shawn McCarthy, May 31, 2007, Globe and Mail - Exxon-Mobil Corp., one of the world's biggest oil companies, has turned up the heat on the Canadian government, saying the company will shelve the long-delayed Mackenzie Valley pipeline project unless it can get significant taxpayers' assistance for it.
Rex Tillerson, Exxon's chief executive officer, told reporters at the company's annual meeting in Dallas yesterday that the $16.2-billion price tag for the 1,200-kilometre natural gas pipeline means that it is not viable without sizable federal aid.
"We are now in a situation where it's not economic at current costs," Mr. Tillerson said, noting the tremendous inflation that has plagued oil field construction projects.
He said it is not clear if the federal government will come forward with a package of royalty and tax breaks large enough to provide the project sponsors with a decent rate of return.
"It may just be that the project is going to have to wait for a different cost environment," he said.
The pipeline would carry up to 1.9 billion cubic feet a day of natural gas from the Canadian Arctic to Alberta, and is seen as a critical piece of infrastructure in opening the North to resource development.
Exxon owns 69.6 per cent of Imperial Oil Ltd. [IMO-T] of Calgary, which is leading the project, currently under review by the National Energy Board.
Earlier this year, Imperial announced that the projected cost for the Mackenzie Valley pipeline had ballooned to $16.2-billion from $7.5-billion, and that the partners would require "an appropriate fiscal framework" from the government to allow it to go ahead.
Since then, the company and the federal government have been in discussions, although industry insiders believe Imperial is asking far more than Ottawa is prepared to give.
Imperial spokesman Pius Rolheiser said yesterday that the company remains committed to the pipeline construction and continues to negotiate with northern native groups and the government as it pursues regulatory approval.
"Yes, it's economically challenged, yes we're concerned about its competitiveness, and to that end, we continue to work with the federal government on a fiscal framework that makes sense for the project, which we see as key to improving its competitiveness," he said.
But Mr. Rolheiser would not repeat Mr. Tillerson's assertion that the project is "uneconomic," retreating to the more vague description, "economically challenged." Nor would he comment on Mr. Tillerson's suggestion that the project might be shelved.
Bill Rodgers, a spokesman for the Minister of Indian and Northern Affairs, Jim Prentice, said the minister was unaware of Mr. Tillerson's comments, but that the government has had no indication Imperial is ready to walk away from the project or put it on the shelf.
"Nothing has changed as far as we can tell," he said.
UBS Securities analyst Andrew Potter said it has been clear for some time that Imperial was unwilling to move forward with the project unless it gets generous tax and royalty breaks from Ottawa.
Mr. Potter said he believes the pipeline project could yield an 8-per-cent rate of return at current natural gas prices on spot markets, but noted that Exxon and Imperial are notoriously cautious about using conservative price estimates for project planning.
"Uneconomic means different things to different people," he said.
The analyst added that the federal government is hesitant to be seen as providing subsidies to the world's most profitable oil company but, at the same time, is eager to see the project proceed because it would open the North to further natural gas development.
"It's a strategic project for the nation; it's a strategic project for North American gas supply," he said.