Bring The Arctic To Market
Honourable Bob McLeod
Friday, September 18, 2009
Alaska Oil and Gas Congress
It’s a pleasure to be back with you again this year.
Last year I spoke about the Promise of the North.
The Arctic continues to be in the spotlight on the international stage; several circumpolar countries – including Canada – have moved Arctic sovereignty to the top of their agenda. The implications of climate change on the Arctic and, in particular, the polar ice cap – continue to attract attention around the world. And there’s growing awareness of the Arctic’s vital energy resources and their significance for North America.While North America grapples with energy price volatility and forecast price increases, Alaska and the Northwest Territories are working towards real and viable solutions, laying the groundwork to bring the Arctic to market.
With the groundwork in place, the Government of the Northwest Territories, like many of you in this room believes that it’s time to move to implementation of respective projects. This year my presentation is titled Bring the Arctic to Market. It’s time to get on with it.
Today I’m going to quickly set the stage for bringing the Arctic to market with an over view of the global picture and the North American continental market.
Then look at natural gas resources here in the North, the Alaskan Project and the Mackenzie Gas Project and talk about considerations that we believe are critical to development of these projects. Those considerations include US supply and demand, climate change, consultation, and a new way of doing business.
According to the Energy Information Administration – world market energy consumption is projected to grow by 44 percent between 2006 and 2030, World oil prices are forecast to return to previous high levels after 2012.
When this happens, consumers will opt for less expensive natural gas to meet their energy needs.
Governments around the world and, in particular here in North America, will foster additional demand for natural gas through policies aimed at reducing greenhouse gas emissions. Natural gas will become the logical choice to displace more environmentally damaging fossil fuels.
In short, demand for natural gas across North America will continue to grow.
At this point, I think it’s useful to take a look at the evolution of the North American natural gas market.
In 1985, the Federal Energy Regulatory Commission Order 436 created the open access era for the natural gas industry. In 1992, FERC issued the final restructuring rule for interstate pipelines and further separation of merchant and transportation functions.
Strong parallels can be found between Canada and the US with regard to regulatory principles and processes. The National Energy Board in Canada and the US Federal Energy Regulatory Commission both maintain transparent, administrative, case-by-case, rule making procedures.
Regulatory practices are quite common across all agencies and jurisdictions, sometimes as a result of precedent but usually shared through active national regulatory associations. NARUC – the National Association of Regulatory Utility Commissioners in the US and CAMPUT- the Canadian Association of Members of Public Utility Tribunals – interact regularly.
The history of our countries when it comes to the era of open access is one of coherence. This regulatory tradition, in combination with the emergence of strong cross-border trade and the seamlessness of Canadian and US industry structure has yielded an outcome that is, for the most part, a single, common market for natural gas.
A continental market has served both our countries well. US private investment in Canadian natural gas assets has resulted in major economic projects in Canada. Development of Canadian resources has assured the US with a secure supply of natural gas. Today, Canada meets 15 to 16 percent of US requirements.
Security of supply has many additional benefits. The most important of these secondary benefits is that the US has been able to aggressively advance its agenda with respect to industrial generation and open transmission access in the electricity sector.
Because most US industrial power generation is fueled by natural gas, the market structure for natural gas and electricity has converged. Today, these industries are interdependent.
We have relied on each other for security of supply, cost-effective supply, capital investment, and development of our respective natural gas and electricity potential.
The USA and Canada have 4.7% of the world’s natural gas reserves.
While North America’s reserves are enough to meet its needs, its appetite for natural gas is second to none. North America is the largest consuming region for natural gas in the world. North America’s natural gas industry is comprised of the most expansive and complex infrastructure in the world. This infrastructure is supported by very liquid competitive markets.
While the Canada//US market is comprised of 49 states, 10 provinces and 3 territories, the region enjoys relatively unfettered energy trade. To put it succinctly, North America is a self-contained market.
However, the industry is subject to market forces and fluctuations in the economy that affect the supply-demand balance. A quick review of consumption and price swings makes the point. Since 2001, monthly consumption of natural gas in the US has ranged from a low of 1.4 Million Cubic Feet to a high 2.7 Million Cubic Feet. That’s a 90 percent swing and in examining the data the swing has little to do with the season or the weather.
At the same time the price at the well head has fluctuated just as much. Since 2001, natural gas prices have ranged from $2.19 to $10.82 per Thousand Cubic Feet.
Right now, the natural gas industry is dealing with a fall in well head prices that may match the 2001 low. But the long-term demand for natural gas is assured, particularly in light of the forecast increases for crude oil.
Because we are a continental market, US imports from Canada will continue to track growing US demand. Our interdependence continues to grow.
In 2008, the US imported 3.6 Trillion Cubic Feet of natural gas from Canada, representing 16 percent of US natural gas consumption.
That is triple the volume of natural gas imported from Canada just 20 years ago…in 1988.
In June of this year – the US Potential Gas Committee, an independent, nonprofit organization led by the Geology and Geological Engineering Department at the Colorado School of Mines announced the highest US resource evaluation in its 44-year history.
When combined with Department of Energy’s latest determination of proved gas reserves – The US has a total available resource of technically recoverable natural gas of 1,747 trillion cubic feet.
From a supply-side that estimate might send a shiver through the room as we ask: Where does that put demand for Arctic gas.
Further examination of the data indicates that one third of the total…more than 600 Trillion Cubic Feet…consists of shale gas, an unconventional and more costly resource to bring to market.
Research shows that total annual production volumes from the four most promising shale reserves – Haynesville, Fayetteville, Marcellus, and Woodford – could be 3-4 Trillion Cubic Feet. That’s about 10 to 14 per cent of US forecast requirements in 2030.
Production of shale gas brings a different set of environmental concerns into play – from contaminate ground and drinking water to chemicals and flammable gases released into the air. No doubt these issues will be addressed over time.
As you can see there is a requirement for both conventional and unconventional natural gas supply going forward.
The Potential Gas Committee’s evaluation is good news for the long-term. Shale gas has its place. But in the near-term Arctic Gas is an important part of the mix. There are two important Arctic gas projects in play right now.
The Alaska Gas Project which is planned to reach full capacity in 2018; and The Mackenzie Gas Project, based on current timelines, we estimate that natural gas will be flowing in the MVP sometime in 2016.
The proponents of the Mackenzie Gas Project estimate that discovered marketable reserves in the Mackenzie Delta and shallow Beaufort to be about 10 to 11 trillion cubic feet.
Natural gas from the region could begin flowing to southern markets as early as 2016. At present there are three large, proven natural gas fields in the Mackenzie Delta: Imperial Oil’s Taglu field (3 Trillion Cubic Feet); ConocoPhillips’ Parsons Lake field (1.8 Trillion Cubic Feet); and the joint Shell Canada-ExxonMobil Niglintgak field (1 Trillion Cubic Feet).
Through 2025 natural gas consumption in the US electric industry will increase rapidly in response to: Generators’ concerns about the potential for legislation limiting greenhouse gas emissions; and because of the lower capital cost for new natural gas power plants compared to nuclear and renewables.
In Canada consumption is also expected to increase 40% by 2025.
The Energy Information Administration forecasts that Henry Hub spot market prices will be $0.63 lower per thousand cubic feet with Alaskan gas.
Natural gas from the Mackenzie Delta will result in even more favourable cost reductions.
From 2018 the combined effect of both projects is an average reduction of close to a dollar per million BTU’s.
In the absence of natural gas from the Arctic – including the Mackenzie Delta and Alaska – consumers in the US Lower-48 could expect to pay about $300 billion more for natural gas over the 2014-2025 period.
For the US Lower-48 and central Canada the combined increased cost during the same 12-year period could approach $340 billion.
It’s not either or…North America needs both Arctic Gas pipelines.
I don’t have to spend much time describing the effects of climate change in the North. Many of us see them every day. While southern jurisdictions aren’t faced with its effects daily, the pronounced change in global rainfall patterns and climatic events are bringing the importance of climate change to the attention of southerners.
The Northern Hemisphere is feeling the greatest effects of climate change: Temperatures in Northern Canada rose at twice the global average between 2000 and 2006. 2007 summer loss of Arctic sea ice set a modern-day record: 43 percent less ice coverage than in 1979, when accurate satellite observations began.
Most of the ice that’s left is seasonal ice, “young ice” which melts much more quickly during warm weather.
Permafrost ground temperatures in the NWT’s Mackenzie Delta have warmed by as much as 2°C since the early 1970s. This trend is similar across the North. The melting of ice-rich permafrost can cause land to move, lakes to enlarge, peat lands to collapse, and land to slump.
The introduction of Arctic gas to the continental market will reduce greenhouse gas emissions.
The Government of the Northwest Territories commissioned an independent study by a Virginia think tank to determine the extent to which carbon emissions could be avoided by displacing coal-fired generation with electricity generated by Arctic gas.
The study determined that over 2014-2025 period the potential reductions in power sector carbon emissions in the Lower-48 and Ontario are 282 million tons. This would go a long way to meeting greenhouse gas emission targets in both United States and Canada.
I have also been asked to speak to you today about engagement of northern communities and opportunities. It’s all about partnerships.
Through the success of Impact Benefit Agreements between diamond mines and affected communities and socio-economic agreements between the government and the diamond mines – we’ve grown a very successful Aboriginal business sector in the NWT.
Today – in the Northwest Territories we have 33 communities – economic and environmental priorities co-exist.
We also understand that to take advantage of economic opportunities, governments, aboriginal people and industry need to work together. The goal is to achieve economic prosperity, but there’s also a sense of inter-generational reform at work. Aboriginal leaders intend to improve the self-sufficiency of their communities and increase the capacity of their peoples through training and employment, improved social and family programs, and support for emerging businesses.
They’re taking a holistic view of economic development as a means to achieve social well-being. And it’s working.
With the Mackenzie Gas Project we’ve moved to a new form of economic cooperation that includes Aboriginal equity interest in projects.
The Mackenzie Valley Pipeline crosses four Aboriginal regions in the Northwest Territories. The Aboriginal Pipeline Group is owned by three of the four Aboriginal groups in the Mackenzie Valley and its Board of Directors includes representatives from all four nations.
The group’s mandate is straightforward: to maximize long-term financial return through an equity position in the Mackenzie Valley Pipeline.
The Aboriginal Pipeline Group has secured a right to own up to one-third of the pipeline. These rights were achieved through an arrangement based on pipeline flow-through; the greater the volume of gas that flows to market, the greater the return for Aboriginal shareholders. The Aboriginal Pipeline Group will borrow from lending institutions, based on the security of the pipeline and producers’ shipping contracts. The loans are repaid from the group’s share of revenue once gas begins to flow. And the balance of the group’s revenue is returned to their shareholders who are the Aboriginal governments of the Mackenzie Valley.
A conservative estimate would see a 20% return on investment each year for shareholders of the Aboriginal Pipeline Group, who are the Aboriginal Organizations along the MGP right of way.
As Bob Reid, President of the Aboriginal Pipeline Group, formerly a Senior Vice-President with TransCanada PipeLines says: “This is a chance to change the way things have been done in the North. Aboriginal groups will sit at the board table and can play a meaningful role in resource development, sharing in the long-term dividends – an exceptional deal for future generations.”
This ownership structure provides the best opportunity for economic collaboration and cooperation.
The APG model: Provides a commercial framework for economic cooperation; Aboriginal peoples realize employment opportunities and project returns; and Enables the GNWT to achieve its strategic goals with respect strong, self-reliant communities.
The Mackenzie Gas Project will connect to an existing natural gas pipeline system in northwestern Alberta and help to meet demand across central and southern North America. The project is a 1220-kilometre system from the Mackenzie Delta, down the Mackenzie River Valley. It consists of: A Gathering System to bring natural gas from 3 anchor fields to Inuvik; A Natural Gas Liquids Line from Inuvik to Norman Wells; and A natural gas pipeline from Inuvik to Zama, Alberta.
The collective capital investment for the system is estimated at $16.2 billion. The companies that have interests in the three anchor fields – Imperial Oil, ConocoPhillips, and the Shell Canada-ExxonMobil joint venture – will deliver 830 million cubic feet per day through the system.
MGM Energy has registered an interest in using an additional 200 million cubic feet per day capacity on the gathering system. Initial delivery volumes will be in the neighborhood of 1.03 billion cubic feet per day. based on current timelines, we estimate that natural gas will be flowing in the MVP sometime in 2016.
The Mackenzie Gas Project is the corridor of the future for Arctic Natural Gas.
Once built it opens a brand new frontier for development.
The project is at the advanced stages of regulatory and design processes and will be at full capacity several years ahead of the Alaska Pipeline.
Governments in both Canada and the US have made significant investments in short-term economic stimuli. Arctic pipeline projects represent major private investments that provide stimulus over the medium-term supporting government efforts and North America’s economic recovery.
Arctic Natural Gas is in ready supply.
The process of getting Arctic Natural Gas to market is work that we in Northwest Territories and Alaska have been engaged in for quite some time.
And the time has never been more right.
The conditions are absolutely right for both projects to proceed. They will provide: Long-term security of supply; Favourable impacts on market prices; Vital climate change benefits; and Economic stimulus supporting a North American recovery.
Government can only do so much to foster economic recovery. In Canada we have accelerated billions of dollars of investment in public infrastructure to support employment right across the country. We are looking to industry to pick up where government investments end.
Proponents of Arctic Natural Gas projects have the capacity and, we hope, the will to invest in these projects today. Investments in the Alaskan and Mackenzie Gas Projects will create economic opportunities from the Arctic to the US mid-west. The time is right for these projects to proceed.
The continent’s northern reaches can help to ensure the energy security needed by the south.
We can also play a significant role in helping to ensure the continued recovery of our economy from the challenges it is currently facing.
Development of the north’s resources will generate hundreds of millions of dollars in wages, billions in capital expenditures that will be felt across the continent, untold royalties and taxes, and a stronger economic future. As Northerners we share a great many common interests. Together, we can ensure the emergence of Arctic natural gas and economic and social improvements for our peoples.
I would like to thank the conference organizers for the invitation to address you today and extend a special thank you to the conference chair, Paul Wilson.