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Oil and Energy

Despite setbacks, the North sees energy as its future Add to ...

The future of the Northwest Territories is one that relies on energy – vast deposits of oil and gas that remain largely untapped, stranded in remote areas.

The potential of the reserves is far-reaching. They would drive regional economic development, spur Canada’s energy sector and – as Ottawa continues “devolution” talks to grant province-like powers to the territory – could lay the foundation of a new era of self-governance and prosperity for the people of the North.

That energy-rich future, however, remains just out of reach, and there are recent mixed signals about its fate.

Shell’s decision late last week to sell its minority stake in the long-simmering Mackenzie Gas Project pipeline renews doubt about whether the project, which would at last unlock much of the territory’s gas reserves, will ever go ahead. Meanwhile, production at the Norman Wells oil field, the crown jewel of the territory’s existing energy sector, has been declining for years, while the lone new well drilled in the NWT during 2010 was a bust.

All this while the clock ticks on the territory’s bottom line: Production of its other major resource, diamonds, is slipping.

Nevertheless, many in the territory remain hopeful about its future as an energy giant. Above all, they hold out hope for the $16-billion, 1,200-kilometre Mackenzie project, one advocates say is critical to the future of the territory and its people – with or without Shell.

“We need to grow an economy, we need to sustain an economy,” Premier Floyd Roland told The Globe and Mail during an interview in his Yellowknife office this month. “I would say that without the pipeline, without new mineral development … the North is going to stall. And we will, as people of the North, have to hunker down for some slow years. That is a worst-case scenario.”

There are ups and downs facing both the oil and gas sectors in the NWT, with more than a billion barrels of oil and 16 trillion cubic feet of natural gas in reserve.

If the private sector decides to push ahead with it – an outcome that’s considered unlikely by many in the industry – the Mackenzie pipeline would carry natural gas from fields near the Beaufort Sea to the south. The federal government approved the project in March. A decision now rests with the companies that first proposed it, though the discovery of significant shale gas deposits in the United States and the low price for gas have left the plan in peril.

Shell decided last week to sell its estimated 11-per-cent stake, a move pipeline advocates argue isn’t a deal-breaker. They hope shale discoveries will ultimately help their cause by triggering a higher overall demand for gas amid high supply.

“I guess I see it [Shell’s sale] as a business deal” in the wake of the federal approval, NWT Industry Minister Bob McLeod said. “I’m still very optimistic about the pipeline project.”

The Mackenzie pipeline may not be the only hope for a region struggling to develop its energy industry. South Korea’s state-owned Korea Gas Corp. has sent high-level executives to the Arctic as it examines the feasibility of a port that could liquefy natural gas before shipping it through often treacherous Arctic waters to Asia. Mr. Roland characterized the notion as “whisperings,” but added that “at some point, someone is going to say: ‘We need that gas.’”

In the oil sector, Norman Wells’ production has dropped to roughly 15,000 barrels a day, part of what the federal government calls a “continuing downwards trend” of output. However, corporate interest has recently been rekindled. Earlier this month, a series of companies bid $534-million for drilling rights around the existing Norman Wells field, which is already serviced by a pipeline. Of the 11 leases sold, three went to Shell, the company backing out of the Mackenzie deal. In the last few years, BP and Imperial Oil have also committed to spend $1.785-billion to explore several offshore Beaufort Sea leases.

“The good news of the decline of the Norman Wells field is that it’s now opening up even more capacity on the existing pipeline,” said Doug Matthews, a Calgary-based northern energy industry analyst. “While the Delta project, the Mackenzie gas project, may continue to look uncertain, there’s still interest in other areas of the NWT.”

Across the sector, observers say red tape needs to be cut to foster investment – a subject of meetings of Canada’s energy ministers, including Mr. McLeod, in Alberta on Monday.

Drilling in the NWT is more complicated than any other jurisdiction in Canada, said John Hogg, vice-president of exploration and operations at Calgary’s MGM Energy Corp., which has several holdings in the NWT and drilled the only new well in 2010. “The territory continues to be, and always has been, more of a challenge,” Mr. Hogg said.

A full deal on devolution would cut red tape, but remains a long way off as five of seven first nations groups have yet to sign on to an agreement-in-principle finalized this year. In the short term, the territory is looking to Ottawa to champion the Mackenzie pipeline by hashing out a fiscal framework with the companies looking to build it, one that would likely need to including loan guarantees.

“We're at the mercy of industry and big-G government to make decisions,” Mr. Roland said.

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