A Prospect Delayed in Canada's Arctic
By Clifford Krauss

New York Times
16 November 2002

INUVIK, Northwest Territories The streets of this town above the Arctic Circle and alongside the Mackenzie River are lined with heavy construction equipment and dormitory trailers for drilling workers, all poised for a long-expected natural gas bonanza.

Seventy-three trillion cubic feet of proven and potential natural gas reserves three and a half times what the United States uses annually lie within the Mackenzie River delta area, mostly on native lands, promising to convert this remote region of Canada into a major energy provider for the vast American market.

Most of the native groups that once opposed drilling and a planned $3 billion pipeline project have abandoned their protests and now favor exploiting their energy resources. The territorial government is pressing Ottawa for an ambitious road and bridge program that would lower production costs.

But as winter dawns, allowing for the movement of drilling teams down the region's frozen river system, energy companies are planning only one-sixth as much exploration and drilling this year as they completed in 2001.

With natural gas prices way down from their peak late in 2000, largely because of a slowing United States economy that has curbed American demand for the fuel, the bonanza that once looked so promising here has yet to materialize.

"Everybody's ready at the starting line and we're just holding our pose," said Ken Mitchell, vice president for transportation at the Inuvialuit Development Corporation, a local venture capital firm that has invested in seismic research and drilling and is a unit of the Inuvialuit Regional Corporation, a business and public interest group owned and operated by Inuvialuit Indians.

Still, Canadian energy experts and businesspeople here in the Northwest Territories say that the lull, part of a general slowdown in drilling across North America, is just a temporary delay of an expansion of natural gas development that will transform not only the Northwest Territories but much of the rest of northern and coastal Canada as well.

"We still think that the northern gas pipeline will go ahead eventually," said Martin King, energy commodities analyst at FirstEnergy Capital, an investment bank and brokerage house based in Calgary, Alberta. "Before too long, we think prices will be generally stronger, supplies tighter, and that will certainly help the economics of building the pipeline."

Canada is already the world's third-largest natural gas producer, after Russia and the United States, with about 50 percent of its 6.5 trillion cubic feet of annual production destined for the American market. Fifteen percent of the gas used in the United States, the world's biggest consumer, now comes from Canada. With known American fields maturing, that percentage is expected to rise substantially in the next decade.

There are signs that natural gas drilling in Canada will increase in coming years despite the current slowdown. Exploration has been picking up in recent years off the coasts of Newfoundland and Labrador and Nova Scotia, where the federal and provincial governments are trying to replace the flagging fish industries with energy prospecting, and there have been major hydrocarbon discoveries in the last few months. Also, Canada is considering lifting a moratorium on oil and gas development off British Columbia.

To many environmental groups, more exploration and longer pipelines threaten the pristine Canadian North and shorelines. "Canada's wilderness faces an onslaught of oil and gas development that is right now destroying and degrading habitat of endangered species," said a report released last month by the Sierra Club of Canada and the Natural Resources Defense Council.

The drilling efforts are intended not only to bolster exports, but to encourage the replacement of coal-fired power in Canada with gas-fired electricity to meet the country's commitments under the Kyoto protocol, which the government has signed and now seeks to have ratified by Parliament.

One of the most promising gas exploration and pipeline development projects is along the 1,200-mile Mackenzie River, a region with abundant grizzly bears and caribou and so far almost entirely lacking in roads or other infrastructure. Inuvik, a government and business town of some 3,000 set up in 1955 as a supply center for mining and hydrocarbon exploration, is the only place for miles and miles with video stores, a fashionable restaurant or two and more than the most basic amenities.

A consortium led by Imperial Oil Resources of Toronto including ExxonMobil Canada, Shell Canada Resources and Conoco Canada is moving far along in completing the regulatory process necessary for building the pipeline. They are supposed to be joined by the Aboriginal Pipeline Corporation, a company formed by 30 native leaders that is lobbying in Ottawa for loan guarantees so it can invest $630 million in the project.

The severe weather conditions and high labor costs make it expensive to explore in this region. But most Canadian and American energy analysts believe that the Mackenzie Valley route, which could connect the energy-rich Prudhoe Bay of Alaska via an offshore pipeline through the Beaufort Sea, is more cost- effective than an Alaska pipeline proposal now being considered to transport Arctic gas. They also say it is unlikely that both projects will be developed at the same time.

The competing Alaska pipeline, which would transport gas from Prudhoe Bay down along the Alaska Highway and through the adjacent Yukon Territory, received a big boost when the United States Senate passed an energy bill in April that offered $20 billion in subsidies and $10 billion in loan guarantees to companies willing to build the project.

But the bill stalled in conference committee, and the fate of the Alaska pipeline depends on whether President Bush can revive the bill next year in the face of opposition from Senate Democrats to a separate provision opening the Alaska National Wildlife Preserve to oil drilling.

[That setback for Alaska led Imperial Oil to announce on Wednesday that it is considering expanding the capacity of the Mackenzie Valley pipeline to 1.9 billion cubic feet a day from a current planned capacity of 800 million to 1.2 billion cubic feet in response to increasing interest expressed by potential shippers.]

The snags have been encouraging for leaders of the Northwest Territories, who badly want a pipeline built here for the jobs, money and other benefits it will bring.

"It is only a matter of time before there is a pipeline that runs down the Mackenzie Valley with feeder lines to wells up and down the valley, giving local people access to heat and electricity," the territory's premier, Stephen Kakfwi, predicted. "Many communities will become twice the size, and all will have paved roads."

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