By Darren Campbell -- Production from Northern Alberta’s oil sands is expected to quadruple by 2020. Environmental groups say MGP gas will fuel that growth. Are the Mackenzie Valley pipeline and the oil sands inextricably linked?

Pius Rolheiser remembers the first time he saw anyone try to link the construction of the Mackenzie Gas Project with the expansion of oil sands production in Northern Alberta’s Athabasca region. It was October of 2005 and the Sierra Club of Canada had just released an open letter to Lee Raymond, then chairman and CEO of ExxonMobil Corp., majority shareholder of the MGP’s lead proponent, Imperial Oil Ltd. In the letter the Sierra Club asked Raymond to abandon the MGP in favour of advancing an Alaska natural gas pipeline.

A key factor in the Sierra Club’s request was its contention that while Alaska gas would be used mainly to heat homes and generate electricity in the U.S., gas from the MGP would be used for less eco-friendly purposes. In the letter the environmental group wrote the MGP gas would be used to fuel increased production in Alberta’s oil sands, resulting in large increases in Canada’s greenhouse gas emissions at a time when the nation was committed, under the Kyoto Accord, to cut them drastically.

Rolheiser works for Imperial Oil’s public-affairs department and is often the first person the press talks to when it has questions regarding the MGP. When he saw that letter he knew he’d be answering questions on this issue for many months to come. “That’s the first time I saw it written down,” Rolheiser says. “But it was a fallacy then and it’s a fallacy today.”

Fallacy or fact, anyone with a stake in the proposed 1,200-kilometre pipeline project has been trying to figure out which is the truth on this controversial issue. The gas flowing through the pipeline along the NWT’s Mackenzie Valley to the NWT/Alberta border will make its way into the Alberta pipeline system.

But MGP gas has been promoted as a large source of supply that will help natural gas replace carbon-heavy, coal-fired electricity generating plants, as well as diesel oil burned to heat homes across North America. For many people, it’s not acceptable if natural gas – the cleanest-burning fossil fuel on the planet – from the Mackenzie Gas Project is actually destined for the oil sands, a form of resource extraction its detractors often refer to as the “tar sands” and “dirty oil” and a practice those critics say is destroying a Northern boreal landscape, wasting precious water resources and contributing to Canada’s growing greenhouse gas emissions. “I’ll be very surprised if a substantial amount of [MGP] gas doesn’t end up in the tar sands. This takes us exactly the wrong way,” says the Sierra Club of Canada’s executive director, Stephen Hazell. “This is one of the biggest issues we have. If Canada can’t reduce greenhouse gas emissions, how can we expect other, much poorer countries to do that?”

The issue of whether or not there is or isn’t a direct link between the MGP and the oil sands might have never come about if not for a few factors. Growing demand for oil worldwide, dwindling reserves, political instability in the Middle East and a dearth of new discoveries are sending oil prices skyward. At the same time those high prices are making unconventional sources like the oil sands, which first went into commercial production in 1938, an extremely lucrative option.

There’s a lot of it to be had. The Canadian Association of Petroleum Producers reports Canada is second only to Saudi Arabia in global oil reserves. That’s led to a virtual feeding frenzy among oil companies to capitalize on perhaps the last big petroleum prize on Earth.

CAPP says industry will invest $45-billion in new oil-sands projects between 2005 and 2010, and oil-sands production will increase from one to four million barrels a day by 2020.

And natural gas is the fuel of choice for oil-sands producers. Oil-sands resources are extracted by open-pit mining: scooping up the bitumen – a heavy, viscous form of crude oil – near the surface or by in situ drilling, which uses steam to separate oil from sand, and pumping it to the surface. Both forms of extraction need natural gas to generate the steam that separates bitumen from the sand but also to produce hydrogen that’s used to upgrade the bitumen to synthetic oil. There are over 20 oil-sands projects in operation right now and with a slew of expansions and new projects in the offing, gas requirements are expected to triple by 2015 and the oil sands will need about 1.2 billion cubic feet a day more than it uses right now.

Coincidently or not, the MGP is designed to ship approximately 1.2 bcf/d of gas if it’s completed in 2012. With the MGP expected to be the only pipeline built in the next five to seven years able to ship that much gas, it’s been easy for the Sierra Club to tout this figure as proof Mackenzie gas must be destined for the oil sands. However, oil and gas analysts like Tristone Capital’s Chris Theal don’t believe the hype. “In volumetric terms it’s an easy assumption to make,” Theal says. “But that’s where the association ends.” He says that’s because gas producers don’t like to tie their product to one market. They’re always looking to sell their gas to the highest bidder, which could be an oil-sands operator in Alberta or, just as easily a customer in Toronto, Chicago or California.

Critics of the argument linking the MGP and the oil sands say this is a more likely scenario. The Mackenzie pipeline will connect into TransCanada Pipelines Ltd.’s Nova gas transmission system at the NWT/Alberta border. Gas from the MGP will mix with existing gas in that 23,000-kilometre-long system. Theal says once gas enters this web of pipe it’s almost impossible to tell where particular molecules of gas go, regardless of how the pipeline network is connected.

“To say all the gas will flow to the Athabasca region – it’s a bit misleading,” Theal insists. “The gas will be sold on a daily spot-market basis. It’s not a case of connect-the-dots from the Mackenzie Valley to Fort McMurray.”

However, four of the five MGP proponents – Imperial Oil, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada Properties – all have varying degrees of ownership in current or proposed oil-sands projects. Imperial Oil already owns a 150,000-barrel-per-day oil-sands operation in Cold Lake, Alberta. It also holds a 70 percent interest (ExxonMobil Canada has the other 30 percent) in the proposed Kearl oil-sands project that could go into production by 2010.

Oil sands expert Dan Woynillowicz says it may be hard to make a direct connection between NWT gas and the Northern Alberta projects. But the representative of the Pembina Institute, an environmental policy research group, doesn’t think it’s a coincidence either. With conventional natural gas supplies in North America declining and demand increasing, prices have been high and natural gas is now the single highest operating cost oil-sands producers have. “The more gas that’s in the play, the lower the prices,” Woynillowicz says. “It’s a savvy business strategy in light of the proportion of costs of oil-sands production.”

Perhaps the Sierra Club’s biggest weakness over the past two years in its attempts to convince Northerners, the Canadian public and the National Energy Board that the MGP and the oil sands are inextricably linked is the lack of a “smoking gun.” It thought it had one back in the spring of 2004 when a story appeared in the Edmonton Journal heralding a deal between TransCanada Pipelines and the Dene Tha’ First Nation of Northern Alberta. The deal allegedly allowed TransCanada to build a 230-kilometre connector pipeline through the Dene Tha’s lands west to Fort McMurray. To groups like the Sierra Club, this pipeline seemed to be the proof it needed to show that MGP gas would indeed go straight to the oil sands. However, the Dene Tha’ quickly issued a press release stating there was no deal to build this pipeline. The story subsequently died a quick death in the news and hasn’t emerged as a major issue in the subsequent regulatory review of the MGP.

Still, the Sierra Club refuses to let the issue go and Hazell remains as convinced as ever. “The companies have never denied it. What they will not do is say, ‘We are not going to sell any gas to the tar sands,’” Hazell says. “I would fall off my chair if I ever heard that.”

In the end, Hazell thinks Imperial Oil and its MGP partners are only hurting themselves and the project’s chance of gaining regulatory approval – and approval in the court of public opinion – by not making that commitment. He suggests Imperial could agree to shipping contracts with customers who commit to use MGP gas only for climate-friendly purposes. “You could brand Mackenzie gas as green gas. I think that would be a tremendous marketing advantage,” Hazell says. “They could get this project approved pretty easily if they said this gas is going to be used for environmentally friendly purposes.”

But Imperial Oil’s Rolheiser says shipping gas doesn’t work that way. For better or for worse, the companies play by market rules and all gas in the system can be sold to the highest bidder. “Yes, this project will be an incremental supply source for the market. But the oil sands are only one piece of that market. To link the two is erroneous and irresponsible. We would be pursuing this project even if there wasn’t any growth in the oil sands.”

Darren Campbell, a longtime Northern journalist, is managing editor of Far North Oil and Gas.