By Julie Green -- Nine years ago, NWT aboriginal leaders decided they wanted in on the new Mackenzie Valley pipeline project. They got what they wanted, but what’s it worth now? The Inuvik Petroleum Show has evolved into an annual meeting of the true believers in the Mackenzie Gas Project. But there were fewer delegates for the ninth show, in June, than recent years, and those who were there needed cheering up. The report from the Joint Review Panel conducting an environmental assessment of the $16.2-billion pipeline and gas gathering system is long overdue. Confidential negotiations between gas producers, led by Imperial Oil, and the federal government on the “fiscal framework” (the royalty regime, taxation levels, public funding of everything from port upgrades to community support workers) haven’t produced results. Commodity prices remain low and the size of shale gas reserves south of 60 are increasing.  Meanwhile, there’s new life in an old competitor, the Alaska Highway natural gas pipeline. The need for good news was palpable.

Bob McLeod, the NWT’s minister of Industry, Tourism and Investment, wanted to help. He announced that the territorial government was making a $300,000 contribution to the Aboriginal Pipeline Group for its operating costs through until next March. McLeod squashed himself behind a table in the trade show booth belonging to the APG, along with board chair Fred Carmichael and president Bob Reid. With a television camera rolling, flashes popping, and a dozen people standing by, the three smiled and signed the paperwork.

Only in a year as forlorn as this one would the continued funding of the APG count as news. But for the pipeline group, it was an important vote of confidence from the territorial government, a show of faith in the promise of aboriginal ownership in the project, a promise still unfulfilled as the prospect of a Mackenzie Valley pipeline recedes into the distance yet again.

he idea of having aboriginal people own a pipeline down the Mackenzie was hatched in Fort Liard in January 2000. The location was no accident. Energy companies found commercial quantities of natural gas after the Acho Dene Koe band opened its traditional land for exploration in the mid-’90s. Paramount Resources and Berkley Petroleum offered ADK a 10 per cent interest in the Shiha pipeline in 1999. The 23-kilometre pipeline would deliver three million cubic feet of natural gas from the M-25 and K-29 wells near Fort Liard to the Maxhamish gas plant in northeastern British Columbia. The band didn’t have to put money up front, but instead earned its interest through tolls.
“The share of the pipeline wasn’t an incentive, but a reward for ADK,” says Shirley Maaskant, who worked for Paramount Resources at the time. “We wanted to acknowledge the risk they were taking in opening their lands to exploration.” The band also bought five per cent of Chevron’s Liard West line.

Both pipelines were deactivated last year after commercial quantities of gas dried up, but with those early experiences fresh in mind, Harry Deneron, then chief of ADK, invited aboriginal leaders from throughout the Northwest Territories to talk about getting in on the biggest pipeline of them all – a 1,200-kilometre ribbon of steel from the Mackenzie Delta down the river valley to a connection point in Alberta. Deneron had a simple message for delegates: we need to own a piece of that pipeline to properly benefit from it.

The time was right. Former federal Conservative cabinet minister Harvie Andre met with aboriginal leaders in the autumn of 1999 to talk about their Mackenzie Valley pipeline proposal. Deneron believed the idea would get a better reception than it did in the 1970s because three of the four aboriginal organizations along the route had settled their land claims. “We feel we are prepared and ready to take control of the development on our lands,” said Dennie Lennie, representing the Inuvialuit Development Corporation at the Fort Liard meeting.

The response from delegates was enthusiastic. At the end of the meeting, the chiefs signed a resolution that said: “We the aboriginal peoples of the Northwest Territories agree in principle to build a business partnership to maximize ownership and benefits of a Mackenzie Valley pipeline.” That first step was relatively easy; the heavy lifting lay ahead.

Nellie Cournoyea, a former NWT premier and longtime head of the Inuvialuit Regional Corporation, took charge of making that resolution tangible. By June 2001, Cournoyea and other aboriginal leaders had created the Aboriginal Pipeline Group and negotiated a memorandum of understanding with the four gas producers – Imperial Oil, ConocoPhillips Canada, Shell Canada and ExxonMobil Canada – whose six trillion cubic feet of reserves were to anchor the Mackenzie Valley pipeline.

The gas producers offered the APG a way to buy 33 per cent of the pipeline, and a seat on the management committee that would steer the project. But the APG had to finance its own share of the pre-development and construction costs. Then by attracting up to 500 million cubic feet of additional gas to the project, the APG would create long-term income from tolls to repay debts and pay dividends to shareholders. It was a tall order then, and it still is. Yet all aboriginal organizations except the Deh Cho First Nations signed on in October 2001.

The newly formed APG needed some deep pockets to pay its upfront costs.

“We were told to put our money on the table to be part of the project,” says Fred Carmichael, chair of the APG. “We said, ‘Our money is on the table, in land and the support of aboriginal people for the pipeline.’” But it wasn’t enough. The producers wanted the APG to contribute cash so, with help from Imperial Oil, TransCanada Pipelines stepped up to lend it.

TransCanada agreed to loan the APG $80-million that would only have to be repaid if the project proceeded to construction. What the country’s biggest pipeline company got in exchange was the right to buy a five per cent interest in the Mackenzie Gas Project, along with the right of first refusal if any of the anchor field gas producers decided to sell their stake in the project. It also answered TransCanada’s need to keep its spider web of pipelines full of natural gas. “The deal between TransCanada and the APG is a good deal,” says former NWT premier Stephen Kakfwi, “but it’s not the only deal.” He helped negotiate access and benefit agreements for his home community, Fort Good Hope, in 2005.

y mid-June 2003, at the third Inuvik Petroleum Show, confidence in the Mackenzie Gas Project was riding high. Excitement crackled through the tradeshow and conference. Following months of hints, delegates prepared themselves for good news. K.C. Williams, then head of Imperial Oil was in town, along with Hal Kvisle, CEO of TransCanada. On June 18th, they signed an agreement with Carmichael to ensure the APG would take part in the next stage of what was then a $5-billion project. Williams called the agreement “a win for all parties,” and Carmichael assured delegates it would “create real and lasting benefits for the people of the North.” That same day, Imperial Oil filed its preliminary information package to kick-start the regulatory process for the MGP. The APG was finally on a roll.

But all these advantages have been slowly ground into dust over the last six years. The Joint Review Panel conducting the environmental assessment of the project began in 2004 and has taken at least three years longer than predicted, and cost more than twice as much. Not only has that delay increased the APG’s pre-development costs, it also prompted energy companies to reduce exploration spending in the Mackenzie Delta because of uncertainty about when or if pipeline construction will begin.

The decline in exploration has put the APG in a difficult spot. It doesn’t have the gas it needs to meet the 400-500 million cubic foot target that is part of the deal. With no gas to supplement the anchor fields, the APG would earn just $1.5-million a year for the first 20 years. As things stand now, aboriginal people in the NWT will earn a pittance from the pipeline, but Carmichael remains optimistic. “Once the Joint Review Panel’s report comes out, and a decision is made to build the pipeline, you’ll see the explorers come back,” he says.

Then there’s the question of how the APG will pay its daunting share of construction costs. According to the 2006 estimate, the MGP will cost $16.2-billion. The APG’s share of the pipeline portion is pegged at $2.6-billion. Where that money is going to come from has occupied much of the APG’s time in the last six years. In 2005, the Dominion Bond Rating Service gave the APG a provisional “A-low” rating, listing long term ship-or-pay contracts as a strength, and insufficient gas reserves, along with the potential for cost overruns and delays, as weaknesses. The former Liberal government refused to subsidize the pipeline. Deputy Prime Minister Anne McLellan talked tentatively about the government owning part of the project in late 2005, but that option disappeared when the Conservatives were elected in 2006, just before the Joint Review Panel began hearings.

Just where the Conservatives stood on the pipeline became clear in June 2007, after talk about the marginal economics of the project hit a crescendo. Jim Prentice, the federal minister responsible for the pipeline, didn’t say how he could help, but he was clear about what he wouldn’t do. “This government has no interest in subsidizing or underwriting the cost” of the MGP, Prentice said. “If the project is not viable as a private sector investment then it should not proceed.” Prentice challenged Imperial Oil and its partners to restructure the project so that it was truly a basin-opening project, rather than sizing it to serve the interests of the anchor field producers alone.

The results of these talks haven’t been made public. But in December 2007, the Financial Post reported that gas producers would step aside and let TransCanada “take the lead, with 60 per cent ownership, with the rest going to the APG.”  The advantage is that “TransCanada’s involvement is seen as improving the pipeline’s chances of success because the regulated company has lower profit expectations than oil companies,” Claudia Cattaneo reported.

But even if the restructuring is done, the APG still faces trouble. “All their premises have changed,” says energy consultant Doug Matthews. The APG has no control of gas prices, new gas finds, momentum for the Alaska gas pipeline or the speed of the regulatory system. “Nellie (Cournoyea) and Fred (Carmichael) could stand on their heads for a month and it wouldn’t help,” he says.

nother thing that doesn’t help is that the APG doesn’t have the high ground of claiming the support of all the aboriginal organizations along the right of way. The Deh Cho First Nations, representing 40 per cent of the route, is in “limbo,” a word used by both APG president Bob Reid and former Liidlii Kue First Nation chief Keyna Norwegian. The DFN has consistently used the pipeline to leverage its land claim process, with some success. Former DFN grand chief Herb Norwegian was convinced that signing on would weaken the organization’s position, says Keyna Norwegian.

The APG paid for a number of independent evaluations of the deal to win Deh Cho hearts and minds, including one by the law firm Fraser, Milner, Casgrain and another by the chartered accountant Meyers, North, Penny. The reports aren’t publicly available, but “all concluded it is an exceptional deal, and strongly recommended the Deh Cho sign on,” APG president Bob Reid says.

That endorsement wasn’t enough to bring all the Deh Cho communities on board, but Fort Liard’s Harry Deneron, and Norwegian, who lives in Fort Simpson, worry about missing the boat. When Interprovincial Pipeline (now Enbridge) built the Norman Wells oil pipeline in the early 1980s, the company offered the Dene Nation a 10 per cent share. But the chiefs decided against accepting the offer. “They worried it would imply they supported the project, when they didn’t,” says Matthews.

That history isn’t lost on Keyna Norwegian when it comes to the natural gas pipeline. “We need to make sure we get something out of the pipeline given that we’re one of the largest communities along the route,” she says. As a result, both Fort Simpson and Fort Liard joined the Dehcho Pipeline Management partnership, the entity that will hold the region’s share of APG benefits. The Deh Cho is also odd man out with the gas producers as the only region along the right-of-way without signed access and benefits agreements.

And the potential negatives for the APG don’t end there. The size of Trans-Canada’s initial loan is set to double. The company had loaned the APG $142-million by the end of June 2009. TransCanada is warning the bottom of the barrel is in sight. In its second quarter update, the company warns “in the event the co-venture group is unable to reach an agreement with the government on an acceptable fiscal framework, the parties will need to determine the appropriate next steps for the project. For TransCanada this may result in a reassessment of the carrying amount of the APG advances.”

TransCanada CEO Kvisle is sounding less optimistic about getting a return on that investment. The Northern pipeline that was once a “strategic priority” is now a source of pessimism. “It may well not proceed,” Kvisle told an industry conference in Houston in March.
Pipeline analyst Bob Hastings of Canaccord Capital in Vancouver doesn’t think the project will happen. He’s been in the business for more than 30 years. Hastings points to low commodity prices, the same problem that emerged after the last pipeline push in the 1970s. “If it doesn’t make economic sense, then it will die,” he says of the current project.  

Hastings says TransCanada’s arrangement with the APG continues to do what it has always done: secure its position. TransCanada keeps putting money into the APG because the company has already spent so much. “It’s like you’ve just started a home renovation and then you find it’s going to cost more. What’s a bit more at that point? You just keep going,” says Hastings.

But despite the threats to the pipeline, Carmichael is relentless. “The proof will be when negotiations are finalized and the deal is presented” to APG shareholders, he says. “We’ll move forward with greater ownership and greater earnings,” he says, which is what the meeting in Fort Liard was all about. By signing on at the beginning, the APG took its full share of risks, but the rewards remain elusive.