BY Keith HallidayCapturing your share – and more – of the Mackenzie Gas Project The JRP report is surprisingly helpful in this regard
If the Mackenzie Gas Project goes ahead, the opportunity is huge: $16.25-billion, according to the Joint Review Panel’s recent report. To put that in perspective, Statistics Canada says the NWT’s gross domestic product was $5.4-billion in 2008.
The effects would be so profound that anyone who wants to can capture a bit of the action. But in the spirit of the gold rushes that brought so many of our ancestors north, let’s think about how to get really rich.
In this regard, the JRP report is surprisingly helpful. Its charts, developed over the more than five years that the panel studied the pipeline, highlight the business opportunities and risks. In fact the JRP itself is a model of how to capture more than your share of the gravy, but we’ll get to that in a minute.
The first thing the report reveals is that businesses have to think about the project in two phases. In the first four years – the construction phase – about $12-billion will be spent. But only 15 per cent of that will be in the NWT. This is a big number, but unless you’ve recouped your investment within four years or have acquired the expertise to win new contracts, you could be in trouble when the pipeline is finished.
After construction however, during the operations phase, there will be a steady burn of about $250-million a year for at least twenty years. In terms of money spent in the NWT, this phase is about three times bigger.
The second thing that emerges is that the opportunity is concentrated in a few communities, particularly around the three “anchor fields” in the Beaufort Delta where gas companies will be building wells and collection pipelines. “As a consequence, firms located in the Beaufort Delta Region would be more likely to benefit over a longer period than firms located in the Sahtu or Dehcho regions,” wrote the JRP.
What the report doesn’t get into is the bare-knuckle secrets to becoming filthy rich, rather than just having a good few years.
The real question is: Which businesses will figure out how to create a competitive advantage that translates into big returns?
It will be those with an advantage that noone else can match. For example, just because there will be thousands of workers in the NWT, and all of them need to eat, does not mean your restaurant will make a profit. First, you won’t be the only one to open a restaurant. Second, as we’ve seen in Fort McMurray, your staff won’t be shy about demanding high wages. And your trucking company will charge full freight to deliver your frozen chicken wings.
What you need is some kind of “choke point” asset that no one else can replicate. Customer access is an example. In environmental consulting, for instance, there are likely to be hundreds of new consultants coming north. They will do OK contracting to larger firms, but the big firms that establish themselves as prime contractors will capture most of the margin.
Supply assets are another one. If a First Nation controls the only gravel pit for 300 miles, it should treat it as the valuable asset it is. Logistics is another opportunity. The owners of the new container port in Prince Rupert, B.C., for example, are said to be doing extremely well. One wonders if either the highway system or the Mackenzie River offers a logistics play. If the Yukon got greedy, a toll on the Dempster Highway might generate a tidy profit until another highway gets built.
A variant of this tactic is to find an “outside” asset and bring it north. Who, for instance, owns the rights to operate a GSM cell phone system in the Delta? They will share the market with Northwestel in a cozy duopoly, and enjoy all the roaming by workers coming North with Rogers or AT&T phones.
Some of these opportunities also illustrate the best way to manage risk. The best assets hedge their bets and pay off in multiple scenarios. A construction company might make money or not, depending on how good it is and how many contracts it wins. But the gravel company makes money no matter what.
Does all this sound like hard work? It sure is, but that’s why the payoff is so big.
Fortunately, the JRP provides us with some inspiration. In 2004 it established – well, the government gave it – an unassailable choke point: The $16.25-billion project couldn’t proceed without the JRP report.
Just imagine, seven individuals holding up the world’s largest energy companies at generous per diem rates for over 2,000 days. Let’s hope that, if the pipeline does go ahead, Northern entrepreneurs will be equally successful.
Keith Halliday is a Whitehorse-based management consultant.
