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Mackenzie Pipeline: Shell, Kogas and the cost of doing Arctic business

Mia BennettEye on the Arctic

Though the Arctic may be rich in natural resources, that doesn't mean it's easy for corporations to make money there. BP's attempt to join up with Rosneft in Russia's Arctic was officially denied by the Russian courts, as they found that TNK had an exclusive right to work with BP in Russia as part of the existing TNK-BP joint venture. Rosneft is now seeking a new partner in the Arctic to develop offshore oil and gas deposits. But even if Rosneft finds a willing partner, it still faces tough times ahead. At the St. Petersburg Economic Forum last June, President Dmitry Medvedev called an economy based on state-controlled industries an economic model that is "dangerous to the future." He continued,

Corruption, hostility to investment, excessive government role in the economy and the excessive centralisation of power are the taxes on the future that we must and will scrap.

In line with that view, one of his economic advisers suggested that the Kremlin's stake in Rosneft could drop to below 50 percent. Back in April, Medvedev ordered eight state-owned companies to eliminate government ministers from their boards by July 1. Rosneft's chair Igor Sechin was forced to step down, perhaps showing that Russia is serious about improving competition in its economy.

Shell pulls out of Arctic pipeline project

Meanwhile, in Canada, Shell decided late last week to sell its 11-percent stake in the Mackenzie Valley Pipeline project. Shell is a minority stakeholder in the project, which involves five companies. Though ImperialOil, ExxonMobil, ConocoPhillips, and the Aboriginal Pipeline Consortium are still on board, Shell's decision to leave threatens the future of the pipeline – and the Northwest Territories. During the six years that it took Canada's National Energy Board to finally approve the MVP, the price of natural gas dropped significantly. Natural gas now sits at $4.57/MMBtu, down from a high of $15.38 in December 2005. This precipitous decrease is one of the reasons why the MVP has been delayed over and over for decades: the price of gas is just too erratic to be able to guarantee that the $16.2 billion required to develop the pipeline will pay off down the line.

Now with Shell balking, the Northwest Territories' Minister Responsible for Energy Initiatives, Bob McLeod, is campaigning hard for public backing for the project. He is asking for a "fiscal framework" comparable to the inflated-adjusted $18 billion the US government guaranteed in loans to the Alaska Natural Gas pipeline in 2004. It's not quite no-strings-attached money (more details about the loan are available here), but it certainly improves the chances that the pipeline, deemed the most expensive privately financed project in the world, will be built. Still, estimates of construction costs have ballooned since 2004 to between $32 billion and $41 billion. This means that the government's loan might end up covering less than half of the necessary amount, so it's not much of a guarantee. Thus, even if the MVP were to secure public backing, there's no way of saying whether that would be enough to justify the project's construction. In any case, Ottawa has remained staunch in its position that the pipeline, as a private-sector project, must stand on its own feet.

The cost of resource activty in the North

The costs of doing business in the Arctic, however, have historically necessitated some degree of public involvement. In 2010, Alaska received $20,351.13 in federal tax dollars per resident – the highest in the country (save for Washington, D.C.). Canada's three territories are also massively dependent on federal subsidies. In Russia, the state is one of the main economic players in the Arctic, too. Since much of the economy in the global North is dependent on resource activity, which requires large amounts of capital that private firms are often initially unwilling to fork over, many ventures in the Arctic cannot be undertaken without public support. Whether they are smart investment for governments is less clear.

Shell will now focus its North American projects on shale gas development in northeastern British Columbia and the U.S. Kogas, the world's largest importer of LNG, may step in to take its place. Last April, I wrote about the Korean company's interest in developing an LNG port at Cape Bathurst in the NWT. It is also interested in possibly building a terminal on Vancouver's coast on the Pacific Ocean, which is certainly a less treacherous place than the Arctic. But if it goes ahead with the former plan, and if it buys Shell's 11-percent stake in the MVP, then Kogas could become the NWT's economic savior. Contrastingly, if the MVP collapses and diamond mining continues to decline, the NWT's economy could be in jeopardy. The territory's economy is more reliant on natural resources than it was ten years ago, so it has fewer alternative engines of economic growth to fall back on. Premier Floyd Roland remarked in an interview with the Globe and Mail,

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.

Mia Bennett graduated summa cum laude and Phi Beta Kappa from the University of California, Los Angeles in 2010 with degrees in Political Science and European Studies and minors in Geospatial Information Systems & Technology, Scandinavian, and French. She focuses on the politics of Arctic resource management and Canadian infrastructure, and is interested in the application of GIS technology to Arctic dilemmas. She speaks French, Swedish, and is learning Russian. She freelances for the magazine ReNew Canada and currently lives in New York City.

This commentary is posted on Alaska Dispatch as part of Eye on the Arctic, a collaborative partnership between public and private circumpolar media organizations.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.