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Chapter 7
Economic feasibility

7.1 Public convenience and necessity

The National Energy Board must be satisfied that any facilities it approves pursuant to section 52 of the National Energy Board Actare required by the present and future public convenience and necessity. In making that determination, the National Energy Board considers the economic feasibility of the project. This involves determining the likelihood of the facilities being used at a reasonable level over their economic life and the likelihood of the demand charges being paid.

The National Energy Board takes the following criteria into consideration when considering economic feasibility for facilities built under the National Energy Board Act:

  • the availability of markets for the gas flowing on the pipeline (will the gas be purchased?);
  • the availability of downstream pipeline capacity (will there be sufficient pipeline capacity to move the gas from the end of the Mackenzie Valley Pipeline to ultimate markets?);
  • the long-term gas supply which is available to the pipeline (is there sufficient gas to be transported?);
  • the contractual commitments underpinning the project (will the fixed cost component of the pipeline tolls be paid?); and
  • the ability of the project to be financed (will investors fund the pipeline?).

7.2 Economic setting

Development of the large natural gas deposits that lie buried under the Mackenzie Delta has had a unique history. The resources were discovered in the early 1970s when natural gas prices were not high enough to justify building costly pipeline infrastructure. Growing natural gas consumption and decreasing production from conventional sources in North America have enticed producers back to the Mackenzie Valley in search of hydrocarbons. While a small amount of gas is currently produced in the Mackenzie Delta for local use, producers will need access to the larger markets in southern Canada and the lower 48 U.S. states in order to support the significant development of these resources. The Mackenzie Gas Project would provide northern producers with access to the North American pipeline network and markets.

The Mackenzie Gas Project would be:

  • largely owned and operated by producers;
  • opening access to a previously little-developed basin;
  • located a great distance away from natural gas markets and existing transportation infrastructure; and
  • located in an environmentally unique and sensitive area.

The project must meet a threshold or minimum size; otherwise the cost to bring that gas to market could be far more than the value of the gas. Due to significant economies of scale, services would be more efficiently provided by one larger pipeline operated by one firm than by competing firms operating separate smaller pipelines.

Given these circumstances, it is important that the facilities are the right size for the available supply, that the cost of shipping the gas is fair, and that the pipeline is accessible by all parties. There are two main economic questions for us to answer when assessing this project:

1. Is the project economically feasible?

  • Are the facilities, as they are proposed, right for the circumstances?
  • What is the supply?
  • Is there sufficient demand?
  • Can the project be financed?
  • Will it be paid for?

2. Are the proposed tolls and services (i.e., the shipping arrangements) fair and reasonable?

  • Will other parties have fair access to the facilities in the future?
  • Is there “open access” so that any producer that meets the tariff requirements is able to use the pipeline?

The first question is discussed here in Chapter 7 and the second in Chapter 8.

7.3 Supply

For many new natural gas pipelines, the main challenge is ensuring that there will be enough natural gas to supply the pipeline for its economic life. However, the more significant concern in this proceeding has been the question of whether the facilities will be large enough to transport present and future volumes. Estimating future volumes is full of uncertainty and must account for issues such as:

  • uncertainty in resource estimates, both discovered and undiscovered;
  • the timing of the development of these resources; and
  • whether resources will be large enough to allow them to be connected economically.

The natural gas resources in the area are shown in Figure 7-1.

The Proponents assume that three years after they begin producing natural gas from the Niglintgak, Parsons Lake and Taglu development fields, other producers will begin producing both the remaining discovered onshore fields in the Mackenzie Delta and fields in the Colville Hills region. The Proponents concluded there are sufficient gas resources to fill a 34 Mm³/d (1.2 Bcf/d) pipeline for 25 years, given a reasonable pace of exploration and development. The Mackenzie Valley Pipeline

Figure 7-1 Natural gas resources

Figure 7-1 Natural gas resources

Table 7-1 Comparison of available natural gas supply forecasts

Table 7-1 Comparison of available natural gas supply forecasts
   

GLJ Supply Studyfor the Proponents (sales gas volumes)

Sproule Supply Study for Mackenzie Explorer Group
(sales gas volumes)

Resource type

Area

Metric
(Gm³)

Imperial
(Bcf)

Metric
(Gm³)

Imperial
(Bcf)

Discovered

Development fields

161.3

5694

161.3

5694

Non-anchor onshore

7.7

272

21.9

772

Offshore shallow (</= 100 m)

64.4

2275

57.5

2028

Offshore deep
(> 100 m)

0.0

0

0.0

0

Colville Hills

10.7

379

15.2

537

Total discovered

244.1

8620

255.9

9031

Undiscovered

Onshore

86.9

3069

226.4

7993

Offshore shallow

47.6

1679

198.6

7010

Offshore deep

0.0

0

256.0

9036

Colville Hills

45.3

1599

71.3

2517

Total undiscovered

179.8

6347

752.3

26556

 

as applied for has a design capacity of 27.3 Mm³/d (964 MMcf/d) with one compressor and 34.3 Mm³/d (1.2 Bcf/d) with three compressors, and is expandable to 49.8 Mm³/d (1.8 Bcf/d) with the installation of fourteen compressor stations.

Gilbert Laustsen Jung Associates Ltd. prepared the gas supply study for the Proponents (the GLJ Supply Study) and Sproule Associates Limited prepared the gas study submitted by Mackenzie Explorer Group (the Sproule Supply Study). These studies show a minor difference in estimates for discovered resources but a major difference in estimates for undiscovered resources for the Mackenzie Valley and Colville Hills areas (See Table 7-1).

Both studies supported the prediction that sufficient resources would be available to keep a 34.3 Mm³/d (1.2 Bcf/d) pipeline full throughout its economic life.

Figure 7-2 illustrates the productive capacity forecasts of the Proponents and Mackenzie Explorer Group along with the proposed contract profile and the pipeline capacities at the sizes of 27.3 Mm³/d (964 MMcf/d), 34.3 Mm³/d (1.2 Bcf/d) and 49.8 Mm³/d (1.8 Bcf/d).

The Sproule Supply Study examined scenarios in which different sized pipelines would remain full for a 20 year period. The study concluded that it is likely that resources could be developed in the future that would support the

construction of a 34.3 Mm³/d (1.2 Bcf/d) pipeline or a larger 49.8 Mm³/d (1.8 Bcf/d) pipeline. For example, there is a 75 percent probability that a 62.3 Mm³/d (2.2 Bcf/d) pipeline would be fully used for 20 years.

Based on the results of the Sproule Supply Study, Mackenzie Explorer Group supported the design of the Mackenzie Valley Pipeline because it could be expanded to 49.8 Mm³/d (1.8 Bcf/d) by adding compression. Mackenzie Explorer Group anticipates that demand for space on the natural gas pipeline would increase significantly as the basin is opened by further exploration and development. It also supported the size of the liquids line from Inuvik to Norman Wells, which is part of the Mackenzie Gathering System.

Figure 7-2 Capacity forecasts

Figure 7-2 Capacity forecasts

Figure 7-3 Supply basins and sub basins

Figure 7-3 Supply basins and sub basins

Natural gas flowing from the Mackenzie Delta to southern markets must pass through the Mackenzie Gathering System as well as the Mackenzie Valley Pipeline. Mackenzie Explorer Group contends that the Mackenzie Gathering System north of Inuvik could not be expanded to the same extent as the Mackenzie Gas Project. A discussion of the appropriate design of the Mackenzie Gathering System facilities can be found in Section 6.3.4.

The Government of Yukon also prepared a gas supply study that focused on the Eagle Plain region (see Figure 7-3) in Yukon – the Geological Survey of Canada Supply Study (GSC Supply Study). According to this study, production from the Eagle Plain region is

Table 7-2 Eagle Plain basin resource estimates

Table 7-2 Eagle Plain basin resource estimates
 

Discovered
Gm³ (Bcf)

Potential resource estimates
Gm³ (Bcf)

GLJ Supply Study

2.37 (83.7)

(P90)

10.8 (382)

(P50)

21.3 (751)

(P10)

39.7 (1401)

GSC Supply Study

2.37 (83.7)

(P95)

67.4 (2379)

(P50)

152.7 (5392)

(P05)

339.8 (12000)

currently uneconomic but could become viable with adequate gas prices and pipeline access to markets. Table 7-2 provides a comparison of Eagle Plain resource estimates used in the GLJ Supply Study and the GSC Supply Study.

On the Record

Market supply and demand cases

The Proponents submitted the Mackenzie Valley Pipeline Market Demand, Supply and Infrastructure Analysis Final Report, by Navigant Consulting, Inc. and Energy and Environmental Analysis, Inc. (the Navigant Study). In the report, four cases were studied:

  • The Base Case – studied the impact of the Mackenzie Delta region delivering 34 Mm³/d (1.2 Bcf/d) of gas to the marketplace by the end of 2009.
  • The Mackenzie Expansion Case – identified the impact of expanded Mackenzie Delta production to 42.5 Mm³/d (1.5 Bcf/d) in 2015 and to 51 Mm³/d (1.8 Bcf/d) in 2020.
  • The North American Economic Slowdown Case – identified the impact on gas markets from a North American economic slowdown.
  • The Alaskan Pipeline Development Case – identified the impacts of Alaska gas coming onstream, ultimately reaching a level of 113.3 Mm³/d (4.0 Bcf/d) in 2014.

Conclusions of the report:

  • There is an adequate market for gas supplies from the Mackenzie Gas Project in all cases.
  • With small increments to the NOVA Gas Transmission Ltd. system, there is sufficient capacity on NOVA Gas Transmission Ltd. and on other pipelines leaving Alberta except in the Alaska Case. Under that scenario, 85 Mm³/d (3 Bcf/d) of additional export capacity would be required.

7.4 Markets/demand

There are two traditional considerations when assessing markets for natural gas. The first consideration is whether there is sufficient demand for the gas that would be transported by the proposed project. The second consideration is whether there would be sufficient space on connecting downstream pipelines to receive and move the gas to market.

In its original evidence, the Proponents submitted the Mackenzie Valley Pipeline Market Demand, Supply and Infrastructure Analysis Final Report, prepared by Navigant Consulting, Inc. and Energy and Environmental Analysis, Inc. – April 13, 2004 (the Navigant Study). The Navigant Study assessed the long-term ability of the market to accept natural gas from the Mackenzie Valley using four different scenarios.

The Navigant Study focused on market regions that are connected via gas pipelines to the Western Canada Sedimentary Basin and looked at forecasted consumption over the period 2010 to 2030, which was expected to cover the Mackenzie Valley Pipeline's first 20 years of operation at the time the study was prepared. The forecasts projected strong growth in gas demand in Canada, particularly Alberta, and the United States for electrical power generation, residential and commercial consumption and for use in industrial and resource development. However, the study anticipated only modest growth in gas production in Canada and the United States and suggested that a significant shift to currently untapped resources would be needed over the next 20 years to meet growing

natural gas demand. Therefore, according to the study, markets would need the proposed 34.3 Mm³/d (1.2 Bcf/d) of gas to be transported on the Mackenzie Valley Pipeline.

Even with the increase in capital costs and cost of service filed in the spring of 2007, the Proponents' view was that there would be adequate markets for the natural gas from the project, and Mackenzie Delta gas would be required to offset the expected decline in conventional gas production.

Mackenzie Explorer Group noted that the forecasts are subject to some uncertainty. Regardless, the favourable results obtained in all of the sensitivity cases that were studied suggest that “market risk” would not be a significant issue for the Mackenzie Gas Project.

The Government of the Northwest Territories submitted that the Mackenzie Basin reserves are a long-term resource that, over time, will find their way to very diverse markets. The Government of the Northwest Territories position was that the Mackenzie Gas Project should provide access to as much of the North American market as possible and market economics should be allowed to determine the use of the reserves thereafter.

In March 2010, the Proponents filed updated projections for North American natural gas markets and supply in a report prepared by Angevine Economic Consulting Ltd. (the Angevine Report) An Updated Natural Gas Market Demand and Supply Analysis for Canada and the U.S. Lower 48 States. The author of the Angevine Report was also a co-author

of the Navigant Study. Gas modelling analysis for the Angevine Report was performed by ICF International, which acquired Energy and Environmental Analysis Inc. in 2007. The Angevine Report concluded that in spite of increasing shale gas production, the North American market remains sufficient to absorb incremental gas volumes from northern gas projects and would support the construction of the Mackenzie Valley Pipeline.

The Angevine Report assumed that the Mackenzie Pipeline would be constructed and put in service by October 2018, and that a gas pipeline from Alaska's North Slope would also be constructed and would be in service by October 2023. The updated projections for North American natural gas consumption and domestic gas production suggested that incremental gas volumes would be required from other sources such as northern gas or imports of liquefied natural gas to meet growing North American requirements (see Figure 7-4).

The approach used by both the Angevine Report and the Navigant Study did not assess the competitiveness of Mackenzie Valley gas relative to other sources of gas supply. The reports assessed the impact of incremental gas volumes from the proposed project into the market and left the Proponents to determine if the project would be economic at the resultant natural gas prices which are predicted by the modelling analysis. Both reports concluded that the North American market would be sufficient and able to absorb the 34.3 Mm³/d (1.2 Bcf/d) from the Mackenzie Gas Pipeline.

Figure 7-4 Projected North American natural gas supply and consumption

Figure 7-4 Projected North American natural gas supply and consumption

 

In the Navigant Study, the Proponents also assessed the capability of the Alberta pipeline system and the main export pipelines from the Western Canada Sedimentary Basin to deliver Mackenzie Delta gas to markets in central Canada and the United States. These markets are currently served by five export pipeline corridors from the Western Canada Sedimentary Basin (see Figure 7-5 and Table 7-3).

The Navigant study concluded that with a forecasted increase in natural gas consumption in western Canada along with an expected drop in conventional gas production in the Western Canada Sedimentary Basin, there will be no pipeline capacity constraints on gas exports from the Western Canada Sedimentary Basin. Furthermore, no export pipeline facility

 

expansions would be required to accommodate the delivery of 34.3 Mm³/d (1.2 Bcf/d) from the Mackenzie Valley Pipeline. However, in the case where the Alaska Pipeline is also built, additional downstream pipeline capacity would be required.

With respect to intra-Alberta infrastructure, the Canadian Arctic Resources Committee expressed concern that the Proponents did not accurately or sufficiently assess the requirements and costs of constructing additional infrastructure in Alberta to ship Mackenzie Valley gas via the existing NOVA Gas Transmission Ltd. system. The Proponents submitted that the Mackenzie Valley Pipeline volumes can be accommodated in the NOVA Gas Transmission Ltd. system with a modest expansion in the northwest part of the system.

Figure 7-5 Existing export pipeline corridors from the Western Canada Sedimentary Basin

Figure 7-5 Existing export pipeline corridors from the Western Canada Sedimentary Basin

Table 7-3 Western Canada Sedimentary Basin export pipeline capacity and projected gas flows

Table 7-3 Western Canada Sedimentary Basin export pipeline capacity and projected gas flows

Mm³/d (Bcf/d)

2003

2010

2020

2030

 

Pipeline Corridor

Capacity

Projected Flow

Capacity

Projected Flow

Capacity

Projected Flow

Capacity

Projected Flow

 

Northwest Pipeline

39.92 (1.41)

28.61 (1.01)

49.58 (1.75)

29.12 (1.03)

49.58 (1.75)

60.91 (2.15)

32.32 (1.14)

42.10 (1.49)

49.58 (1.75)

60.91 (2.15)

21.95 (0.78)

33.80 (1.19)

Base Case

Alaska Case

Gas Transmission Northwest

77.05 (2.72)

59.24 (2.09)

77.05 (2.72)

63.43 (2.24)

77.05 (2.72)

94.05 (3.32)

64.08 (2.26)

80.68 (2.85)

77.05 (2.72)

94.05 (3.32)

59.77 (2.11)

68.36 (2.41)

Base Case

Alaska Case

Foothills and Northern Border

62.04 (2.19)

60.28 (2.13)

62.04 (2.19)

60.31 (2.13)

62.04 (2.19)

70.54 (2.49)

60.96 (2.15)

68.73 (2.43)

62.04 (2.19)

70.54 (2.49)

35.52 (1.25)

67.56 (2.39)

Base Case

Alaska Case

Alliance Pipeline

43.54 (1.54)

42.41 (1.50)

43.54 (1.54)

42.69 (1.51)

43.54 (1.54)

52.04 (1.84)

42.18 (1.49)

51.02 (1.80)

43.54 (1.54)

52.04 (1.84)

40.82 (1.44)

49.72 (1.76)

Base Case

Alaska Case

TransCanada

203.12 (7.17)

152.66 (5.39)

203.12 (7.17)

171.47 (6.05)

203.12 (7.17)

242.78 (8.57)

136.37 (4.81)

182.46 (6.44)

203.12 (7.17)

242.78 (8.57)

112.44 (3.97)

145.55 (5.14)

Base Case

Alaska Case

7.5 Transportation contracts

7.5.1 Mackenzie Valley Pipeline

When considering economic feasibility, the National Energy Board evaluates whether there is adequate contractual support for the pipeline from prospective shippers. The National Energy Board is also mindful of the desire for capacity to be available for third-party shippers.

To date, only the owner-shippers have signed contracts for capacity on the Mackenzie Valley

Pipeline. The capacity available for third-party shippers is shown in Table 7-4 under three scenarios, with one, three and fourteen compressor stations in place. As noted previously, this application seeks approval for construction of three compressor stations.

If additional shippers do not sign contracts for capacity on the pipeline, the installation of two of the compressor stations would be delayed. Table 7-5 shows the volumes that have been contracted by each of the shipper-owners.

Table 7-4 Contracted and available capacity on Mackenzie Valley Pipeline

Table 7-4 Contracted and available capacity on Mackenzie Valley Pipeline

System design

System capacity (summer)

Owner-shipper contracted capacity

Owner-shipper contracted capacity

Uncontracted capacity

Uncontracted capacity

1 compressor station

27.3 Mm³/d (964 MMcf/d)

23.5 Mm³/d (830 MMcf/d)

86%

3.8 Mm³/d (134 MMcf/d)

14%

3 compressor stations

34.3 Mm³/d (1.2 Bcf/d)

23.5 Mm³/d (830 MMcf/d)

69%

10.8 Mm³/d (380 MMcf/d)

31%

14 compressor stations

49.8 Mm³/d (1.8 Bcf/d)

23.5 Mm³/d (830 MMcf/d)

47%

26.3 Mm³/d (928 MMcf/d)

53%

Table 7-5 Contracted volumes by shipper

Table 7-5 Contracted volumes by shipper

Shipper

15 year
term
(GJ/d)

20 year
term
(GJ/d)

Total
(GJ/d)

Total
(Bcf/d)

Imperial

361 821

90 455

452 276

.400

ConocoPhillips

197 255

49 314

246 569

.225

ExxonMobil

65 752

16 438

82 190

.75

Shell

111 040

27 760

138 800

.130

Total

735 868

183 967

919 835

.830

7.5.2 Mackenzie Gathering System

The Mackenzie Gathering System owners have been allocated rights to capacity in various functional units under the Mackenzie Gas Gathering and Processing Facilities Development and Operating Agreement. In October 2007, the Proponents filed contracts signed with MGM Energy Corp. for 5.66 Mm³/d (200 MMcf/d) of capacity on segments of the Mackenzie Gathering System. These were the first third-party contracts executed for capacity on the Mackenzie Gathering System. MGM Energy Corp. did not sign a corresponding contract for capacity on the Mackenzie Valley Pipeline at that time.

 

 

Did you know?

Volume and energy measurements for natural gas

Natural gas can be measured in several different ways. It can be measured by volume which is stated in cubic metres or cubic feet. One cubic metre equals approximately 35.3 cubic feet under standard temperature and pressure conditions. (Standard is defined as 15 degrees Celsius (60 degrees Fahrenheit) and 101.325 kPa (14.7 pounds per square inch)).

Natural gas can also be measured in terms of energy. One gigajoule (GJ) is equal to one billion joules (or 109 joules) and, in terms of volume, is equivalent to approximately 26.8 cubic metres (or 946 cubic feet) of natural gas, depending on the heat content of the gas stream. One gigajoule is approximately 950,000 British thermal units (Btus), where one Btu is the amount of heat needed to raise the temperature of one pound of water by one degree Fahrenheit.

Refer to Appendix E for a conversion chart of volume measurements and energy measurements

7.6 Financing

The National Energy Board has an obligation to satisfy itself that the proponents of a project can obtain the necessary funds to pay for their facilities. In this case, the Proponents have proposed a joint venture structure for owning and operating the Mackenzie Valley Pipeline. The final ownership interests would be determined once the group decides to proceed with construction. The ownership interest of each development field owner, or its affiliate, would be the ratio of its development field firm service transportation agreement to the total firm service transportation agreement commitments at that time. Predevelopment interests are shown in Table 7-6.

Ultimately, the Mackenzie Valley Aboriginal Pipeline Limited Partnership could own up to 33.3 percent of the Mackenzie Valley Pipeline. Its actual ownership interest in the facilities would be calculated as the ratio of third-party contracts to the total contracts in place on the Mackenzie Valley Pipeline when the Proponents make their decision to construct the pipeline. If no shippers, other than the owner-shippers, have signed contracts before the decision is made to construct the facilities, then the Mackenzie Valley Aboriginal Pipeline Limited Partnership would be given a minimum interest in the pipeline. The minimum interest is calculated as the ratio of the Mackenzie Valley Aboriginal Pipeline Limited Partnership's predevelopment phase spending, which is being funded by TransCanada PipeLines Limited, to the total construction costs, plus all predevelopment phase costs for the gas pipeline. It is expected that the minimum

interest could be in the range of two to three percent. However, the Mackenzie Valley Aboriginal Pipeline Limited Partnership would have the option to increase its ownership interest up to the maximum of one third within the first 10 years from pipeline start-up as additional contracts are entered into.

Table 7-6 Predevelopment interests of owner-shippers

Table 7-6 Predevelopment interests of owner-shippers

Owner-shipper

Predevelopment interest

Imperial Oil Resources Ventures Limited

34.2%

Mackenzie Valley Aboriginal Pipeline Limited Partnership

33.3%

ConocoPhillips

16.0%

Shell

11.2%

ExxonMobil

5.3%

Once the Proponents decide to construct the facilities, TransCanada PipeLines Limited would have the option to acquire from the development field owners an interest in the pipeline equivalent to five percent of the total development field capacity.

According to the Proponents, the joint venture structure was selected because it allowed for financing flexibility, tax efficiency and efficient use of overhead resources. The development field owners will arrange financing for their own share of the project costs, most of which will probably come from internally generated funds. The Proponents argued that the pipeline owners are all part of organizations that are very financially strong and highly credit worthy. The Mackenzie Valley Aboriginal Pipeline Limited Partnership intends to raise debt and equity in

conventional capital markets and can access, if necessary, backstop funding from the owners of the development fields for its equity share of the Mackenzie Valley Pipeline's construction costs.

As noted at the beginning of the chapter, when considering the economic feasibility of an application, the National Energy Board considers all of the evidence dealing with markets, downstream facilities, supply, contracts and financing to assess whether the pipeline is likely to be used and useful and whether the pipeline's costs will be paid.

Alternatives North argued that it is not good enough to say the decision on economic viability lies with the Proponents alone as financial, environmental and socio-economic costs and impacts would be borne by others. Alternatives North also argued that the Proponents had failed to prove the need for, and the economic feasibility of, the pipeline.

Views of the Board

Financing

If the shipper-owners decide to construct the facilities, we agree they will be able to finance the project from internally generated funds or other sources as business conditions may dictate. We note that the Mackenzie Valley Aboriginal Pipeline Limited Partnership would be able to access backstop funding from the owners of the development fields if not through conventional capital markets.

Supply

We note that no evidence was filed which was contrary to the Proponents' long-term forecasts for the supply and consumption of natural gas in North America. In our view, the evidence demonstrates that there is, and there will be, adequate natural gas supply to support the use of the project over its expected economic life.

Transportation contracts and markets We are satisfied that the forecasted growth in the North American market would be sufficient to absorb the expected gas volumes from the Mackenzie Valley Pipeline. We note the forecasted growth in natural gas consumption and the continued decline in gas production from conventional sources in western Canada. We accept that this supports the conclusion that adequate pipeline capacity exists to accommodate the delivery of 34.3 Mm³/d (1.2 Bcf/d) of natural gas from the Mackenzie Valley Pipeline to downstream markets.

Although the Angevine Report did not specifically re-assess the availability of pipeline capacity, the updated projections for combined production from British Columbia, Alberta and Saskatchewan in the updated evidence are significantly lower than the original projections for natural gas production in the Navigant Study. Consequently, the evidence of the Angevine Report would support the Navigant Study conclusion that no export pipeline expansions would be required to accommodate the delivery of 34.3 Mm³/d (1.2 Bcf/d) from the Mackenzie Valley Pipeline.

For the Mackenzie Valley Pipeline to be successful, the natural gas moved through it would need to compete with other sources of gas supply in the North American market. In final argument some parties raised concerns that the evidence on the record does not prove that Mackenzie gas could successfully compete in the market. We note that it is impossible to know how markets and circumstances will change over time.

If the pipeline is built it would take several years for construction and the pipeline would be expected to operate for at least 25 years. The Proponents estimated that 2018 is the earliest the pipeline could commence service. Therefore, the pipeline could be in operation until 2043 and beyond. Economic conditions will inevitably change over that time as they have in the past several years. More specifically, supply and demand forecasts and gas prices will continue to change over time. We do not agree that these are reasons to deny the project. Our approval gives Mackenzie gas an opportunity to compete. Denial would block that opportunity indefinitely.

Although the shipper-owners have entered into Precedent Agreements, these agreements are only in effect until a Firm Service Transportation Agreement is entered into. Either party to the agreement has the option of terminating the agreement if the Proponents have not provided start up notice by 1 November 2012 or such later date as may be agreed to by the parties. In final argument the Proponents indicated they would not be prepared to make

a decision to construct until after that date. Therefore, all existing Precedent Agreements could theoretically be terminated. Accordingly, we require the Proponents to demonstrate to the National Energy Board's satisfaction that the necessary long-term transportation service contracts have been executed for the Mackenzie Valley Pipeline before construction starts.

The Proponents and shippers have made significant financial commitments and will have to make further commitments by signing Firm Service Transportation Agreements. If they do, we are satisfied this will demonstrate that parties have determined Mackenzie Valley gas would be competitive in the market and that the pipeline would be useful. If producers are confident that Mackenzie gas can compete in the market they will enter into the required long-term contracts for service on the Mackenzie Gas Pipeline. These contracts provide necessary assurance that the demand charges for the pipeline will be paid. It is an important indicator that the proposed pipeline will be used.

Economic feasibility

Given our views on financing, supply, contracts and markets we believe that if long-term contracts are signed as required, the pipeline is likely to be sufficiently well utilized over its economic life.