December 16, 2010 / 10:10 PM / in 7 years

Canada gas megaproject gets nod but future cloudy

CALGARY, Alberta (Reuters) - Canada's energy regulator approved plans on Thursday for a C$16.2 billion Arctic gas pipeline, but the project faces growing economic uncertainty as natural gas prices languish.

The National Energy Board, in a ruling released after six years of hearings and deliberations, said the Mackenzie Gas Project is in the public interest, provided the major oil companies that are backing it meet more than 200 technical, environmental and socioeconomic conditions.

"We examined the benefits the project can bring. We found that they are large and varied," the board said. "We also looked at the negative impacts. We found that they can be minimized and are acceptable."

The Mackenzie Pipeline project, first envisioned in the 1970s, is led by Imperial Oil Ltd. Its partners are Royal Dutch Shell, ConocoPhillips, Exxon Mobil Corp and Aboriginal Pipeline Group.

The pipeline would carry as much as 1.2 billion cubic feet of gas a day to the Alberta border from the Mackenzie Delta on the coast of the Arctic Beaufort Sea.

The federal government still needs to sign off on the plan, and Environment Minister John Baird said the cabinet will examine the NEB's ruling in the new year. He did not say when he expected to issue a decision.

The Northwest Territories governments and many residents of northern Canada have been anxiously awaiting the decision on the massive development, which they say has the potential to create jobs and spinoff businesses, especially in regions where traditional subsistence livelihoods are vanishing.

Some environmental groups have opposed the project, arguing it would disturb pristine wilderness. And the Deh Cho, a native group whose lands make up a third of the pipeline route, have yet to support the development.

The NEB said the companies must provide an updated cost estimate and make a go-ahead decision by the end of 2013. Construction must start by the end of 2015.

Conditions include such things as banning loud noise at a nationally protected bird sanctuary that lies over two gas fields, and keeping construction workers in closed camps away from small communities along the pipeline route.

But the pipeline is still far from certain.

Imperial cautioned that the consortium has much study to do before deciding to go ahead. It must still obtain numerous permits and reach a fiscal deal with Ottawa.

"This is a significant and very positive step for the project, but this is a journey of many steps," said spokesman Pius Rolheiser.

SHALE THREAT

The project has been plagued by rising costs, regulatory delays, competition from a larger proposal in Alaska and -- most recently -- the development of far cheaper shale gas reserves that are much closer to major markets.

The NEB addressed that issue, saying it did not agree with critics who say that the emergence of competing supply sources was a reason to deny the project.

"Our approval gives Mackenzie delta gas an opportunity to compete. Denial would block that opportunity," it said.

U.S. gas prices have averaged $4.42 per million British thermal units this year, half the average in 2005.

The Mackenzie partners and Ottawa have also so far failed to reach a multibillion-dollar deal on financial support that would make the project viable through public funding for infrastructure like roads and airstrips as well as other measures.

Talks were on hold pending the NEB approval and Rolheiser said restarting them is the next major step.

The backers filed regulatory applications for the 1,220 km (760 mile) pipeline in 2004, estimating a start-up of 2009.

Northwest Territories Industry Minister Bob McLeod described the ruling as "an early Christmas present" for the region, but said he had to review it in detail.

Additional reporting by David Ljunggren in Ottawa; Editing by Peter Galloway and Janet Guttsman

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