Canada’s NWT Counting on China Cash for Resource Projects

Canada’s Northwest Territories is appealing to Asian investors to boost oil and natural gas drilling after reaching an agreement with the federal government over control of resources, the region’s leader said.

With an estimated 6.87 billion barrels of potentially recoverable oil resources and 81.1 trillion cubic feet of gas, the territory’s economy stands to gain from rising global energy demand, according to territorial leader Bob McLeod, who has scheduled talks with “about 20” Chinese oil and gas companies next month in Calgary.

“The people of the Northwest Territories are not going to sit idly by and see all of this tremendous oil and gas potential just continue to sit in the ground and be stranded,” McLeod said in an interview from his office in Yellowknife, the territorial capital. He declined to name any of the Chinese companies.

The rush to develop oil and gas comes after the territory reached a consensus agreement with the federal government, announced March 11, to transfer oversight of public lands, water resources, mineral resources and oil and gas to the Northwest Territories, giving it access to royalties on resource development. Chinese companies have invested $29.9 billion in Canadian oil and gas assets over the past two years, including Cnooc Ltd.’s purchase of Nexen Inc. (NXY), according to data compiled by Bloomberg.

April 2014

After consultations with native communities to finalize the agreement, so-called devolution is scheduled to take effect in April 2014. The Northwest Territories, with 43,000 people spread over an area almost twice the size of Texas, will retain as much as half the royalties previously collected by the federal government, or as much as five percent of its budget, McLeod said. That’s about C$75 million ($73 million), based on the government’s fiscal plan for 2013-2014.

“Today, the government of the Northwest Territories is the kid that gets its money from its dad,” John Hogg, vice president exploration and operations at MGM Energy Corp., said in a March 12 interview, calling the agreement positive. “There’s no incentive to make development work, there’s no incentive to have infrastructure” under the old arrangement, he said.

MGM Energy, a Calgary-based energy producer, is exploring alongside ConocoPhillips, Imperial Oil Ltd. (IMO), Royal Dutch Shell Plc and Husky Energy Inc. in the Canol Shale in the territory’s central Mackenzie Valley. The area has sparked new interest in the region, with producers committing more than C$625 million in exploration spending at land auctions since 2011.

Bakken Comparison

The Canol’s potential may be comparable to the Bakken Shale that helped reverse oil production declines in the U.S., Brad Hayes, president of Petrol Robertson Consulting Ltd. said on March 12. It is probably the source of Canada’s most northerly producing oil field, Norman Wells, which has produced more than 265 million barrels of oil since its 1920 discovery, according to the Geologic Survey of Canada.

Northwest Territories oil production fell 43 percent from 2002 to 2011 as output at Norman Wells declined, according to Aboriginal Affairs and Northern Development Canada.

With devolution, changes in regulatory oversight and the lack of a clear approval process in the future threaten to delay exploration, Eric Hanson, supervisor for the central Mackenzie Valley at ConocoPhillips (COP), said in a March 12 interview.

“Will there be delays, slowdowns in programs because of devolution?” Hanson said. “It only takes a small delay to lose a whole year.”

Winter Roads

Companies currently need local, territorial and federal approvals to drill in the Northwest Territories, a “complex” regime that caused ConocoPhillips to wait almost a year to drill the two wells it will have completed by the end of the month, Hanson said. The use of winter access roads and an ice bridge over the Mackenzie River means producers have three months a year to reach drilling sites.

The challenge for the region whose capital city is about 5,390 kilometers (3,350 miles) northwest of New York is transporting the fuels to markets.

The territorial government is counting on the C$16.2 billion Mackenzie gas project, a 1,196-kilometer proposed pipeline from Inuvik to northern Alberta, to help push development, as well as a possible Beaufort Sea port at Tuktoyaktuk, said McLeod. Partners on the Mackenzie pipeline suspended the project indefinitely last year as gas prices in North America fell to a decade low.

To develop shale oil, producers will also need a new oil export line, as Enbridge Inc.’s existing 39,400 barrel-a-day Norman Wells pipeline that connects Northwest Territories with the North American pipeline grid fills, Hanson said.

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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