Exxon Pipelines May Be at Cross Purposes
Gas Projects in Canada, Alaska May End Up Competing for Labor, Materials

By Tamsin Carlisle
The Wall Street Journal
Tuesday, June 13, 2006

In its efforts to procure affordable steel and labor for multibillion-dollar Arctic natural-gas projects, Exxon Mobil Corp. may soon be competing with itself.

Canada's Imperial Oil Ltd., in which Exxon Mobil owns a 69.6 percent stake, is leading a consortium of energy companies attempting to build a 840-mile pipeline from the Mackenzie Delta in Canada's western Arctic to energy-hungry markets in the United States and Canada. But delays and rising costs have complicated the project, leading Imperial to consider building some portions of the pipeline abroad -- a potentially tricky move politically as the company seeks help from Canada's government to complete the project.

Meanwhile, a competing pipeline of more than 2,000 miles -- being considered by a different, Exxon-led consortium -- that would pipe four times as much gas from Alaska to the same southern markets has gained momentum in recent months. Further Mackenzie pipeline delays could force the two projects to compete for already costly manpower and materials. Should the Alaska pipeline be completed first, it could add enough gas to U.S. markets to complicate Imperial's efforts to make the Mackenzie pipeline pay off.

"I don't think in this labor and input-cost environment they can go out at the same time," said Chris Theale, an analyst with Tristone Capital Inc.

Exxon's pipeline predicament illustrates the tough choices oil and gas companies face as they consider major projects, even in a time of higher energy prices, growing global demand and flush industry profit. Increasing prices for items such as steel, drilling equipment and skilled workers have raised costs. The cost of hot-rolled steel, for example, has more than doubled since 2001.

Such rising costs could be stumbling blocks to bringing new energy supplies to market. Budgets have ballooned at important new projects such as Sakhalin Island in Russia's far east and at the Baku-Tbilisi-Ceyhan pipeline in the Caucasus region of Asia.

One or both Arctic pipelines could affect gas prices worldwide, as a nascent global trade in cooled gas shipped in tankers knocks down traditional geographic barriers. The Arctic gas also could be instrumental in powering efforts to tap Alberta's oil sands, an attractive source for vast amounts of new crude oil.

Imperial's Mackenzie pipeline once appeared to be on the fast track. But regulatory approval now is not expected until late next year. Two native groups have not agreed to sign over land-access rights along a big swath of the route.

With costs rising, the Mackenzie consortium -- whose partners also include Royal Dutch Shell PLC unit Shell Canada Ltd., ConocoPhillips and others -- last year raised projected capital costs by 50 percent to about $6.8 billion.

"The project is loaded with challenges," said Randy Broiles, Imperial senior vice president, who adds that a further sharp increase in projected costs could be in the cards.

Neither Exxon nor its Imperial affiliate fully controls either project's fate. The other companies backing the projects, as well as the governments of Canada and Alaska, are eager to get supplies to market.

Imperial has cited its potential competition over resources with the Exxon-led Alaska project to help it win aid from Canada's government, which included money in its proposed budget to help mitigate any negative social and economic impacts of the Mackenzie project on northern natives.

Imperial said it makes its decisions separately from Exxon. An Exxon spokeswoman said the company would like to see "all of its projects advance."

Some analysts say it could help to have a smaller northern pipeline built before the larger, riskier Alaska project as a kind of pilot project.

Pipes must withstand stresses from big temperature fluctuations and cross major rivers.

To control costs, Broiles said, Imperial's consortium is considering outsourcing at least some pipeline sections and equipment offshore, in Asian countries such as South Korea, instead of in Alberta as originally planned.

Costs for ship-and-barge transportation of prefabricated modules across the Pacific Ocean and up the Mackenzie River are not likely to exceed costs for moving smaller sections from Alberta by rail and road, he said. While offshore construction may not be welcome with Canadian authorities, Broiles said it could prove more palatable than the possibility of shelving the project.

The first deliveries of as much as 1.2 billion cubic feet a day of Mackenzie-borne gas would most likely take place in 2011 or 2012. Any further delays would push the timetable close to the projected 2014-2015 start-up expected for the Alaska project, which would deliver 4 billion to 5 billion cubic feet a day of natural gas to the same markets. Analysts predict that direct competition could result in delay of the smaller Mackenzie project for an additional 10 to 15 years.