SAHTU
Henry Sykes, president and CEO of Calgary-based MGM Energy, recently announced the company would be folding, as shareholders are expected to accept a share offer from Paramount Resources.

Henry Sykes, president of MGM Energy Corp, announced recently MGM would be folding its NWT resource plays once a pending deal with Paramount Resources concludes. - NNSL file photo

MGM was formed to develop natural gas and oil resources in the Northern Mackenzie Delta and the Central Mackenzie Valley.

MGM came into the NWT seven years ago on the back of expectations surrounding the construction of the Mackenzie Valley gas pipeline. A slump in natural gas prices during the National Energy Board approval process meant that, despite project approval, there is has been very little forward momentum on the project.

"When that project went on hold, the gas we had managed to discover or acquire in the Mackenzie Delta became effectively stranded," said Sykes.

"The view now is that you're probably talking 2020 or beyond," Sykes added. "But we don't know, so it's indefinite."

Indefinitely stranded resources represent indefinitely stranded investments. For Sykes, this is at the root of the problem facing the development of oil and gas resources in the NWT, including the Sahtu's Canol shale oil potential.

"You're asking investors to put money in today without knowing when, or if, they will ever be able to see a return on that investment," said Sykes.

He was speaking on more than the expected financial challenges that come with drilling for oil.

Resource exploration is risky and expensive anywhere, but in Sykes experience, the regulatory environment in NWT is so exclusive, investors are looking for opportunities elsewhere.

Sykes sees future development in the region restricted to major companies like ConocoPhillips or Husky, which both have exploration applications before the Sahtu Land and Water Board.

With large cash resources, they are not as immediately accountable to shareholders as smaller junior exploration companies.

They are also, Sykes noted, able to sit on discoveries - and the money it cost to prove them - with relative ease.

For example, after spending more than $67 million exploring unconventional oil resources in the Sahtu, ConocoPhillips has put further exploration on hold for at least a year.

"What may happen - this isn't a prediction but a possibility - is companies active in the central Mackenzie today may spend enough money to meet their drilling commitments, get their SDLs (significant discovery licences) and then sit on them the way they're sitting on them in the (Mackenzie) Delta until infrastructure finally gets developed," said Sykes.

If that happens, investment in a region could come to a standstill, not only stranding resources, but stranding regional contractors and suppliers who need year-to-year stability for their businesses, he added.

Exploring for oil and natural gas in the NWT is relatively expensive compared to exploration in other jurisdictions. Drilling a test well in the Sahtu, Sykes estimates, can cost up to five times what it would cost in Alberta.

"A 1,000-metre horizontal 12-stage frack might cost you between five and 10 million dollars in Alberta," said Sykes. "It'll cost you between $30 and $50 million in the central Mackenzie Valley."

"A lot of that (cost) is because of the very short operating window. You have to pay for almost a full year's worth of cost of equipment even though you're only going to use for about two-and-a-half months."

"You have to stage in (equipment) in advance, you have to build roads, everything has to be flown in."

But exploration companies, Sykes' included, know what they are getting into before they propose working in the NWT. Those extra operational costs aren't necessarily the issue, Sykes said, given the potential return.

The main problem in the NWT, Sykes said, is a lack of clarity surrounding the territory's regulatory processes.

"There's still a risk that any application to drill an exploration well will be referred to an environmental assessment," Sykes said. "We think that's entirely inappropriate. That should wait until development stage."

Comparing the NWT regulatory process to those in B.C. and Alberta, Sykes sees room for improvement.

"Regulators there (outside the NWT) are much more comfortable with what's going on," he said. "Things that are low-risk are dealt with in a very straightforward manner."

"That's not necessarily the case in the North."

There is no straight line from investment to return on investment in the NWT, Sykes said.

"It costs a lot of money to put together an application, but you have no idea what's going to happen with it," said Sykes. "Whether or not you're going to be referred to an environmental assessment or not, and whether or not your application will be heard in a timely manner."

Shell Canada was not willing to back MGM through a full environmental application when MGM's application to drill an exploratory well was referred by the Sahtu Land and Water Board to a full environmental assessment under the Mackenzie Valley Review Board, and the expense that goes with it.

As Sykes sees it, the risk that your application to drill an exploratory well could be referred to the kind of environmental assessment normally associated with long-term oil or natural gas production is too high.

Sykes is not alone in identifying the regulatory application process as opaque and anti-investment.

Following a request for comment on proposed changes to the GNWT regulatory regime, the Canadian Energy Pipeline Association (CEPA) delivered an October 2013 letter to Aboriginal Affairs and Northern Development Canada (AANDC). In that letter, CEPA identified the need for enhanced "certainty and predictability of process" in the North.

The industry, Sykes said, is not looking for guaranteed approvals. The industry needs the certainty that if an area is open to exploration, then it really is open with a well-defined path from license bidding to exploration, and finally to potential development, said Sykes.

The way it is now, an exploration outfit coming into the Sahtu is asked to negotiate a number of expensive hurdles, without knowing if an exploratory well is even on the table.

"Once an area is open to exploration and posted (by AANDC)," Sykes explained, "(We) bid on it, pay license fees and sit down and negotiate access and impact benefit agreements."

"(We) do all that, and then hear, 'well, we really don't want you drilling wells in the area.'"

"If the answer is no, then say so in advance so that we don't have to spend $4 million just to hear 'no'," said Sykes. "If people do not want us in a particular area, tell us in advance and we'll go somewhere else. We're not going to focus on an area that doesn't want us."

After Shell backed out of MGM's play, Sykes approached a number of other companies to find a partner.

"The response was we like the play, but we see no visible way towards commercialization and too high a risk, so we're not interested.'"

"Ultimately, to have a vibrant energy sector you need a way for people to invest money and earn a return on their investment at some point,'' said Sykes.

"There has to be a clear path to commercializing the resource."

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