Cashing in on the North — can we do it?

While the Northwest Territories have a large supply of valuable natural resources, the logistics of exploiting them continue to challenge developers. CMA Rob Eirich has worked in the region and offers his perspective on the difficulties and the possible rewards.

By Rob Eirich, CMA

The Northwest Territories remains a challenge and an opportunity for Canadian business. Among other resources, like gold and diamonds, the territory holds an estimated 153 trillion cubic feet of natural gas with 64 trillion cubic feet in the Mackenzie Delta alone. To access much of this resource, a $7 billion dollar pipeline needs to be constructed. Prior to the pipeline, $700 million dollars will be invested in completing a road from Wrigley to Tuktoyaktuk at the Beaufort Sea. The proposed Mackenzie Valley Pipeline will follow the Mackenzie River from Great Slave Lake to the delta. The road, which began construction in 2005, will take over five years to complete, according to recent estimates.

The pipeline project continues to be beleaguered by development problems, which was highlighted in June when Northern Affairs Minister Jim Prentice suggested the project needed to be “reinvented.” A significant challenge that continues to exist is the logistics of reaching these vast resources. Oil is the main focus in the media, but similar challenges exist for companies trying to reach other resources as well. My experience working on these logisitical difficulties suggests we have a long way to go to effectively manage them. This article explains why.

The transportation basics 

The Northwest Territories is the size of Alaska, yet contains a mere 44,000 people. Half of this population is in the capital of Yellowknife, the remaining being scattered in many tiny communities, some reachable only by air through most of the year. The territory is bisected by the Mackenzie River, which hasn’t yet been bridged. Extreme weather means that the northern third of the territory is only reachable by means of a barge in the summer, or an ice road in the winter. The land is marked by numerous scattered lakes and marshes, making road construction impossible in all but a few locations. This geography makes the exploitation of the area’s important natural resources a unique logistical feat.

The Northwest Territories has an illustrious history of unconventional modes of transportation. But perhaps the most significant event in the Territories’ modern transportation history is the completion of an all weather road from Hay River to Yellowknife in 1969. This road has allowed Yellowknife to become a staging point for the exploration and excavation of gold, oil and diamonds throughout the territory.

Today, there are three main modes of commercial transportation available north of the 60th parallel. Barges operated mainly by Northern Transportation Company Limited (NTCL) from Hay River to the Mackenzie River Delta at the Beaufort Sea can carry large quantities of supplies at a low cost. Barge configurations are well suited for heavy equipment and temporary camp buildings. However, although NTCL claims that its barges can operate in as little as three feet of water, load capacities diminish with shallow water. Also, they can only operate 2.5-3 months of the year due to water levels and ice flows and ice accumulation on the Mackenzie, which can restrict access or artificially lower water levels. Loads are required to be staged in the early spring and unloading at destinations requires additional equipment and cost.

Cargo aircraft can carry small loads (100 to 40,000 lbs). They have good accessibility to remote areas, year-round. However, this is the least cost-effective transportation mode. Equipment loads need to be broken down into smaller components, thereby increasing freight costs.

Trucks offer near consistent delivery, with high frequency and low costs. However, there are road restrictions based on weight and load configurations. Costs are increased by 40-50% during the annual Mackenzie River crossing closures betweeen December and May.

The current infrastructure includes a large regional airport at Yellowknife, acting as a hub for smaller local airports in Inuvik, Hay River and Iqualuit. Much of the mining industry’s resupply and exploration efforts are supported directly from the Yellowknife airport through freight expeditors and charter airlines. Riverine traffic in summer months is handled predominantly through NTCL facilities, in Hay River, with scheduled sailings to the Mackenzie Delta on the Beaufort Sea. The territorial capital of Yellowknife is served by a paved, all-weather road with a ferry at Fort Providence. The ferry, however, doesn’t operate during ice formation and break-up seasons, leaving Yellowknife inaccessible by road for four weeks in the spring and an average of a week post-Christmas. There has been ample discussion and planning for a bridge over the Mackenzie River at Fort Providence for several years. However, at press time, project planners for the Deh Cho Bridge hadn’t yet started construction in earnest, citing increasing construction, labour and steel costs.

Winter road challenges

Ice roads and winter roads are both winter-accessible roads. Ice roads generally have a shorter life cycle than “winter only”travel roads. Winter roads have generally established routes over frozen muskeg and tundra, with occasional frozen lake ice crossings. Ice roads take routes over lakes to minimize distances. While ice roads have permanent ingress and portages, construction depends on ice thickness.

Typically, ice road construction involves plowing snow from ice surfaces over planned lake routes. The exposed ice thickens from 36-48 inches, allowing for the weight of fully loaded B train fuel transports. Trucks are limited to traveling at speeds no faster than 25 km/h, as vibration waves under the ice form and can send sufficient force ahead of the truck to break the ice in its path. Ground penetrating radar is used to monitor ice thickness and local on-site visits check the condition of portages.

The longest of these ice-roads is the Tibbett-Contwoyto road, which reaches approximately 568 km from Yellowknife north to Tahera Diamond Corp.’s Jericho mine in Nunavut. With 64 portages, the road travels over 495 km of lake ice. The distance is managed by a consortium that employs a seasonal cadre of 100 maintenance personnel.

The mines have traditionally been dependent on the short winter road season to re-supply 95% of their annual needs, including fuel, heavy equipment and construction materials. Loads can weigh up 138,000 lbs (truck, trailer and cargo) when the ice is over 50 inches thick. Commercial charges average approximately $2,100 per truckload, which is based on a tonnage fee by kilometre. This fee is charged as a cost recovery measure for road construction, maintenance and safety. This charge doesn’t cover vehicle recovery if a truck and trailer slip off, or get blown off the ice road. The Tibbitt-Contwoyto road currently averages about 8,000 to 8,500 loads per year.

The key to making the ice road season an effective means of resupply for the mining sector is the ability to move as many full capacity loads as possible to the mine when the ice is at optimum thickness. The consortium, with this in mind, have in the past extended travel permits 3-4 days after the official closure of the ice road to ensure that mines have obtained a target amount of supplies.

The risk of a load breaking through the ice is ever present. While speed and safety are stringently observed by transport carriers and the Joint Venture Management Committee (JVMC, the consortium), every year a load goes through the ice. These loads often contain toxic substances, such as diesel fuel, hydraulic fluid and other industrial chemicals.

The most significant risk to the natural resource and transportation sectors may not be increasing operating costs, rather opposition to exposing the natural northern environment to dangerous chemicals from transportation accidents. The sight of 48,000 litres of diesel fuel breaking through the ice on a pristine northern lake may generate significant negative public opinion. Ethical questions arise, such as whether risking polluting Canada’s northern lakes for the quest for exportable, conflict-free diamonds is the right thing to do.

Yellowknife and points served by ice roads have also been subject to warming trends. January to March temperatures have seen a gradual warming of 3-5 degrees above average monthly temperatures. The ice road requires a minimum of 42 inches ice thickness and temperatures of -28 degrees Celsius to handle loads at full capacity. In 2006, the ice road operating window was approximately 43 days, perhaps 10 of which were at optimal load capacity. This trend toward shorter annual operating windows weighs heavily on the minds of mine supply managers. Total loads on the Tibbett-Contwoyto road are expected to peak at just under 12,000 loads per year in the next three years. As the logistics factors surrounding the use of seasonal ice roads to supply mining operations become more complex, air transport takes up the slack.

Mackenzie Valley Pipeline Project

The Mackenzie Valley road and pipeline construction are intertwined. Even though pipeline construction materials and equipment can be prepositioned using barges in the summer months, a year-round all weather road will be essential for the constant movement of supplies and personnel during and after construction. The gas pipeline will run approximately 1,200 km and require an estimated 870,000 tonnes of cargo to be transported for the project. Most of the fuel and equipment will likely be transported by rail from Edmonton and Northern B.C. This rail link is key to minimizing costs for the project. However, in 2005, it was estimated that over 40% of the track required serious upgrades. Some sections were limited to a maximum speed of 30km/h or less due to poor rail bed conditions. Since Canadian National has repurchased the line from Rail America, it will fall to CN to make the line economically viable. Materials, fuel and equipment off-loaded at Hay River will then be staged over the fall, winter and early spring for summer river barge voyages down the Mackenzie to the delta. It’s expected that the pipeline will also require 20-22 sites along the route for bulk fuel and materials storage.

But there are a number of risks in developing this transportation infrastructure. These have to be managed carefully.

Aboriginal Groups

A key to developing industry in the North is the involvement of local First Nations members. Many northern companies operate as a joint venture with a local “aboriginally-incorporated” entity. A joint venture offers two main benefits: generous bid concessions when competing for NWT Government contracts, and a method to provide economic benefit to the local aboriginal communities — where the work is completed. An ancillary benefit is that mining firms prefer to deal with these entities to validate a socially responsible corporate mandate.

However, it can be difficult to establish the number of stakeholders involved. This is a problem that Imperial Oil faces with the Mackenzie Valley Pipeline project. The First Nations and Inuit communities who have land claims along the Mackenzie have all supported the project. Other groups, however, have emerged and claim they are due participation in the project. This is challenging the development.

Funding

Building the infrastructure for all-weather and ice roads requires significant funding. The Mackenzie Valley road construction, for example, is expected to exceed $700 million. The latest Deh Cho Bridge estimate tops $240 million and is climbing. The annual cost of ice road construction on the Tibbett-Contwoyto route is in the range of $8-9 million annually. The Deh Cho Bridge and Mackenzie Road are considered public projects. However, it’s extremely unlikely that the Territorial Government will fully fund these projects by tax levy. The bridge is expected to be a toll bridge operated by a private firm and the Mackenzie Road will need substantial private investment to complete. Any new infrastructure costs for natural resource exploration and development are likely to be borne by mining and oil and gas companies.

Climate change

The world is currently experiencing a repetitive cycle of warming and cooling of regional climates. The north (Yellowknife, specifically) is currently going through a short warm temperature trend, which is expected to last another three years until colder temperatures begin to return. This cycle has been repeating itself approximately every seven years since 1943.

In the warmest years, the efficiency of ice roads diminishes. It has also been discovered that in some sections of permanent road along the lower Mackenzie Delta, the permafrost has begun to thaw. This has pushed large sections of road surface over 20 feet above grade, making the road unusable. Shortened supply seasons for the diamond mines are already increasing overall logistics costs as air transport is used at three times the cost per 100 lbs of cargo and 30% of the capacity of trucks. The smaller diamond mines with below-average dollar-per-carat profitability will suffer, short term.

Labour

It’s the current and future labour shortage that will make or break projects.

The economic profit for northern diamonds in 2005 averaged between $48 and $54 per carat. The highest profit attained was $128 per carat (BHP Billiton’s Ekati property) and the lowest was $13.68 (Tahera Diamond Corp’s Jericho property). Rising labour costs, along with a shortage of available skilled labour, is an ongoing problem. As these costs increase, the smaller, less profitable diamond mines will feel the effect.

Perhaps the biggest demand for labour will be for the Mackenzie Valley Pipeline Project. At its peak in 2008-2009, the project will require 8,500 labourers of all skill levels and in non-peak years it will require a minimum of 3,000 workers per year. The current population of the Northwest Territories is 43,000. Clearly, the labour supply will need to be fulfilled from outside.

There is also a competitive risk looming — the Alaskan pipeline extension to the Alaskan Natural Wildlife Range (ANWR). Should the construction of this route preempt the MacKenzie pipeline, it’s likely that the resources found in the Beaufort Basin and Delta will be transported via a shorter line to the Alaskan extension. The extension to ANWR would be a shorter and less costly effort for gas producers, and the MacKenzie Valley project could be abandoned.

The rewards can be great if the risks above can be mitigated. But profitability and business continuity will continue to be challenged. It will take savvy risk management over the next few years to overcome these challenges.

Rob Eirich, CMA, was formerly the controller of RTL Robinson Group of Companies in 2005-2006, responsible for the financial management of three operating companies — ground transportation, construction and an airline. RTL employs up to 500 people annually in all operations and is a key player in the annual construction of ice roads to the diamond mines, as well as highway construction in the non-winter months. The firm is responsible for hauling the majority of the diesel fuel transported to the mines in the short ice-road season.

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