Baby Steps
As the Yukon’s mining business stands on the threshold of another boom, moves are underway to develop the territory’s natural gas potential
In the vast, under populated Yukon Territories, a 125-year-old mining industry that traces its origins back to the fabled Klondike gold rush is stirring again, driven by record gold prices and other high metals prices.
To Dr. Harvey Brooks, Yukon’s deputy minister of economic development, it’s different this time. He believes the territory’s economic future is finally secure, after a history of booms and busts.
“Yukon has five per cent of Canada’s territory and there are only 35,000 people here, so we need partners when we develop the economy,” says Brooks, who adds that those “partners” will need to be small and large businesses, and skilled and adventurous individuals. “We’re big but we’re small [(in population]). We’re growing but there’s lots of opportunity here.”
Brooks, who moved to the Yukon in July 2008 to assume his current post is a former deputy minister with the Saskatchewan government, where he held senior positions in four different departments. He also has private sector experience, having overseen policy and economic research for the former Saskatchewan Wheat Pool (now Viterra Inc.).
Brooks, who earned his doctorate in economics at the University of Iowa, sounds almost evangelistic about the Yukon’s economic potential, pointing to billions of dollars in new mines either being developed or proposed.
“It’s a good story,” he says. “There are a number of existing or planned mines, to produce lead, zinc, silver, copper and gold. People say [(the]) Yukon is the number one precious metals target in the world now.”
Although gold isn’t the only target (the Wolverine mine, which is now being developed, is primarily extracting zinc and silver), the fact that the territory is gold-prone is what is creating most of the excitement and attracting hundreds of millions of miners’ dollars.
“Miners have never found the mother lode, in the 125-year history of gold mining in [(the]) Yukon,” says Brooks. “They have targeted placer deposits [(alluvial deposits of sand and gravel in stream beds, depositing gold from an original source and typically representing a miniscule portion of the total deposit]). The search is on for the hard rock source. That’s what the excitement is all about.”
Fort McMurray of mining
Mining development in the Yukon is reaching such a fever pitch that the Alaskan state government and business interests in the state will be spending US$80 million to expand the port facilities at Skagway, Alaska, about 170 kilometres west of Whitehorse, to upgrade ship loading facilities to handle minerals from the territory. Skagway, a busy cruise ship port in the summer, provides year-round, ice-free access to outside markets.
It’s also possible the historic White Plains & Yukon Railroad, which was born during the Klondike Gold Rush and still exists between Whitehorse and Skagway (mostly carrying tourists), could be upgraded to handle mining-related freight.
Some locals are now calling the Yukon “the Fort McMurray of mining.”
Bryyrony McIntyre, manager of mineral planning and development for the Yukon territorial government, says mining exploration has grown dramatically in recent years, and much of that exploration has led to new mines or plans for them.
“Expenditures on exploration are now at about $300 million a year, up from $5 million in 2002,” she says. “There has been a huge increase.”
While gold prices edging towards $2,000 an ounce—along with high silver and base metals prices—have helped, a pro-mining territorial government has boosted the sector’s prospects too.
The right-of-centre Yukon Party, dominated by former Conservative Party members, was expected to be returned to power for a third term in a mid-October territorial election. It held 11 of Yukon’s 17 seats in the last legislative assembly (rising to 18 seats after the election).
The opposition Liberals, who held five seats and had been in power previously, are also pro-mining development, but are pushing for more affordable housing (single family homes in Whitehorse start at $500,000, while condos start at $300,000) and for better social services to deal with the mining boom.
Aside from high minerals prices, a mining-friendly one-window assessment approach, led by the Yukon Environmental and Socio-economic Assessment Board, has also smoothed the way for the boom.
Critics, led by the once-powerful environmental movement and by the territory’s New Democratic Party, (once in power but a spent force in recent elections, with just one or two seats), say they don’t want Yukon to return to the booms and busts of the past.
The territory’s economy was devastated in 1998 by the closure of the Faro lead, zinc and silver mine, with Yukon’s economy having sunk by one-quarter after the closure and the once-thriving town of Faro, which had a peak population of 2,000, becoming a virtual ghost town.
Whitehorse, the capital city, which has 26,300 of the Yukon’s people, is thriving, with new big- box stores, an expanded Yukon College campus, a large new residential development and a riverfront redevelopment along the Yukon River, featuring upscale condos and new retail stores.
Brooks points out that the city now has achieved an economic stability it didn’t have in the past, thanks largely to a huge government presence, with 4,000 of its residents working for either the federal or territorial governments.
Those who are nervous about the mining boom argue that mining will only strain existing infrastructure and services in the picturesque capital city, returning it to the booms—and busts—of the past.
But mining supporters, such as the Yukon Party, the Liberals and business interests, argue that all of the mines being proposed now are multi-year projects that will employ Yukoners for generations.
McIntyre says miners have only scratched the surface of the Yukon’s potential.
“We have a database of 2,600 mineral occurrences in the Yukon, but these reports only cover four per cent of the territory and only eight per cent of the territory has been staked or explored,” she says. “Our bedrock geology is diverse. There’s also nickel and platinum potential.”
Powering the future
But the prospect of a major revival in the mining sector has created a dilemma for the Yukon, which lacks the domestic energy resources to provide power for the mines that are proposed.
“Every atom of hydrocarbons in the Yukon comes from outside,” says deputy minister Brooks. “All of the mines will require energy. If they [(the mines to be developed]) are off the grid, they’ll have to have a plan [(to access power]).”
And that’s where the territorial government’s “Energy for Yukoners” strategy comes into the picture, aided at least in part by Richard Wyman and his company, Northern Cross (Yukon) Ltd.
Wyman is searching for black gold among the yellow gold that has long brought fellow explorers and prospectors to this land.
He expects to find that black gold in the territory’s Eagle Plain area, where Northern Cross holds exploration permits to more than 560,000 hectares—but he actually hopes to find large volumes of natural gas as well—a hydrocarbon that few companies in Canada are actively searching for these days, since huge shale gas finds in the United States have depressed prices.
But the circumstances in the Yukon are almost unique on the continent. The territorial government is hoping Northern Cross will find enough gas to feed Yukon’s power grid or to directly provide power, probably through conversion to liqueified natural gas (LNG), for its booming mining sector .
“Yukon’s power needs will more than double in the next decade,” Wyman says. “Other than increased diesel use there’s no other logical alternative.”
First things first
Officials with Yukon Energy, Mines and Resources, the department which oversees oil and gas development in the territory, have crafted an energy development future built around that gas development.
Called ”Energy for Yukon: The Natural Gas Solution,” it is a first-things-first approach towards developing an energy industry in the Yukon, with hopes that future pipelines built through the territory or nearby will provide access to oil and gas that might otherwise never be tapped.
Yukon has been thinly explored, both onshore and offshore, with just 73 wells drilled there since the 1950s, says Richard Corbett, manager of operations for the department.
The only area of the territory where there is existing production is in the Kotaneelee and La Biche Fields, located near the Northwest Territories, part of the Liard Basin, where there has been oil and gas production for many years. That area is serviced through the Northwest TerritoriesWT and there is existing pipeline infrastructure from there to British Columbia. Two gas wells at Kotaneelee are currently producing and there is a resource potential there of more than four trillion cubic feet of gas, with some oil reserves as well.
However, that’s not the biggest potential prize, according to resource assessments conducted by the department. That lies in Northern Cross’s backyard of Eagle Plain, which starts about 450 kilometres northwest of Whitehorse. Those resource assessments have suggested Eagle Plain could hold more than six trillion cubic feet of gas and 436 million barrels of oil potential. The Peel Plateau and Plain, located just to the east of Eagle Plain, may have almost three trillion cubic feet of gas.
In total, past resource assessments have shown the onshore potential in Yukon is more than 17 trillion cubic feet of gas and 772 million barrels of oil. The offshore potential, in the Yukon’s sector of the Beaufort Sea, has been estimated at some 40 trillion cubic feet of gas and 4.5 billion barrels of oil.
However, the energy, mines and resources ministry continues to conduct further assessments, with some confidence the department has only scratched the surface.
And if two major pipeline projects go ahead there will be an incentive for companies to search for those untapped hydrocarbons.
The proposed US$30 billion Alaska Natural Gas Pipeline, being led by partners TransCanada Corporation. and ExxonMobil Corporation., would move right through the Yukon and Whitehorse, carrying gas from the Alaska North Slope and presumably provide an outlet for Yukon (and northern British Columbia) gas.
The $16- billion Mackenzie Gas Project, led by Imperial Oil Limitedtd., would carry gas from the Mackenzie Delta region of the Northwest TerritoriesWT and could pick up Yukon gas via a potential lateral.
Brian Love, executive director of Yukon Energy, Mines and Resources, says both pipelines are the key to unlocking the Yukon’s unexplored potential.
“Without those the hydrocarbons will largely be stranded,” he says. “It’s a chicken and egg process.”
Not waiting
But his department isn’t sitting idle, waiting for those pipelines to be built, especially since massive shale gas developments in the United States and western Canada probably mean neither northern pipeline will be built for many years.
In 2009, Love’s department and the Geological Survey of Canada launched a cooperative initiative to map energy and minerals in the Yukon. The four-year project is aimed not only at mapping the territory’s mineral potential, thought to be substantial, but also at providing geoscience knowledge about the Yukon’s hydrocarbon potential, particularly Eagle Plain and the Peel Plateau.
In recent years, little drilling has been done onshore (and none offshore), with some 2-D seismic having been undertaken by various producers, including Chevron Canada Ltd., stretching back to 1999. Devon Canada Ltd. drilled wells in the Liard Basin and in Eagle Plain in 2004 and 2005, but chose not to develop those mostly gas-prone areas.
Love says the department now believes the best way to unlock the Yukon’s hydrocarbon potential is to encourage Northern Cross and others to prove up adequate gas potential to provide a source of power for Yukoners and the mines being developed.
“Instead of using millions of barrels of imported diesel every year, we would like to be using our own resources,” he says. “It’s a win-win, because natural gas is better for the environment than diesel [(40 per cent fewer greenhouse gases]) and we believe natural gas from Eagle Plain can meet Yukon’s energy requirements for the foreseeable future.”
He adds that it’s also a more cost-efficient source of energy, since it costs about 30 cents per kilowatt-hour (kWh) to produce power with diesel. Yukon uses about 90 million litres of diesel a year, worth well over $100 million once it’s trucked into the territory.
When development does occur, Yukon has an attractive fiscal regime already in place, with royalties—tied to market prices—currently ranging from 10 per cent to 25 per cent, says Debra Wortley, manager of rights and royalties.
Love points out that there’s another incentive for the Yukon to develop its oil and gas and mineral resources: it can now gain a direct share of the royalties and taxes flowing from their development, thanks to a “devolution” deal the territorial government negotiated earlier this decade with Ottawa that gives the Yukon control over how onshore resources are developed and access to revenues that flow from such development.
At the same time, the territory negotiated a similar sharing agreement with Ottawa for future Beaufort Sea resource revenues, and Love says a devolution arrangement could still be possible covering the offshore, as well.
Corbett argues that it’s important for the whole country that Yukon’s resources be developed.
“What better way to put your footprint on Canada’s north than to populate it with industry?” he says.
But, first things first, he and Love add, which brings them back full circle to Northern Cross and its search for gas to feed the grid and Yukon’s mines.
McIntyre says the most significant impediment to mining development is lack of low-cost power and other energy.
“It [(the minerals, especially heavier ones like zinc and lead]) may remain stranded if it’s 100 or 200 kilometres away from infrastructure,” she says.
Janet Patterson, director of communications for Yukon Energy, the Crown corporation that owns all the territory’s generation assets, says new mines and other economic growth are projected to lead to a demand for 600 gigawatt-hours (gWh) of power by 2014, almost double the 385 gigawatt-hoursWh the utility generates now. Its most optimistic projection is that it can grow that to 490 gigawatt-hoursWh by 2014, if projects aimed at augmenting existing hydropower generation work out.
Aside from that possibility and perhaps some wind power, the utility has no alternative but to rely on diesel, or on domestically produced hydrocarbons.
China syndrome
Which is why Northern Cross’s Wyman is so bullish on his company’s prospects in Yukon—and he’s not alone.
This past June, Northern Cross announced that an affiliate of Chinese energy giant Chinese National Offshore Oil Corporation (CNOOC) Limited had made an investment in the company which will allow Northern Cross to fulfill a work commitment under its current exploration permits at Eagle Plain.
Although Wyman won’t reveal how much CNOOC has invested, he says the company took an equity stake in his company.
It’s a relatively small investment for the Chinese company, compared to others it has made recently in Canada. For instance, CNOOC recently took over troubled OPTI Canada Ltd. for US$2.1 billion, gaining OPTI’s 35 per cent stake in the Long Lake steam assisted gravity drainage (SAGD) project, operated by majority- owner Nexen Inc. It also has a 14.2 per cent stake in MEGeg Energy Inc., which produces 28,000 barrels pera day at its oilsands projects and has plans to increase that to 260,000 barrels pera day. It bought that interest two years ago for $122 million.
Wyman believes there is the potential for substantial unconventional oil and gas reserves on his firm’s leases, but it will need to drill deeper than has ever been done in the Yukon.
“We own a rig but it’s rated at 2,400 metres and some of the opportunities we’re looking at are at 4,000 metres-plus,” he says. “We’ll be looking for stratigraphic plays. Those wells could cost $10–-$15 million each. We needed a large company to assume a strategic position in our company and we have done that.”
Wyman says Northern Cross wants to drill four to six wells and should have results in two to three years.
“We need a critical mass,” says Wyman, who has been involved in his firm’s Yukon quest for 17 years. “Something in the order of [(500 billion cubic feet]) of gas would likely be adequate.”
The company’s land position comprises about 25 per cent of the Eagle Plain play, giving it large potential there if drilling proves up reserves.
Northern Cross believes it could provide LNG-based power for $4 per mmBtumillion British thermal units, compared to $30 per million British thermal unitsmBtu with diesel. It would convert gas to LNG and truck it to the power grid and to mines.
Wyman says the company has already held discussions with several mining firms and they are interested in the LNG option.
The company needs to spend $18 million by 2017 to meet its commitment to the Yukon government (it has already spent $2 million).
Wyman says eventually Northern Cross would look for ways to exploit markets outside of Yukon.
“But you have to walk before you run, and the local market is what we’re interested in now.”
