Ottawa says no to Mackenzie pipeline subsidy

CALGARY -- The Conservative government won't subsidize the proposed Mackenzie Valley natural gas pipeline, but taking an equity stake in the struggling project is among a range of possibilities, Ottawa's top negotiator said yesterday.

The comments were made as Imperial Oil Ltd. prepares to resume talks with the federal government about assistance for the pipeline, the cost of which has spiralled to $7.5-billion from $5-billion and is expected to reach roughly $9-billion. The two sides appeared to be exploring positions before the negotiations begin in earnest.

"In the past . . . governments have participated in private sector projects of various kinds, in various guises, as equity partners," said Andrei Sulzenko, the federal government's chief representative for the Mackenzie project. "There's an investment [and] because of the risk, there's a return to the taxpayer. I don't see that as a subsidy," he told reporters after speaking at a conference on northern energy in Calgary organized by Insight Information.

Imperial, however, insisted an equity stake is not an option.

"We have not discussed an equity position, nor would we be interested in the federal government taking one," Imperial spokesman Pius Rolheiser said yesterday.

In June, Imperial Oil, the project's main proponent, halted talks with Ottawa on potential aid as it revised its plans and cost estimate. The former Liberal government had discussed various options with Imperial, including lower royalties and making shipping commitments on the pipeline, as well as "various forms of federal investment in one or more components of the project."

The potential aid discussed with the Liberals was valued at $1.2-billion.

Jim Prentice, Minister of Indian and Northern Affairs, wouldn't say how much the new government would be willing to offer and added that there never were "fulsome discussions" on various options.

"I'm not prepared to speculate on anything. I'm waiting to see where Imperial Oil is at," said Mr. Prentice, the lead minister on the Mackenzie project.

He also said he wouldn't speculate on an equity stake or other options.

Tim Hearn, Imperial Oil's chief executive officer, has previously said that the economics of the project are difficult.

Mr. Rolheiser said Imperial sees the pipeline like an oil sands project, which requires a lot of money up front with a long period before a payoff. The company wants a "fiscal framework" of royalties and taxes that recognizes the high costs and risks.

Oil sands projects enjoy a nominal royalty until capital costs are covered.

Exxon Mobil Corp., which owns 70 per cent of Imperial, is one of three companies that wants to build a pipeline from Alaska to Chicago. In that deal -- which is in limbo -- the state of Alaska wanted a 20-per-cent equity stake.

The province of Newfoundland and Labrador asked this year for a 5-per-cent stake in the undeveloped Hebron offshore oil field but the energy companies, including Exxon, refused and shelved that project.

The 1,200-kilometre Mackenzie line would connect three large natural gas fields in the Mackenzie Delta with Alberta, with an initial capacity to carry 1.2 billion cubic feet a day -- about 7 per cent of current Canadian production.

Public hearings are under way but have been delayed, meaning the earliest a pipeline might be in service is 2012.

Mr. Prentice last met informally with Mr. Hearn in early August. Official talks will resume once a new plan is issued, but when a deal might be sealed is not known.

Mr. Sulzenko, Ottawa's chief representative for the Mackenzie project, is a retired civil servant and was one of the main negotiators of the Canada-United States free-trade agreement.

The federal government has often played a role in the energy business, including the creation of Petro-Canada, which is no longer state-owned. Ottawa still holds an 8.5-per-cent stake in Hibernia, the first offshore oil field in Newfoundland. It has the stake because one company dropped out when the facility was being developed and Ottawa stepped in to ensure the project didn't die.

Exxon, which is the world's largest public oil company and had a profit of $36-billion (U.S.) last year, owns one-third of Hibernia, along with being the main Mackenzie backer.