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Financial Post: Ottawa’s denial sparks surprise

MacKenzie gas project; Talk of taking over pipeline ‘nonsense,’ says prentice

Claudia Cattaneo, Jon Harding and paul Vieira, Financial Post
Published: Saturday, May 19, 2007

CALGARY, OTTAWA – Ottawa’s flat denial yesterday that it is exploring taking control of the $16.2-billion Mackenzie Gas Project surprised some of those close to the talks, who said the scenario is indeed under discussion.

“That’s damn accurate,” said one source engaged in the sensitive negotiations, who spoke on condition of anonymity.

On Friday, the National Post reported that Imperial Oil Ltd., ConocoPhillips Co. and Royal Dutch Shell PLC have advised the government the pipeline project is effectively dead because it is uneconomic without big government incentives like tax breaks and the oil companies are now considering the merits of the government owning the pipeline with TransCanada Corp. and the Aboriginal Pipeline Group (APG), an aboriginal enterprise that owns one-third of the project.

Sources reconfirmed yesterday that Ottawa may replace Imperial at the project’s controls and is looking at buying out the partners by reimbursing them for costs incurred so far.

But Jim Prentice, Minister of Indian Affairs and Northern Development, said yesterday that suggestions Ottawa is set to take over Imperial Oil’s stake in the project were “nonsense” and “erroneous.”

“No one from Imperial Oil has ever suggested to me that the project is dead, or that the proponents’ project which has been put forward is dead,” he said. “There have been no exchanges of ultimatums.”

Pius Rolheiser, a spokesman for Imperial, said his company is still committed to the pipeline, that it will not step aside as operator, and that at no time has it told the government the project is dead.

The federal government’s own negotiator, Randy Meades, said on Wednesday that the oil companies recently started pursuing Ottawa to take an equity stake, after quashing the idea in the past. The change of heart came after cost estimates ran up to $16.2-billion, from $7.5-billion two years ago.

“This option that was not on the table before is on the table now and we have to flesh it out a little bit before we understand what it means,” said Mr. Meades, executive director of the federal project co-ordination secretariat at the Department of Indian Affairs and Northern Development.

Fred Carmichael, chairman of the APG, also yesterday said Ottawa is considering at least a partial buyout of energy companies involved because it believes the project is commercially sound.

“We’re all business people, and we’re going to make sure there is a return,” he said.

Imperial, which is 69% owned by Exxon Mobil Corp., has very high profit expectations, he said.

“Well, let me tell you, there are other companies out here, including APG, that are happy with much less than a 25% return,” Mr. Carmichael said.

Sources said Ottawa is discussing the idea of becoming an owner because it is unhappy with the way Imperial has backed them into a corner with its substantial demands.

“They want to make sure that Imperial understands that the federal government is willing to examine other options and that Imperial shouldn’t think they have the feds over a barrel,” said one source.

“I know Cabinet discussed the issue this week, and my understanding of the discussions is that they were not going to allow Imperial to paint them into a corner. They see the Mackenzie Pipeline as a basin-opening initiative in the national interest and they are going to do what they have to do to move it forward.”

It’s not the first time the federal government appears to have floated the idea of taking an ownership stake in the project.

In October, 2005, then Liberal deputy prime minister Anne McLellan vehemently denied that Ottawa offered to take a stake of 20% in exchange for concessions on fiscal terms. Five months later, Randy Broiles, senior vice-president at Imperial and the lead executive overseeing the file, confirmed that the Liberal government proposed taking an equity stake in the project, but the idea was eventually rejected.

“It was quickly thrown aside because it doesn’t solve the problem,” Mr. Broiles told reporters at the time, when the pipeline was estimated to cost $7-billion. “We still have a thin project.”

Yesterday, Ms. McLellan said Ottawa can develop a compelling public policy argument that there is a role to play for

the government to help with the North’s economic development.

Nevertheless, she said Conservative involvement in Mackenzie may come at a political price.

“It will be harder for the Conservative government to justify to its base taking an equity position in a mega-energy project, than it would be for some other governments, she said.

Meantime, industry leaders in the oilpatch said they would like to see Ottawa step into the Arctic pipeline project because they are unsatisfied with what Imperial has done so far.

The company created unnecessary animosity in its negotiations with aboriginals, surprised the energy sector with its huge demands from the public purse, and is seen as having inflated its most recent cost estimates, said several industry sources.

The company also frustrated others exploring in the Arctic by making it difficult for them to access a pipeline-gathering system. The issue of who will regulate the system is now in the courts.

Henry Sykes, president of MGM Energy Corp., a top explorer in the Arctic, said other parties are interested in building an alternative pipeline if Imperial’s project does not go ahead.

“We believe that this is the best project for everybody, but if this project doesn’t go, then we are not going to sit back and say that our gas resources are going to be stranded forever,” he said.

TransCanada Corp., Canada’s largest pipeline company, which has financed the APG so far, has already done a lot of thinking about stepping in, perhaps in partnership with someone else, in case Imperial’s effort fails, sources said.

© National Post 2007

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