The federal government has proposed taking a significant equity stake in the stalled $7-billion Mackenzie gas pipeline as a way to break an impasse over the project's financial arrangements.

Under the proposal, pitched at a meeting two weeks ago in Edmonton between Anne McLellan, the Deputy Prime Minister, and a consortium of oil and gas producers headed by Imperial Oil Ltd., Ottawa offered to take a stake of around 20% in exchange for concessions on fiscal terms, government sources said yesterday.

Negotiations on the Mackenzie pipeline, which would provide a much-needed source of natural gas to meet rising demands, have bogged down on fiscal disagreements. The oil-and-gas firms want a reduction on royalties and taxes paid to Ottawa, since the up-front costs are huge and it will take years before profits are recorded, but the government has been reluctant to give breaks to highly profitable energy firms.

The new proposal is being floated only a year after the federal government sold its last major holding in the Canadian oil-and-gas business when it unloaded its remaining 19% stake in Petro-Canada.

Ottawa's ownership in the megaproject could be similar to the 20% interest the State of Alaska is seeking to hold in the rival, US$20-billion Alaska gas pipeline under agreements being negotiated with Alaska producers, the sources said.

The proposal was poorly received by Mackenzie pipeline backers.

"I can't comment on the specifics of what is being discussed," said Imperial spokes-man Pius Rolheiser. "Government equity participation in this was never part of the scenario."

Still, Ottawa remains keen. "[The federal government is] clutching at straws to try to provide something for the producers to go with this Mackenzie line," one Ottawa source said. "They are desperate to get the Mackenzie thing cranked because they see the Alaska line picking up.

"Ottawa's participation in this would, if not eliminate, at least seriously reduce the other demands, by sort of saying, 'We are there shoulder-to-shoulder and we would ride the same horse'," the source said.

One of the reasons the federal government pitched the idea is that it doesn't want to be seen as giving handouts for nothing to oil companies at a time consumers are clamouring for relief from high energy prices, said another source.

"It's a bad time to talk about tax breaks for big oil, so they are looking at other options to arrive at a scenario that [the oil companies] get the fiscal certainty they need," the source said.

Backers of the line, which would boost badly needed supplies of natural gas, halted field work in April, discouraged by cash demands from aboriginal communities and red tape. In mid-November, they are scheduled to decide whether they are moving forward with public hearings in the new year. The hearings were originally scheduled to start in late summer.

If there is a further delay, the project may be shelved until after the Alaska pipeline is in operation after 2015. The proposed pipelines are so huge their construction has to be staggered because there is not enough labour, steel, or services for both to move forward at the same time.

In a study released this week, the Canadian Energy Pipeline Association estimated a two-year delay in building the Mackenzie and Alaska pipelines, as well new liquefied natural gas terminals, could cost Canadians almost $60-billion over the next 20 years by continuing the supply crunch and keeping gas prices high.

The report says the impact of such a delay would be felt mostly in Alberta and Ontario, with the cost of gas to consumers in these two provinces rising by $20.2-billion and $19.1-billion, respectively.

Still, despite soaring prices, oil companies insist the project is not yet feasible and have asked for tax and royalty concessions of $1.2-billion to $2-billion and certainty on fiscal terms, the sources said.

Imperial holds a third of the project, the Aboriginal Pipeline Group -- a native enterprise -- another third, while the rest is held by ConocoPhillips, Shell Canada Ltd., and ExxonMobil Corp.

Mr. Rolheiser said the producers are looking for a fiscal regime that recognizes the large upfront costs and the long time between the initial investment and first revenue.

"It's not unlike the fiscal regime that is in place for oilsands operations," he said. "You have one royalty regime until you reach project payout, then a much different one. We aren't looking for money from the government to help us build the project."

Imperial, which is majority owned by U.S. oil company ExxonMobil, said this week it earned a profit in the third quarter of $652-million, up nearly 20% from the year-earlier $544-million, due to higher energy prices. Also this week, Shell Canada said third-quarter profit increased 1.3% to $457-million, from $451-million a year earlier.

Brendan Bell, energy minister of the Northwest Territories, said the oil companies should give serious consideration to Ottawa's proposal.

"I think the concept of alleviating some of the risk that the proponent would have to take is probably a good one," he said. "Certainly if I was industry, I would welcome anything that reduced the risk."

Having Ottawa as a partner could help cool down any animosity between aboriginals and the oil companies, the Ottawa source said. Aboriginal groups along the pipeline route are demanding the right to charge property taxes on an ongoing basis -- a demand the oil companies and the federal government are opposed to.

If the project folds, Ottawa could also claim the producers were too greedy.

"There is a feeling in some quarters that [offering to take an interest] takes them off the hook," the Ottawa source said. "If this thing really drops out on them and dies, they can say, 'Look, we did everything we could. We even offered to take an equity position'."

Claudia Cattaneo, National Post