A proposal by Ottawa that it could take an equity stake in the Mackenzie Valley pipeline "is still on the table" despite being rejected by the companies behind the megaproject, highly placed sources confirmed yesterday.

"There's no denying the question of equity was used inside the umbrella discussion of subsidies," a senior source said. "And Imperial [Oil Ltd.], as soon as 'equity' was mentioned, they said 'no.' "

"It's certainly there in so far as the feds are concerned," the source said.
Anne McLellan, the Deputy Prime Minister and the minister responsible for the pipeline file, denied a National Post story that a formal offer has been made to try to move forward the stalled $7-billion project proposed by a consortium of oil companies led by Imperial.

Ms. McLellan told reporters yesterday the government has no intention of re-entering the megaproject business and emphasized that a "private-sector" solution is required when it comes to Mackenzie.

However, she did not rule out the idea.

"We have not put any proposal on the table," she said. "We have talked to Imperial because they came to us with the discussion around fiscal enhancements. In fact, there is a long, long, lengthy list of things that could or could not be done. It is way too soon to see whether this government will choose to take a serious look at a package that is defined as fiscal enhancements."

Several sources confirmed the Post report that the federal government has proposed taking a stake of about 20% in the pipeline.

The proposal was made because Ottawa is now very concerned that a rival US$20-billion line from Alaska is gaining momentum and wants the Mackenzie project back on track, although "in the end there may be other ways than outright ownership to help the project move forward," said one source.

A proposal for an equity stake "was put on the table and the producers' group, basically, said 'no thanks.' And [the producers'] position now is that we are not going to discuss it," said another source.

Secret negotiations between the companies backing the project and the federal government over fiscal terms are getting down to the wire.

Imperial has said it will decide by next month whether enough progress has been made so it can move forward with public hearings for the pipeline, which would bring to market much-needed supplies stranded in the Arctic and help cap soaring natural gas prices.

The talks have bogged down on fiscal terms with Ottawa and access and benefits deals with aboriginal groups along the Mackenzie Valley. Imperial and its partners, Shell Canada Ltd., ConocoPhillips and the Aboriginal Pipeline Group -- an aboriginal enterprise -- want a fiscal regime that recognizes that the up-front costs are huge and it will take years before profits are recorded.
But the government believes giving breaks to highly profitable energy firms would be politically unpopular at a time consumers are being squeezed by high energy bills. Ottawa's negotiators have advanced the equity proposal as a way of getting something in return.

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

Ms. McLellan confirmed that Imperial has approached the government about cutting a deal that would make the project more financially palatable.

"Absolutely no proposal has been made to Imperial in any form in relation to any fiscal enhancements," Ms. McLellan said.

"The one thing I will say is that we're all committed to making sure this project takes place but we clearly see this as a private sector-driven project in co-operation with the aboriginal communities along the valley.

"We know that Imperial has talked about fiscal enhancements. We have indicated we're willing to sit down and talk to them about that but the suggestion that there has been any proposal at any time from us in relation to this project on the fiscal enhancement side is completely false."

Tim Hearn, Imperial's CEO, said recently the oil companies are not looking for handouts, but terms that recognize that today's high gas prices are unlikely to continue as large quantities of liquefied natural gas come to North America from foreign sources in the next decade.

He said the terms should also take into account that the project is opening a new basin and requires huge capital investment that will not yield a return for many years.

The government sources said oil companies have asked for tax and royalty concessions of $1.2-billion to $2-billion and certainty on fiscal terms.

Claudia Cattaneo and Paul Vieira - Financial Post