NO NEWS IS GOOD NEWS FOR ALASKA GAS PRODUCERS

UNCLAS SECTION 01 OF 02 OTTAWA 001516

SIPDIS

SENSITIVE

DEPARTMENT FOR WHA/CAN AND EB/ESC/IEC
DOE FOR IA: PUMPHREY, DEUTSCH
DOE ALSO FOR OFFICE OF OIL AND GAS GLOBAL SECURITY: KORNFELD
STATE PASS USTR: CHANDLER
STATE ALSO PASS FERC

E.O. 12958: N/A
TAGS: ENRG ETRD EPET CA
SUBJECT: NO NEWS IS GOOD NEWS FOR ALASKA GAS PRODUCERS

REF: A. OTTAWA 695


B. OTTAWA 603

C. OTTAWA 134


1. (SBU) Summary: Representatives of the Alaska North Slope
natural gas producers now hope that the GOC may be
reconsidering its options regarding a permitting authority
for the Alaska Natural Gas Pipeline. A GOC decision that the
1,300 mile Canadian portion of the proposed pipeline could be
permitted under either of two competing provisions of
Canadian law would be a major victory for the producers, who
strongly argue that they need flexibility in determining the
pipeline's route, specifications, and financial terms. End
summary.


2. (SBU) In a meeting with ESTOFFs, officials from
ExxonMobil, BP and ConocoPhillips said that they believe the
GOC is re-examining what observers previously believed was an
imminent decision to declare the Northern Pipeline Act (NPA)
as the only valid permitting authority for the Canadian
portion of the Alaska Natural Gas Pipeline. The 1970's-era
NPA would give exclusive construction rights for the Canada
portion of the line to Calgary-based TransCanada Pipelines
Ltd., a situation which ExxonMobil, BP and ConocoPhillips
have called unacceptable. Rather, the producers have argued
that existing pipeline permitting rules administered by
Canada's National Energy Board (NEB) are adequate to handle
the Alaska pipeline, and would offer the flexibility needed
to minimize risks and maximize efficiencies.

A Decision Delayed
--------------


3. (SBU) In February, Minister of Natural Resources John
Efford told Alaska Governor Frank Murkowski that a decision
on a permitting authority would be made "in two or three
weeks," and strongly hinted that the GOC would favor the NPA
(ref B). No such announcement has followed, and the delay
could be a sign that Natural Resources Canada, which was
widely seen as strongly favoring the NPA, is losing influence
on the matter within the GOC. Representatives of the
producer companies told us that they have been calling on a
range of officials within the GOC to advance the case for the
NEB's flexibility, including the Ministries of Finance and
Foreign Affairs, the Canadian Environmental Assessment
Authority, and the Privy Council Office, which reports to the
Prime Minister.


4. (SBU) Whatever decision the GOC makes regarding a
permitting authority, a legal challenge is likely. If NEB
rules are declared valid for the Alaska project, TransCanada
would almost certainly go to court and argue that the project
can only be permitted under the NPA. On the other hand, the
producers and other interested companies may well mount a
challenge if the GOC does declare that the NPA is the only
valid permitting mechanism. According to the representatives
of the three companies, if the decision goes against
TransCanada, it would have to limit its challenge to the
validity of the NEB process, and not actual damages.
Although TransCanada argues that it has spent C$2 billion in
"pre-build" for the Alaska line, the producer representatives
said, most of that has been spent on pipelines which are
currently in use and are fully costed. Thus, TransCanada
would not suffer any real losses from its prior "investments"
in an NPA-permitted pipeline.


5. (SBU) In addition, according to the producers, there is
likely to be an excess of capacity in existing pipelines as
conventional gas production in the Western Canada Sedimentary
Basin begins to decline. The NPA mandates a "bullet" line
through Canada directly to the United States, which the
producers see as inefficient given the coming excess pipeline
capacity. The NEB process, they said, would provide greater
flexibility in determining how the gas would be marketed in
North America, and would still provide a benefit to
TransCanada by utilizing its existing pipelines. NEB
permitting would also make it easier to construct a natural
gas liquids (NGL) facility in Alberta -- a major industrial
benefit -- to take advantage of the "wet" properties of the
North Slope gas. The NPA did not envision an NGL facility,
the representatives said, much less one that would be
constructed in Canada and could provide product for both the
U.S. and Canadian petrochemical industries.


6. (SBU) Calgary based-Enbridge Inc. has touted itself as a
viable alternative to arch-rival TransCanada as prime
pipeline contractor (ref C),and has taken a position on
permitting authority which closely mirrors that of the
producers. However, the three representatives told us that
the companies themselves, ExxonMobil, BP, and ConocoPhillips,
are perfectly capable of building and operating the pipeline.
As the BP representative noted, BP has built more natural
gas pipelines around the world than either TransCanada or
Enbridge. The actual work, he added, could be subcontracted
to any number of companies, including Enbridge and/or
TransCanada.

Potential for Delay
--------------


7. (SBU) According to the producer representatives, there
is potential for the pipeline to be delayed on other fronts.
Assuming that the producers are able to reach a financial
agreement and royalty package with Alaska, similar
arrangements would have to be worked out with the Yukon
Territory and the provinces of British Columbia and Alberta.
In addition, there are several unsettled tribal land claims
in areas of the Yukon through which the pipeline would pass.


8. (SBU) The producer representatives noted that opening
the Alaska National Wildlife Refuge (ANWR) for oil and gas
development is extremely unpopular in Canada. As the Alaska
pipeline and ANWR are debated, the producers said they would
prefer to see the two issues kept separate (if natural gas is
discovered in ANWR, it would likely be transported through
the pipeline). For now, Canadian environmental NGOs
concerned about northern pipelines are focusing their efforts
on opposing the proposed Mackenzie Valley gas pipeline.

Comment
--------------


9. (SBU) As we read the events of the last several months,
the companies have conducted a persistent, but low key,
campaign to remind GOC officials that NEB rules can apply to
the Alaska project. They appear to have had notable success,
bringing in other GOC agencies as counterweights to Natural
Resources Canada's evident preference for the NPA. Given
that the GOC appeared last February to be on the verge of
declaring the NPA as the only valid permitting authority, the
producers' efforts seem to have been successful indeed.

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DICKSON