Bush's Victory Spells Uncertainty for Canadian Arctic Plans

Abstract:There were two elections this week of interest to Canadian energy companies hoping to develop Arctic gas, but the only one that really mattered took place in the U.S.

Analysis:The election of Dennis Fentie as leader of the Yukon Party in Canada's territory that abuts Alaska's eastern border mostly provides fodder for snide jokes. Fentie, whose past includes a conviction for drug trafficking in the 1970s (for which he later received a full pardon), gives new meaning to the phrase "High Arctic."

A former member of the left-leading New Democrats, Fentie's Yukon Party took 12 of 18 seats. Liberal leader Pat Duncan called an early election following intense criticism of her leadership style, which resulted in four Liberals walking out and leaving her with a minority government.

While Duncan was a tireless campaigner on behalf of the Alaska gas pipeline, her party's defeat is not expected to result in any major changes to the Yukon's somewhat controversial stance.

Like the Liberals, the Yukon Party also supports an Alaskan line, estimated to cost between C$10 billion and C$20 billion, because a good chunk of the steel will be buried in its soil. For job- and tax-starved Yukon, which depends heavily on financial support from the federal government to fund the budget for its 31,000 residents, the benefits of supporting the Alaskan proposal is as obvious as wearing a down-filled parka during winter.

A much bigger threat to dim the northern lights for firms such as Imperial Oil, Shell Canada, and Petro-Canada is the Republican victory in both the U.S. Senate and House of Representatives.

Control of both legislative bodies means President George W. Bush could well toss out a watered-down energy plan, worked out when the Democrats still had a strong bargaining position, and push for something closer to the original bill.

This would be a nightmare for Canadian and U.S. petroleum firms with gas reserves and land in the Mackenzie Delta. They hope to have a C$4 billion line carrying at least one billion feet of gas per day from the Mackenzie Delta to northern Alberta operating by between 2007 and 2010.

The initial energy bill, unveiled almost two years ago, contained tax breaks and subsidies worth billions for an Alaskan line.

From a Canadian standpoint (as well as for a number of American producers), the bill's most egregious aspect was a tax credit that essentially acted as a floor price of $3.50 per thousand cubic feet (mcf). The compromise negotiated prior to mid-term elections scaled down the credit to 52 cents per mcf.

While still unhappy with any subsidy, the reduction represented at least a partial win for the Liberal government of Prime Minister Jean Chretien. It has lobbied aggressively in Washington against interfering with free markets and letting competitive forces decide the Arctic gas pipeline debate.

It's a race that Mackenzie Delta backers need to win or there is a good chance the project will not go ahead. TransCanada PipeLines Ltd. has about one billion cubic feet per day of excess capacity on its international transmission system. If Alaska goes first and sucks up this space, the reserves in northern Canada are too small to justify building new facilities. Proven reserves in Mackenzie Delta stand at about nine trillion cubic feet, compared with 35 trillion for the North Slope.

On the record, senior Canadian energy executives express confidence that Ottawa will continue to fight any increase in federal government largesse for an Alaskan line. Privately, they worry that the leadership race to succeed Chretien, something that is not scheduled to happen until February 2004 but has already caused deep splits within the party, will cause this energy file to slip far down the agenda.

If Bush revives the original energy plan, it could set off an ugly fight between the two countries, which are the world's largest trading partners. Energy minister Herb Dahliwal, for example, has hinted the federal government could withhold approval of needed permits if the U.S. subsidizes the Alaskan line. This is a potent threat since about two-thirds of the proposed Alaskan line runs through Canada.

One other election result has to be considered by Canadian energy executives and politicians. The easy victory of Frank Murkowski, a senator for 22 years, to replace Democrat Tony Knowles as Alaska's governor has tilted the playing field.

Murkowski campaigned on a platform that included getting a gas pipeline built by 2010. After more than two decades in Washington, the veteran Republican has numerous friends in high places who can help him turn election promises into reality.

And Murkowski has good economic and political reasons to call in those favors. Oil production is falling rapidly, meaning Alaska's prized status of not having state income taxes will be jeopardized unless commercial development of the North Slope happens sooner rather than later. If Murkowski wants to be more than a one-term governor, he needs to show progress in getting an Alaskan line built.

What's the bottom line for Canadian producers with Arctic dreams? It means a lot more uncertainty over the next few months. It also gives added impetus to file in early 2003 an application with federal regulators so the long review, expected to take at least 18 months, can begin. While Arctic gas development is a marathon, the first project out of the starting blocks will have a huge lead. Second place, at least for the Canadian proposal, is not an option.