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Gas Line Canada Spat*

May 10, 2002

Canadian Oil Firms Raise Objections

To U.S. Tax Credits for Alaska Project



CALGARY, Alberta -- Billions of dollars in proposed U.S. tax credits for a natural-gas project in Alaska are creating a stir in Canada's oil patch and could escalate into the next big U.S.-Canada trade spat.

Energy companies here worry that the tax credits will distort prices for natural gas, just as they seek to develop vast gas reserves in Canada's western Arctic region.

The recently passed Senate energy bill, containing the proposed tax breaks, is subject to reconciliation with an energy bill previously adopted by the House of Representatives. An omnibus energy bill could be presented to President Bush for his signature by the end of the summer.

Canada's energy minister, Herb Dhaliwal, is threatening to block construction of a natural-gas pipeline along the Alaska Highway unless U.S. and Alaskan legislators rethink their stance. "They tend to forget that if they want the Alaska route, two-thirds of it is going to have to come through Canada," he said recently.

The crux of Canada's problem is the Senate bill, which aims to kick-start a $17 billion project to develop Alaska North Slope natural-gas supplies and to build the pipeline along the Alaska Highway. Gas producers including Exxon Mobil Corp., Phillips Petroleum Corp. and BP PLC that are assessing the feasibility of producing Alaska North Slope gas say the Alaska Highway project isn't currently economic on its own merits. But earlier this year, Congress effectively mandated that pipeline route by banning an alternative route beneath the Arctic Ocean and through Canada, citing environmental reasons.

To encourage producers, the Senate bill would -- through tax credits -- guarantee them a floor price for natural gas of $3.25 per million British thermal units of gas at a distribution hub in Alberta. Although U.S. gas prices have strengthened in recent weeks, they languished well below the proposed floor price during most of the past winter.

Even some U.S. producers that ostensibly stand to benefit from the proposed tax breaks want the government to stay out. "We would prefer just to let the natural forces of supply and demand work. We would prefer just to wait until the project can support itself," says Exxon Mobil spokesman Bob Davis, adding that prior congressional interference has limited gas producers' flexibility on projects.

Canadian critics say the proposed tax credits would interfere with free trade in North America's natural-gas market -- a linchpin of the North American Free Trade Agreement that Canada fought hard to get. Some U.S. analysts say American taxpayers will pay billions of dollars more for natural gas under the Senate plan than they would without it.

Northwest Territories Premier Stephen Kakfwi says his region's energy industry could shut down if huge volumes of subsidized Alaska gas flood the market, making it uneconomic for gas producers to develop northern Canadian reserves.

Even though the proposed Alaska tax credits aren't yet enacted, natural-gas producers "would have to be crazy" to invest in northern Canadian energy exploration now, "when they can move just 100 miles west and eliminate a big uncertainty" on price, says Harvie Andre, a former Canadian politician who now heads the Canadian unit of Arctic Resources Co., Houston. Arctic Resources sponsored the pipeline route that Congress rejected.

Indeed, Petro-Canada, a major natural-gas explorer in northern Canada, has just snapped up exploration prospects in Alaska. Petro-Canada Chief Executive Officer Ronald Brenneman says the Calgary company is "hedging its bets."

Write to Tamsin Carlisle at tamsin.carlisle@wsj.com1

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