US embassy cable - 05OTTAWA695

UNCLAS SECTION 01 OF 02 OTTAWA 000695 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CAN AND EB/ESC/IEC 
DOE FOR IA: PUMPHREY, DEVITO, DEUTSCH 
DOE ALSO FOR OFFICE OF OIL AND GAS GLOBAL SECURITY: KORNFELD 
STATE PASS USTR: CHANDLER 
STATE PASS FERC 
 
E.O. 12958: N/A 
TAGS: ENRG, ETRD, EPET, CA, Alaska Pipeline, NPA, Energy 
SUBJECT: EXXONMOBIL ENTERS THE ALASKA PIPELINE DEBATE; 
WANTS "NO OPTIONS CLOSED OFF" 
 
REF: OTTAWA 603 AND PREVIOUS 
 
1. (U) Sensitive but unclassified.  Not for distribution 
outside USG channels. 
 
2.  (SBU) Summary: After many months of staying on the 
sidelines while others argued about Canada's regulatory 
regime for the Alaska Natural Gas Pipeline, executives from 
ExxonMobil visited Ottawa March 3 to discuss the project with 
the Ambassador and senior GOC officials.  The ExxonMobil 
representatives echoed the position of the other producers 
regarding Canada's options for a regulatory authority. 
Elaborating on the technical differences between a project 
regulated by the 30 year-old Northern Pipeline Act, versus 
permitting authority under Canada's National Energy Board, 
they repeatedly stressed that the GOC should "not close off 
any options."  The executives claimed that they could be 
forced to abandon the project if the NPA is the only 
permitting authority, but said that delays on the Mackenzie 
Valley Gas Pipeline should not negatively impact the Alaska 
project.  End summary. 
 
ExxonMobil Comes Calling 
------------------------ 
 
3.  (SBU) An ExxonMobil representative told us late last year 
that the company would not be ready to address the issue of 
Canada's regulatory regime for the Alaska pipeline until the 
three producers (ExxonMobil, BP and ConocoPhillips) had 
finalized fiscal terms with Alaska.  However, last week's 
visit to Ottawa by Alaska Governor Murkowski (reftel) appears 
to have prompted a shift in strategy.  Senior GOC officials 
broadly hinted to Governor Murkowski and Yukon Premier Dennis 
Fentie that Canada may go forward with permitting the 
pipeline under the Northern Pipeline Act (NPA), which 
recognizes TransCanada Pipelines Ltd. exclusive 
"certificates" for constructing the Canadian portion of the 
project.  The producers, most notably BP, have objected to 
being locked into an exclusive arrangement with TransCanada, 
and have lobbied for an alternate permitting process under 
broader National Energy Board (NEB) rules.  An NEB process 
would force TransCanada into a less dominant negotiating 
position, as it would open the project to other potential 
players such as Enbridge Inc. 
 
4.  (SBU) The ExxonMobil delegation, led by Americas Gas 
Marketing Vice President Richard F. Guerrant and Production 
Manager Marty Massey, emphasized to the Ambassador that the 
producer companies all agree that the GOC's best course of 
action would be to declare that the pipeline can be permitted 
under either the NPA or NEB rules (BP Senior Vice President 
Ken Konrad also attended the meeting).  The executives said 
that with either permitting system available, the market will 
ultimately decide the scope of the pipeline, along with the 
route and the final destination of the gas.  The ExxonMobil 
representatives repeated BP's oft-repeated position that in a 
project of the magnitude of the Alaska Natural Gas Pipeline, 
the producers need maximum flexibility in order to manage the 
enormous risk that the project entails. 
 
"Not a Threat" 
-------------- 
 
5.  (SBU) The ExxonMobil executives said that if Canada were 
to declare that the NPA was the only valid permitting 
authority, the pipeline project may not go forward. 
Underlining that this statement was "not a threat," the 
company representatives said that an NPA-permitted project 
would pose unacceptable risks for the producers.  The 
executives also said that an NPA-only permitting authority 
will make it very difficult for the companies to attract 
financing for the project, effectively stranding more than 35 
trillion cubic feet of gas on the North Slope. 
 
NPA vs. NEB 
----------- 
 
6.  (SBU) Changes to the natural gas market since the 1970s, 
the executives explained, have made the NPA obsolete for a 
number of reasons.  In the 1970s there were far fewer 
pipelines and no integrated North American gas market, and 
the NPA mandates that all gas must be destined for the United 
States.  In addition, environmental standards have changed, 
as have government relations with aboriginal and native 
groups along the route (note: Premier Fentie told GOC 
officials last week that he believed the NPA adequately 
protected native rights).  Further, technical changes 
regarding pipeline volume, pressure, natural gas liquids, 
pipeline diameter, routing and distribution have all made the 
NPA inadequate for regulating a modern project. 
 
7.  (SBU) The ExxonMobil delegation said that they had met 
earlier in the day with Peter Nicholson, special adviser on 
economic policy to the Prime Minister, and Minister of 
Natural Resources John Efford.  Efford had told Governor 
Murkowski last week that a decision on the permitting regime 
would be forthcoming in two to three weeks, but the 
ExxonMobil officials believed they may have "slowed down" the 
impending decision.  Earlier this week, Natural Resources 
Deputy Minister George Anderson told us in a separate meeting 
that the GOC will make a "clean" decision on pipeline 
permitting, one that will protect the government against 
litigation.  The final decision will be made by an ad hoc 
committee of government ministers headed by Deputy Prime 
Minister Anne McLellan. 
 
8.  (SBU) The Ambassador commented that ExxonMobil's absence 
from discussions in Ottawa until now has probably not helped 
its lobbying efforts with the GOC.  The Ambassador further 
noted that while Governor Murkowski has been careful not to 
advocate one Canadian permitting regime over another, the 
governor has remained engaged on the issue with the Canadian 
government.  Alaska has maintained its neutrality, moreover, 
even though the state plans to hold a direct equity stake in 
the project. 
 
Alaska, Mackenzie, and Next Steps 
--------------------------------- 
 
9.  (SBU) The ExxonMobil representatives dismissed fears that 
delays on the Mackenzie Valley Gas Pipeline, which would 
carry natural gas from the Mackenzie Delta on the Beaufort 
Sea to an Alberta hub, would impact on the Alaska project 
(note: ExxonMobil subsidiary Imperial Oil holds the largest 
stake in the Mackenzie project).  They said they view the two 
pipelines as complementary, and in contrast to concerns 
voiced by Governor Murkowski and Premier Fentie, they fully 
expect Mackenzie to be built first.  The projected start-up 
of the Mackenzie project is 2009, they said, and Alaska no 
sooner than 2013 or 2014. 
 
10.  (SBU) The company executives told the Ambassador that 
their next step would be to make their concerns about 
Canada's permitting authority known to Department of Energy 
officials in Washington in coming days.  They clearly 
indicated that they will seek greater USG engagement in 
ensuring a flexible regulatory regime for the Canadian 
portion of the Alaska Natural Gas Pipeline Project. 
 
Comment 
------- 
 
11.  (SBU) The statement that ExxonMobil could end up 
abandoning the Alaska project may well have been a bluff; we 
cannot see the producers simply walking away from more than 
35 trillion cubic feet of North Slope natural gas. 
Nevertheless, ExxonMobil clearly does not want to be locked 
into doing business solely with TransCanada on the basis of 
30 year-old legislation.  We expect that the producers will 
seek every possible opportunity to pressure the GOC for a 
permitting decision favorable to their interests, including 
lobbying the USG for a more interventionist stance. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
CELLUCCI