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Cross-border pipeline spat moves to highest levels in Alaska, Canada In sharply worded letters, Knowles terms Dhaliwal remarks as ‘threatening;’ Chretien argues ‘subsidies’ would distort free market, weaken U.S. energy security Gary Park PNA Canadian Correspondent
A quiet summer has turned noisy with the disclosure of a testy exchange of letters between Canadian Prime Minister Jean Chretien and Alaska Gov. Tony Knowles over talk of tax incentives to promote an Alaska Highway gas pipeline.
After months of sparring between U.S. and Canadian government and industry officials, Chretien plunged into the issue in July in response to a May 28 letter from Knowles.
The paper war became public Aug. 30 when The Globe and Mail, one of Canada’s two national newspapers, published the contents of the letters.
Knowles initial volley was based on what he termed “threatening” remarks by Canada’s Natural Resources Minister Herb Dhaliwal, who attacked the U.S. Senate concept of a guaranteed floor price for Alaska gas that would see North Slope producers qualify for a federal income tax credit.
Dhaliwal had suggested that if those measures became part of U.S. energy legislation they could strain U.S.-Canada relations over northern development.
Knowles asks for explanation Knowles said he hoped Chretien could explain what Dhaliwal meant “when he referred to the credit ... as a ‘subsidy’ and stated that if this were included in the final legislation, your government ‘would have to reconsider our current position.’
“His tone appeared threatening, even prompting some writers to use the words ‘trade war.’”
Knowles suggested he and Chretien both recognized “that taxpayers and consumers benefit when governments provide a stable environment for private sector investment in large energy projects.
“I assume your minister’s words were spoken in the heat of the moment and were based on incomplete information and that upon reflection, he would recognize that this tax mechanism is in keeping with similar Canadian efforts to provide the certainty the private sector requires to invest,” Knowles said.
Those arguments were interpreted by Canadian government officials as referring to the billions of dollars of federal and provincial assistance Canada offered in grants, loan guarantees and incentives during the 1970s and 1980s to stimulate exploration and development of frontier resources, especially in the Arctic, East Coast offshore and Alberta oil sands.
Chretien: subsidies would depress prices Chretien’s rebuttal, not sent until July, said his government believed “the proposed subsidies (for Alaska) have the potential to artificially depress gas prices, slowing development and production elsewhere (in the United States and Canada).”
He said the upshot would be a distortion of the free market for energy in the northern United States and Canada by “suppressing and delaying the exploration for and extraction of northern Canadian gas supplies.
“The decrease of Canadian gas imports will weaken U.S. energy security, one that is liked to the energy supplies of its trading partners such as Canada.”
Knowles appeals for cooperation The public airing of the letters came the same week that an article by Knowles appeared in the National Post, Canada’s other national daily, making a plea for Canada-U.S. cooperation on an “Arctic energy strategy,” that would feature gas pipelines from both the North Slope and Mackenzie Delta.
He said Canadians and Americans “have a unique opportunity to strengthen our national bonds by supplying North America’s factories and homes with the affordable, clean-burning fuel of the 21st century — natural gas.”
Instead of “racing against each other to build competing gas pipelines” he said there should be cooperation on three fronts: energy security, economic prosperity and affordable energy. Noting that Canada meets about 20 percent of U.S. gas needs and 10 percent of its oil, Knowles said that role could be dramatically increased by developing North America’s Arctic resources.
“Two gas lines constructed under a cooperative Arctic energy strategy would assure North American industry and consumers of a certain, long-term source of energy,” he said.
“Our failure to cooperate on this development means the energy gap will be filled from elsewhere, perhaps by relying on unstable sources outside North America.”
Beneficial to Canadian economy He said an Alaska Highway pipeline would inject more than $1 billion a year into the Canadian economy, contribute millions of dollars to federal and provincial treasuries and create tens of thousands of jobs in the United States and Canada.
Knowles drew a direct parallel between moves by the U.S. Congress to “jump-start the Alaska project, estimated to cost perhaps US$20 billion” and incentives offered by Canadian federal and provincial governments for frontier projects, notably C$1 billion in grants and C$1.7 billion in loan guarantees to keep Newfoundland’s Hibernia offshore oil venture afloat.
“Canadian-American Arctic energy strategy is a unique opportunity to generate long-term economic benefits for our regions and countries,” Knowles wrote. “Together we can develop two natural gas pipelines for a common goal — a strong, prosperous, secure North supply North American energy needs.”
Powerful dynamic at work But prominent Washington, D.C., energy lawyer Roger Berliner warned Canada in mid-August that there is a “powerful political dynamic at work” as the United States enters mid-term election campaigns with both the Democrats and Republications vying for control of the delicately balanced Senate and House.
He said it is vital for Canada to reinforce its opposition to a floor price for Alaska gas, telling the Canadian Association of Petroleum Producers that “this is not a time for a lot of subtlety.” Berliner suggested Canada should leave no doubt that it is ready to “exercise the full extent of its jurisdiction north of the border if need be.”
He urged the adoption of something a “little more compelling” than rational discourse that incentives would distort the market place and be at odds with the North American Free Trade Agreement and domestic policy as it relates to domestic producers.
Although doubting that President George W. Bush would veto whatever bill emerges from conference, he thinks it’s likely the politicians will retreat from a floor price “to the safer realm of tax incentives.”
Then the question would become whether producers would be willing to proceed with North Slope development.
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