At the fortieth meeting of the Advisory Committee on Northern Development the disposition of the Canol pipelines was discussed. It was agreed that a report on the Washington meetings to discuss the pipelines should be prepared for distribution to members of the Committee.

The attached paper has been prepared by the Department of Northern Affairs and National Resources.

G.W. ROWLEY

[PIÈCE JOINTE/ENCLOSURE]

Note du sous-ministre des Affaires du Nord et des Ressources nationales

Memorandum by Deputy Minister, Northern Affairs and National Resources

DISPOSITION OF THE CANOL PIPELINES

The position taken by the U.S. Army regarding the disposition of the remaining Canol pipelines has changed materially during the past nine months. The latest changes, which were of basic importance, have only been made known to us in two documents? which were received on April 23 and April 25. The following paper will describe the background of the situation and the course which the negotiations have followed. It will then make recommendations as to the next step.

2. During the war a series of agreements was entered into between the Canadian and United States governments which covered the building and operation by the U.S. Army of certain pipelines and appurtenant facilities on Canadian soil. The pipelines were:

4-inch line from Norman Wells to Whitehorse;

4-inch line from Skagway to Whitehorse via Carcross;

2-inch line from Carcross to Watson Lake;

3-inch line from Whitehorse to Fairbanks.

3. It was the implicit understanding of the Canadian government that the ownership and operation of these pipelines by the U.S. Army were wartime arrangements which would be terminated at the end of hostilities. The pipeline from Norman Wells to Whitehorse was in fact disposed of by agreement in 1947. In 1954 the U.S. government declared the 2-inch line from Carcross to Watson Lake to be surplus. The U.S. Army, with no objection from the Canadian Government, continued to own and operate the 4-inch line from Skagway to Whitehorse and the 3-inch line from Whitehorse to Fairbanks. The Canadian authorities assumed, however, that once the 8-inch Haines-Fairbanks pipeline, constructed under an agreement concluded in 1953, was in operation there would be no need for the U.S. Army to continue to operate the 4-inch Skagway-Whitehorse pipeline and the 3-inch Whitehorse-Fairbanks line.

4. In view of the growing need for pipeline facilities to serve the general economic development of the Yukon, a preliminary meeting between officials of the Governments of Canada and the United States was held on July 19, 1956 to discuss the conditions under which these pipelines might be turned over to Canada. The Canadian point of view, as outlined in the preceding paragraph, was accepted by the American officials without reservation. They pointed out, however, that the 8-inch Haines-Fairbanks pipeline had been inoperative for several weeks last winter, and therefore it was essential that the 4-inch line from Skagway to Whitehorse and the 3-inch line from Whitehorse to Fairbanks be available to the U.S. government as a standby. They agreed with the Canadian officials that there seemed to be no reason why these pipelines could not be operated for commercial purposes by a Canadian entity and at the same time be available for emergency use by the United States Army. The U.S. officials at the meeting made no reference to Canada paying any recompense for the 3-inch line, and the Canadians assumed that the Americans regarded Canada's assumption of the obligation that the line would be maintained and available as a standby as sufficient recompense. The meeting agreed that the Department of External Affairs should give the U.S. Embassy a memorandum outlining the principles, as agreed at the meeting, which should govern the transfer of the lines, and that further meetings would be held to discuss the details. A memorandum? was sent to the U.S. Embassy on September 24, 1956. A reply? dated April 24, 1957, was received on April 25.

5. In December, 1956, the Canadian government decided that, subject to the completion of negotiations for Canada to take over the lines from the United States, and subject also to certain conditions, the White Pass and Yukon Route would have the right to operate the 4-inch pipeline and Alaska-Yukon Refiners and Distributors (formerly known as Shamrock Petroleum) would have the right to operate the 3-inch and 2-inch pipelines. In brief, the conditions were (a) that the pipelines would be kept continuously in operating condition and the 4-inch and 3-inch lines would be made available for the use of the U.S. government in the case of a national emergency or a failure of the 8-inch Haines-Fairbanks pipeline, (b) that all the pipelines would be operated as common carriers, (c) that the White Pass would move the 4-inch line sufficiently far from the tracks that it would be safe for the transport of gasoline, (d) that Alaska-Yukon Refiners and Distributors would build a pipeline from Haines to connect with the 3-inch pipeline, (e) that Alaska-Yukon Refiners and Distributors would restore the 2-inch pipeline to operating condition, and (f) that the companies would be given a long-term lease to the pipelines at a rental which would be nominal for an initial period, the government then having the right to review the situation.

6. The White Pass & Yukon, in replying to this offer, pointed out that the U.S. Army is under an obligation to remove the pipeline at any place where it is within 5' of the tracks, and the Deputy Minister of Northern Affairs replied that the government did not mind who moved the pipeline as long as it was moved.

7. In February, 1957, a meeting was held in Washington between Canadian and U.S. government officials to arrange the details for the transfer of title to the pipeline. It became apparent at this meeting that the U.S. officials had developed, on one or two important points, very different views to those which had been expressed at the July, 1956, meetings. Furthermore, there have been further changes in the American viewpoint as expressed in documents which have subsequently been received.

8. The most important new factor which appeared at the February meeting was the demand by the U.S. that the pipelines should be appraised and transferred to Canada at their commercial value. The U.S. representatives presented a Draft Army Proposal of points which should be included in the ultimate Exchange of Notes, and paragraph 4 reads as follows:

The conveyance of that portion of the 4-inch pipeline facility (Canol No. 2) located in Alaska; the 2-inch pipeline facility (Canol No. 3); and that portion of the 3-inch pipeline facility (Canol No. 4) located in Canada will be at the current commercial value in accordance with Exchange of Notes dated 26 February 1945, the current commercial value to be determined by two appraisers, of whom one shall be named by the United States and one by Canada, with power, if they disagree, to appoint an umpire.

9. The suggestion that there should be an appraisal and that the line should be transferred to Canada at the appraised commercial value put an entirely new element into the discussions from the Canadian point of view. The Canadian representatives pointed out that the lines were not being transferred under the circumstances envisaged in the earlier Exchange of Notes, which contemplated that the U.S. Army would have no further use for them. The only provision for maintenance was that the pipelines should not be dismantled without the consent of the Permanent Joint Board on Defence. In the present case, however, the U.S. government was proposing to turn title of the lines over to Canada only if Canada would undertake the obligation that the lines would be kept continuously in operating condition and would be available as a standby, to be used by the U.S. government in the event of either a national emergency or trouble with the 8-inch pipeline, which according to the views expressed at the July 1956 meeting, was a contingency which might well occur. To this the U.S. representatives replied that the value of any obligations assumed by Canada would be taken into account in appraising the pipeline.

10. The Canadian representatives at the meeting tried to get some indication as to whether the Americans expected that an appraised value would be merely a nominal figure or a substantial figure, but could get none. Subsequently, however, we have had discussions with a pipeline expert who examined the 4-inch line in 1955, and he expressed the opinion that the line is in very good condition. We therefore should assume that an appraisal would place a substantial and not a nominal value on the lines.

11. Another position of importance taken by the U.S. representatives was that they wished Canada to accept any outstanding obligations which the U.S. government might have in respect of the 4-inch pipeline. The Canadian representatives said that Canada would be willing to accept the 4-inch pipeline only if it was free of all encumbrances, and specifically, if the U.S. government had made some arrangement to satisfy its obligation to the White Pass Railway in respect to moving the 4-inch line off the tracks. The Americans stated that, if the United States had to move the 4-inch line, this would undoubtedly be taken into account in appraising the Alaska portion of that line.

12. As indicated earlier, there has been a change in American views since that meeting. On April 23 we received a Revised Draft Army Proposal, and this proposal no longer suggested that the 4-inch and 3-inch pipelines should be available in the event of a failure of the 8-inch pipeline. The only requirement was that they should be available to the U.S. government on a priority basis if needed in the case of a national emergency. To indicate the precise difference, paragraph 2 in the first Draft Proposal reads as follows:

2. The United States reserves the right to take over immediate use and possession of the above-mentioned 4-inch and 3-inch pipeline facilities (Canol No. 2 and 4) at any time within from the date of this agreement to meet military requirements of the United States during a national emergency declared by the President or the Congress of the United States or in event of a breakdown of the Haines-Fairbanks 8-inch petroleum pipeline. During such period as the United States may have use and possession of the facilities, the United States will pay a fair rental as may be mutually agreed upon, such rental however not to include any compensation for the portion of Canol No. 2 pipeline located within Canada.

The same paragraph in the revised Draft Proposal reads as follows:

2. If, during a period of national emergency declared by the President or the Congress of the United States, the Secretary of the Army determines that it is necessary to use the above-mentioned pipeline facilities to meet United States requirements, then upon notification to Canada, the United States will be afforded a priority right to use the above-mentioned 4-inch and 3-inch pipeline facilities in Canada. Payment for the operation of the pipeline facility to furnish petroleum products for the United States will be made at such terms as may be mutually agreed upon. The obligations of Canada and the United States under this proviso shall terminate at the end of the economic life of the facility as specified in paragraph 1 above.

13. The U.S. requirement that the 4-inch and 3-inch line be available to meet U.S. military requirements in the event of a national emergency is also expressed in the memorandum from the U.S. Embassy dated April 24, 1957 as follows:

That any lease, contract for operations, agreement of sale or other agreement covering the pipelines in Canada must contain a provision that will ensure the pipelines shall be made available to meet United States military requirements in a national emergency.

14. Another point of interest in the U.S. Revised Draft is that it modifies the demand that there shall be an appraisal and that the pipelines shall be transferred at their commercial value. The clause in the original Draft Proposal is quoted in paragraph 8 above. The relevant clause in the Revised Draft is as follows:

The conveyance of that portion of the 3-inch pipeline facility (Canol No. 4) located in Canada, and the 2-inch pipeline facility (Canol No. 3) will be at the current commercial value. The exchange of notes dated 26 February 1945, while not applicable to all pipelines involved in this exchange of notes, will be used as a guide for procedures to be followed in determination of current commercial value.

It is hard to determine the precise significance of the curious phrase shall be used as a guide for procedures to be followed. It is not quite clear what is the difference between stating, on the one hand, that the pipelines shall be disposed of at a commercial value to be determined by an appraisal, and on the other, that an appraisal shall be used as a guide for procedures to be followed in determination of current commercial value. Presumably, however, there is some difference, because otherwise there would be no point in having used different words.

15. The final point of interest in the U.S. Revised Draft was that it omitted any specific reference to Canada assuming any obligations which the U.S. government may have in respect to any of the pipelines (specifically, the obligation to move the 4-inch pipeline off the White Pass track). However, the opening statement in the Revised Draft reads as follows:

The United States proposes that Canada accept the transfer and conveyance of all right, title and interest of the United States in and to that portion of the 4-inch petroleum pipeline facility known as Canol No. 2, located within Canada ... etc..

This would appear to imply that Canada will take over any unsatisfied obligations along with title to the line. Moreover the memorandum from the U.S. Embassy dated April 24, 1957 states that the U.S. Army accepts in principle that title to the pipelines be transferred to Canada provided that the proposal can be implemented without cost to the United States. It would appear, therefore, that the U.S. government is still attempting to arrange that the pipelines be transferred to Canada without the U.S. paying the cost of moving the 4-inch pipeline. The significant point to remember, however, is that the U.S. Army has a contract with the White Pass and Yukon Route, entered into in 1947 without the Canadian government being any part of it, which requires that the U.S. government remove the pipeline where it is within 5' of the track when the contract comes to an end. The contract comes to an end on September 30, 1957 unless it is terminated earlier. The position which the Canadian representatives have consistently taken is that the completion of this contract between the U.S. Army and the White Pass is a matter in which Canada has no concern, and is from the U.S. government turning over title of the pipelines to Canada. The U.S. representatives, however, are clearly unwilling to regard it in this light.

Present Position

The question of the position to be taken by Canada in the light of the proposals by the United States is being studied. While definite conclusions have not yet been reached, it seems clear that Canada should not acquiesce in a situation in which the United States appears to be seeking to require the appraisal and full valuation procedure contemplated in Note 710 of June 1942 and at the same time impose substantial new conditions. That Note contemplated a situation in which the pipelines would no longer be required for defence purposes and would therefore be sold, the only recognition of a possible ultimate defence need being the provision that the line should not be dismantled without the approval of the P.J.B.D. Under the current proposal, however, Canada would be required to make the lines available for U.S. defence needs in time of a national emergency. Canada would also, under Clause I of the U.S. Revised Draft, be required to maintain the pipeline facilities, in such manner as to assure their integrity and continued availability for the transportation of petroleum products for the defence needs of the United States and for the mutual defense of the United States and Canada for their remaining economic life which is agreed to be .

Tentatively, and subject to further consideration, it appears that the course to take is to advise the U.S. authorities that, in the view of Canada, the U.S. Draft Proposal does not contemplate the circumstances envisaged in the Note of 1942. If the United States wishes to have additional conditions applied, along the lines of their Revised Draft Proposal, we could indicate that this would require a new agreement. This agreement would provide that title to the pipelines would be transferred to Canada, free of all encumbrances, in return for Canada undertaking that the pipelines would be maintained in continuous operating condition and would be available for U.S. defense needs in time of a national emergency. This new agreement, of course, would refer only to those portions of the pipeline which lie in Canada, and it would appear that the question of the removal of the Alaska portion of the 4-inch pipeline would have to be left to negotiations between the White Pass and the U.S. government.

If, on the other hand, the U.S. government wishes to adhere to the principle of appraisal and disposal at the commercial value, we could indicate that under such circumstances Canada would not bid for the pipelines. The sale would have to be to companies incorporated in Canada and those companies could not be required to undertake obligations vis-à-vis the United States. The only obligation would be that of the Government of Canada, under the 1942 Note, that the lines would not be dismantled without P.J.B.D. approval.

Any views by members of the Advisory Committee on this matter would be appreciated.⁸⁷

R.G. ROBERTSON