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'There needs to be a new chapter. … We’re tired of handouts,' says Chief Charles Weasel Head of the Blood Tribe treaty 7, seen here in Calgary, Feb. 29, 2012.Todd Korol for The Globe and Mail

The ground under Alberta is stuffed with gooey bitumen that's good for little more than waterproofing birch-bark canoes – until it's refined into valuable products like diesel, which is why the province wants more upgraders and refineries built within its borders.

Yet a proposal by Alberta's first nations for a $6.6-billion facility, which would boost the province's refining capacity while helping pull the bands out of poverty, has been rejected by the provincial government.

Alberta initially liked the project because of the benefits that would have flowed to first nations in the province, but ultimately decided it didn't make economic sense. In a meeting Feb. 8 the province said it couldn't commit to the project, prompting some of the chiefs representing the proposed Alberta First Nations Energy Centre to walk out in anger.

Alberta Liberal energy critic Kent Hehr has asked the ethics commissioner to investigate "the sudden reversal" in the Alberta government's involvement in the project, according to the party's website.

To Alberta's first nations – and energy industry heavyweight Eric Newell, a current Nexen Inc. board member and former chief executive of Syncrude Canada Ltd. who signed on as the project's chair – the multibillion-dollar project is about more than the economics of making jet fuel and gasoline.

The grand chiefs argue AFNEC would reduce poverty and enable higher education for its expanding population, while aligning the bands with the industry and province's oil sands objectives. The project's proponents also calculate it would put $3.6-billion in the hands of Alberta's first nations over 30 years.

For AFNEC to work, it needed Alberta to send about 93,000 barrels of bitumen per day to its facility for refining. (The province has a royalty program that takes bitumen-in-kind rather than cash payments. AFNEC wanted a slice of that.) The proponents of the project argued they could secure outside funding if they could show potential partners they had a big customer already on board.

Multibillion-dollar refineries take years to build, however, and, like any business, must be competitive. The province has already committed bitumen to North West Upgrading Inc., a merchant upgrader that sank about $300-million into engineering design before striking a deal with the government. Further, that project had regulatory approvals in hand, a plot of land, and a big industry partner. AFNEC, on the other hand, has spent a fraction of that, is still negotiating with potential partners in China and India, has yet to buy a slice of land for its facility and is without regulatory approval.

"This deal needs to go back to getting a third-party [partner] getting more front-end funding and project work done, and then bring in the province," said Mike Deising, spokesman for the department of Intergovernmental, International, and Aboriginal Relations. "From our perspective, this deal is off the table and we're no longer entertaining it."

The process that eventually led to the AFNEC proposal started back in 2006, after discussions among some of the chiefs on problems facing the bands, said Treaty 7 Grand Chief Charles Weaselhead. The chiefs decided the first nations needed to seek more business opportunities as well as a chance to "enjoy some of the wealth that Alberta has created through the oil sands and the oil boom," Mr. Weaselhead said.

"There needs to be a new chapter," he said. "In order for us to succeed and be sustainable as first nations communities, we need to take a look at further development of our human resources in the area of education and economic development in regards to providing our own source of revenue. … We're tired of handouts."

The chiefs determined that an upgrader/refinery would strengthen their economic position, which could then help address social problems such as housing, education and addiction. The first nations joined hands with Teedrum Inc., a group of private investors, to form the Alberta First Nations Energy Centre.

Mr. Newell, who resigned as AFNEC chair last month after negotiations with the government crumbled, said he originally signed on – at no salary – because "I saw this as a great way to … bring first nations people to the table as a full partner in resource development."

Not everyone agrees. Many observers back the Conservative government's decision that AFNEC was too risky. The so-called "double dividend" of linking oil sands development to the economic prosperity of first nations does not trump the potential risk to taxpayers, experts say.

Alberta's upgraders and refineries have to compete against heavy-oil-hungry American facilities that are running under capacity. And that means AFNEC would likely need "some kind of subsidy," said Richard Dixon, executive director at the Alberta School of Business at the University of Alberta.

"So you're setting up the wrong kind of economic message," Mr. Dixon said. "Yes we want to get that double dividend, but at the same time, at what cost?"

The province's first nations have built a number of smaller companies within the energy industry, and Mr. Dixon thinks this is the way to go. "They should build on that strength. There are a lot of first nations [in northern Alberta]with wonderful entrepreneurial spirit."

Bob Schulz, a professor of strategic management at Haskayne School of Business at the University of Calgary, doubts whether even North West's upgrader and refinery will be economically viable, and so he finds it reasonable that Alberta rejected a second project.

Further, while AFNEC would have created thousands of jobs during construction, that would dwindle to a couple of hundred once the facility was running – a small payoff, he noted.

"It is good that the first nations are thinking about long-term employment and have the support of Eric Newell – he has a lot of respect in the industry and he's trying to help – but there's a lot of risk here."