A U.S. requirement that American steel be used to update a ferry terminal in B.C. is causing some tension with Canadian officials, potentially threatening the project.

The terminal is on Canadian soil, in Prince Rupert, B.C., but the land is leased to the state of Alaska. Under a 50-year lease signed last year, the state is to rebuild the terminal facilities and docking structure on that land.

The vast majority of funding for the construction work is expected to come from the Federal Highway Administration, which has "Buy America" requirements for steel, iron and manufactured products used in projects it funds. The rest of the funding would come from the state.

The requirement for materials produced in the U.S. can be waived in some circumstances, such as when use of domestic material would raise costs by more than 25 per cent, U.S. products are in limited quantity, or their use "would be inconsistent with the public interest."

In a letter to Alaska Gov. Bill Walker this month, Gary Doer, the Canadian ambassador to the U.S., said applying Buy America restrictions to a project on Canadian soil is unacceptable.

"More broadly, Buy America policies run counter to the economic interests of both the U.S. and Canada, as they deny our companies and communities the clear benefits that arise from our integrated supply chains," Doer wrote.

"In these tough economic times, Canada and Alaska should be working together to make the best use of taxpayer dollars and allow this project to benefit from unfettered access to the North American procurement market."

One option to resolve the issue would be a public interest waiver, Doer said.

Walker responded this week that he didn't consider a waiver request appropriate at this time, but he pledged to work toward a solution in which Alaskans and Canadians could benefit from improved ferry system infrastructure as soon as possible.

The bid opening for the project has been pushed to Jan. 6 to allow more time to reach a possible resolution.

Reuben Yost, a deputy commissioner with the Alaska Department of Transportation, said the department doesn't have experience with the kind of waiver Doer suggested. Before the department would make an application, it would want to hear from the U.S. Transportation Department if such a waiver could be successful, he said.

The Canadian government has threatened to block the project if the state proceeds under the Buy America specifications, Yost said Wednesday.

Asked if the state could lose the lease, Yost said the state isn't contemplating that yet.

The state paid about $3.3 million for the lease, department spokesman Jeremy Woodrow said.

The port at Prince Rupert is part of the Alaska Marine Highway System and serves as a link between Alaska and the Lower 48 that can be more convenient for some travellers to Alaska than the port in Bellingham, Washington.

Yost said he was fairly certain the ferry dock at Prince Rupert, built in the early 1960s, was the last remaining wooden structure within Alaska's ferry system. The others have been modernized.

Patricia Eckert, associate director for international trade within the governor's office, said the state wants to explore

"every option that's out there," but she did not get into what those might be.

"The postponement is evidence that there is still a good talking relationship between Alaska, the U.S. Department of Transportation and Canadian officials," she said.

The project is estimated at between $10 million and $20 million.

While the state could fund the project itself to avoid the federal requirements, Yost said that given Alaska's tight budget situation, that option isn't being seriously considered.

"We're looking for the U.S. government to tell us different ways that we can deal with this problem, because primarily this is a problem between the U.S. government and the Canadian government," he said.