It is claimed the Obeids stood to make $100 million from tainted coal deals there.
"I did not instruct the department to create a Mt Penny tenement," Mr Macdonald told the inquiry.
Mr Macdonald's denial came after Mr Watson suggested that such a direction could have had "a bit of a smell about it".
"So am I," Mr Macdonald replied.
"I won't comment," Mr Watson quipped, to laughter from the public gallery.
At one point, he was asked: "Doesn't it seem like it's stacking up here that you had a very, very, very particular interest just in this one tenement, Mt Penny?"
Mr Macdonald also said he could not explain how a confidential government map ended up with the Obeids, but he admitted he had requested the map from the department and received it in June 2008.
"It looks like it's in the possession of the Obeids, doesn't it?" Mr Watson asked.
"It appears so, yes," Mr Macdonald replied.
Mr Macdonald's evidence continues.