My bad - the hgrc file should have the sections headers:
[ui] ssh = /usr/bin/ssh -i /home/me/.ssh/id_rsa-xyz -p 1234 [paths] default = ssh://myuser@barney.example.com//hgroot/project1
With that change, it gives me the error:
remote: abort: requirement 'fncache' not supported! abort: no suitable response from remote hg!
Which is because the remote machine only has a pre-1.1 version of Mercurial.