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Cablegate: Scene-Setter for Tri- and Bilateral Energy Meetings

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 OTTAWA 001924

SIPDIS

STATE FOR EB/ESC/ISC (MCMANUS AND DUDLEY), WHA/CAN
(RUNNING), OES/EGC (REIFSNYDER AND DEROSA)

USDOC FOR ITA/MAC -- OFFICE OF NAFTA

DOE FOR IA (A/S BAILEY, DAS DOBRIANSKY, PUMPHREY AND
DEUTSCH)

DEPT PASS USTR FOR MELLE AND CHANDLER

DEPT PASS INTERIOR FOR INT'L AFFAIRS

DEPT PASS FERC FOR KEVIN KELLY AND DONALD LEKANG

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG ETRD CA
SUBJECT: SCENE-SETTER FOR TRI- AND BILATERAL ENERGY MEETINGS

REF: (A) Ottawa 1812 (Uranium)

(B) Ottawa 1721 (Hydrogen Economy Partnership)
(C) Ottawa 1578 (NOAA Administrator's visit)
(D) Ottawa 687 (GOC climate change measures)
(E) Ottawa 566 (2002 energy trade data)
(F) Ottawa 503 (Natural gas in North America)
(G) Ottawa 334 (Protecting oil/gas pipelines)
(H) Halifax 52 (Atlantic offshore outlook)
(J) Calgary 44 (Alberta electric restructuring)
(K) 02 Vancouver 1153 (BC energy policy)
(L) 02 Calgary 473 (Alberta and Kyoto)
(M) 02 Ottawa 3205 (Atlantic offshore overview)
(N) 02 Ottawa 2474 (Power transmission barriers)

SUBJECT PARAS

CANADA ENERGY OVERVIEW 3 - 9

PARTNERSHIP FOR THE HYDROGEN ECONOMY 10

SHIFTING TO OILSANDS AND FRONTIERS 11 - 15

OILSANDS: CONTINUING EXPANSION 16 - 19

ARCTIC PIPELINES: APPROACHING REALITY 20 - 21

ELECTRICITY: ONTARIO RESTRUCTURING SKIDS 22 - 25

NUCLEAR: MOVING TOWARD LONG-TERM DISPOSAL 26

CLIMATE CHANGE 27 - 28

1. THIS MESSAGE IS SENSITIVE, BUT UNCLASSIFIED. NOT
FOR DISTRIBUTION OUTSIDE USG CHANNELS.

2. In preparation for the forthcoming meetings of the
North American Energy Working Group (NAEWG) and U.S.-
Canada Energy Consultative Mechanism (ECM) in Ottawa
July 15-17, post provides the following updated
overview of the very dynamic Canadian energy scene.


CANADIAN ENERGY OVERVIEW
------------------------

3. Since the early 1980's, Canada has been the single
largest foreign supplier of energy to the United
States; measured in total energy, it is our number one
energy supplier by a wide margin. Canada is the
world's fifth largest energy producer and a net
exporter of all major energy products including oil and
petroleum products, natural gas, electric power,
uranium, and energy technology and services. The
United States is virtually Canada's sole customer for
crude oil and natural gas exports, which grew steeply
over the past decade and a half, as well as its sole
customer for exports of electric power.

4. Canadian and U.S. government efforts are coordinated
across the full range of energy-related technologies
including climate monitoring, carbon sequestration,
clean coal, hydrogen and nuclear. Canada has been
invited to participate in the Carbon Sequestration
Leadership Forum (CSLF) and the International
Partnership for the Hydrogen Economy (IPHE).

5. OIL: Canada supplies more oil and oil products to
Americans than any other country, including Saudi
Arabia. In 2002 Canada exported approximately 1.4
million barrels per day of crude oil, plus the
equivalent of about 500,000 barrels per day in
petroleum products and partially processed oil. In
2002, imports of Canadian oil and petroleum products
accounted for about about 17 percent of U.S. oil
imports and nearly 10 percent of total U.S. oil demand.

6. GAS: Natural gas makes up the largest part - more
than one-third - of Canada's primary energy production.
In 2002 Canada exported 3.74 trillion cubic feet of
natural gas, making up 93 percent of U.S. gas imports
and 18 percent of total U.S. gas demand. (See ref F
for a Canadian perspective on North American gas supply
issues).

7. ELECTRIC POWER: Canada exported about 35 terawatt-
hours of electric power to the United States in 2002.
Canada's total electricity exports peaked in 2000 and
are now on a declining trend, due to changes in demand
patterns, a lack of capital investment in both the U.S.
and Canadian electric power industries and the
difficulty of building new transmission capacity (see
ref N for analysis).

8. NUCLEAR: Canada is the world's largest uranium
producer (ref A), supplying about one-third of world
production and 20 to 30 percent of U.S. demand. A
Canadian Government-owned firm, AECL, is one of the
world's most active vendors of nuclear reactors, having
supplied units to China and South Korea in the past
decade.

9. For further data on Canadian energy production and
trade, refer to the EIA's Country Analysis Brief on
Canada (www.eia.doe.gov/emeu/cabs/canada.html), or the
GOC's National Energy Board website (www.neb.gc.ca).


INTERNATIONAL PARTNERSHIP FOR THE HYDROGEN ECONOMY
--------------------------------------------- -----

10. Canada has been invited to participate in the IPHE.
Working-level GOC officials appear to be cautiously
interested, but have significant concerns about how IPHE
will relate to the IEA's Hydrogen Coordination Group (ref
B). They also have numerous questions about IPHE's possible
structure and process.


SHIFTING TO OILSANDS AND FRONTIERS
----------------------------------

11. Canada's conventional oil and gas fields are mainly
located in or adjacent to the western province of
Alberta, which is north of Montana. While the cost of
finding new reserves in this region has risen
significantly in recent years, the industry continues
to thrive, notably in the less-exploited northwestern
portion of the Western Canada Sedimentary Basin which
extends into the neighboring province of British
Columbia. A relatively new energy/mining technology,
the extraction of oil from oilsands (vast deposits of
oily dirt) in northern Alberta, became profitable
during the 1990's. Multi-billion-dollar investments
are ongoing in that industry. See paragraphs 16-19
below for details.

12. The ability of supplies to keep up with North
America's natural gas demand has been the subject of
recent controversy in Canada, as it has in the United
States. There is now broad, well-developed support
among stakeholders to construct a pipeline down the
Mackenzie River Valley, which would allow development
of natural gas fields in the Mackenzie River Delta and
Beaufort Sea areas (east of Alaska's North Slope). The
first formal steps toward applying for regulatory
approval for such a pipeline are expected to be taken
in the second half of 2003. While the amount of gas
which will be accessed by this pipeline is a fraction
as large as that in Prudhoe Bay, the barriers to
pipeline development are lower, and the gas could begin
to reach southern markets around 2010.

13. Substantial oil and gas deposits under the
continental shelf off Canada's Atlantic coast entered
commercial production in the past decade, highlighted
by the placement of a large fixed platform on the
"Hibernia" oilfield (east of Newfoundland) in 1997, and
the inauguration of natural gas exports from Nova
Scotia to New England through the Maritimes and
Northeast Pipeline early in 2000.

14. The Hibernia oilfield, which is being exploited by
a consortium of private oil firms (Exxon/Mobil is the
operator), is estimated to contain more than 600
million barrels of oil. Major oil firms are now
beginning production from the nearby "Terra Nova"
oilfield, which has reserves of about 300-400 million
barrels. Conservative estimates put East Coast
discovered reserves of oil in the two billion barrels
range, with possible eventual production rates of up to
one million barrels per day.

15. Offshore natural gas production from the Sable
Island area, east of Nova Scotia, began early in 2000.
Most of this gas is exported to New England - bringing
large-scale natural gas service to these states for the
first time, and helping to stabilize their winter
heating costs. Gas reserves around Sable Island have
been estimated at 3.5 trillion cubic feet, but more
drilling is needed to complete this picture (ref H).
There are much larger gas resources in Newfoundland and
Labrador, but environmental and distance problems will
slow these developments.


OILSANDS: CONTINUING EXPANSION
-------------------------------

16. The economically recoverable oil resources in
Alberta's oilsands are many times larger than the sum
of Canada's other oil reserves. Oilsands (aka
"tarsands" or "heavy oil") are vast deposits of oily
dirt which can be processed (economically at current
oil prices) into "synthetic crude" which can then be
refined in conventional oil refineries. Canadian
authorities estimate reserves in the oilsands to be the
equivalent of 175 billion barrels assuming current
technology and economic conditions, and up to 315
billion barrels with technological advances and some
price increases. Oilsands already account for more
than half of Canada's crude oil output, and for most of
the recent increases in Canada's production.

17. Crude bitumen production from oilsands increased by
about 25 percent in 2002, due to large ongoing capital
investments. The Canadian government has predicted
that if currently planned projects are realized, by
2010 Canada will provide approximately 20.5 percent of
U.S. oil imports and 14.1 percent of total U.S. oil
supply. The Alberta Energy and Utilities Board
projects that synthetic crude oil production from
Alberta's oilsands will expand by 237 percent from 2002
to 2012.

18. During the past year, first Oil and Gas Journal and
subsequently the U.S. Energy Information Administration
began to recognize Canada's oil sands as "proven
reserves" -- a decision which dramatically increases
Canada's petroleum reserves on paper, to about 180
billion barrels, making Canada the world's second-
largest reserve holder after Saudi Arabia. While the
validity of counting the oilsands as "proven reserves"
has been subject to some ongoing controversy (notably
following a critical item by Jeff Gerth in the New York
Times on June 18), their economic reality is affirmed
by the many billions in actual capital investment which
they are attracting and the resulting current increases
in oil output.

19. COMMENT: There is growing confidence among
Canadian stakeholders and analysts that this resource
imposes an effective limit on the price which North
America must pay for overseas oil in the long run,
absent severe foreign supply disruptions. Embassy
shares this view. END COMMENT.


ARCTIC PIPELINES: MACKENZIE LINE CLOSER TO REALITY
--------------------------------------------- ------

20. IN RECENT MONTHS, STAKEHOLDERS IN AN ANTICIPATED NATURAL
GAS PIPELINE DOWN THE MACKENZIE RIVER VALLEY IN NORTHWESTERN
CANADA HAVE TAKEN FURTHER STEPS TO PAVE THE ROAD FOR A
FORMAL DEVELOPMENT PROPOSAL. TRANSCANADA PIPELINES (TCPL),
ONE OF THE WORLD'S LARGEST PIPELINE OPERATORS, SIGNED A DEAL
IN JUNE TO PROVIDE FINANCING TO ABORIGINAL PIPELINE GROUP
(APG), ENABLING APG TO TAKE A ONE-THIRD OWNERSHIP SHARE IN
THE PIPELINE. THE MAIN PRODUCING PARTNER IS IMPERIAL OIL,
THE CANADIAN SUBSIDIARY OF EXXON. AN INITIAL APPLICATION TO
REGULATORS IS EXPECTED IN THE FALL OF 2003.

21. STAKEHOLDERS LESS AND LESS VIEW THE MACKENZIE LINE AND
ANOTHER, LARGER PIPELINE TO ALASKA'S PRUDHOE BAY AS BEING
INCOMPATIBLE. THIS IS BECAUSE IT APPEARS INCREASINGLY
LIKELY THAT THE SMALLER AND SHORTER MACKENZIE LINE WILL BE
CONSTRUCTED FIRST, AND BECAUSE THERE IS INCREASING CONCERN
THAT NORTH AMERICA'S DEMAND FOR NATURAL GAS MAY OUTSTRIP
SUPPLIES OVER THE COMING DECADE (REF F). CANADIAN
OBJECTIONS TO POSSIBLE FISCAL INCENTIVES TO SUPPORT THE
ALASKA PIPELINE FOCUS ON THE POSSIBLE MARKET-DISTORTING
EFFECTS OF SUCH SUBSIDIES - PARTICULARLY IF THEY GO BEYOND
THE SCOPE OF MEASURES TAKEN TO ENCOURAGE INVESTMENT IN OTHER
GAS PRODUCING REGIONS.


ELECTRICITY: RESTRUCTURING SKIDS IN ONTARIO
--------------------------------------------

22. Electric power is primarily under provincial
jurisdiction in Canada, and is traditionally dominated by
provincial government-owned firms. Several provinces have
taken steps to restructure their electricity sectors on
competitive principles. Alberta has achieved a degree of
competition at both wholesale and retail levels which has
been characterized as a "messy success" (ref J).

23. In Ontario in recent years, the provincial monopoly
utility was split up into generation, transmission and
distribution components, and some competition was introduced
at the retail level. However, in April 2002 a planned
initial public offering of the provincial government-owned
transmission grid operator, Hydro One, was blocked by a
court ruling. Transmission grid issues quickly became
politicized, particularly when power prices rose during the
peak summer period. In November 2002, the Ontario
government froze retail power rates at 4.3 cents/KWH for
most customers until 2006. Since then, the government has
struggled to increase generating capacity with little help
from private investment. Re-starting mothballed nuclear
plants is crucial to its survival strategy, but the first re-
starts - expected this summer and fall - have been delayed.

24. Canada's National Energy Board (NEB) predicts that
domestic electricity demand will grow slightly faster than
supply through 2025, causing electricity exports to the
United States to decline significantly from current levels
in the long run. This is driven by the trend for generating
facilities to be located closer to end users. One major
reason for this is the difficulty of constructing new
transmission capacity due to a range of concerns including
environmental/agricultural opposition, regulatory hurdles,
and uncertainty associated with the evolving market
environment for electric power. Another is the growing
availability of natural gas and the efficiency of gas-driven
generating technology.

25. Canada still has abundant undeveloped hydroelectric
potential, but these resources tend to be located far from
densely populated markets. Provinces with large undeveloped
sites include Newfoundland and Labrador (Churchill Falls
II), Quebec (Great Whale) and Manitoba (Nelson River).
There is significant potential for cogeneration of electric
power in oilsands operations, but here as well, it will be
difficult for the resulting power to reach major markets
unless construction of long-distance power lines becomes
easier.


NUCLEAR: MOVING FORWARD ON LONG-TERM DISPOSAL
--------------------------------------------- -

26. Like the United States, Canada has no permanent disposal
facility for its nuclear waste, which is currently stored at
reactor sites. As in the U.S., proposals to move this waste
to any other site(s) provoke strong local resistance.
During 2002, Canada passed legislation which creates a Waste
Management Organization, funded by nuclear energy firms, to
develop a long-term approach to storing radioactive waste.
The GOC plans to make a decision by 2006 in favor of one of
the three major options (deep geological storage,
centralized surface/subsurface, or continued storage at
reactor sites).


CLIMATE CHANGE
--------------

27. In the spring of 2002 the USG and GOC announced a more
concerted effort to coordinate our climate change programs,
with a particular focus on energy, especially energy
efficiency, clean energy, clean coal, renewable and
alternative energy and carbon sequestration. At Prime
Minister Chretien's initiative, Canada formally ratified the
Kyoto Accord at the end of 2002, despite vocal criticism
from provincial governments and industries (with Alberta and
the oil and gas sector leading the way - ref L). Critics
were concerned that the burden of compliance would fall
disproportionately on certain regions/industries and also
that compliance would place Canada's economy at a lasting
competitive disadvantage vis--vis the United States.

28. In its spring 2003 budget, the GOC committed C$1.5
billion (about US$1 billion) over five years directly to
achieving greenhouse gas emission reductions, plus modest
additional funds for research and long-term technology
development. GOC officials are now engaged in determining
what process will be used to allocate this spending.

CELLUCCI

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