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Cablegate: Atlantic Canada: Energy Topics

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




E.O. 12958: N/A



1. (SBU) SUMMARY: Nova Scotia and Newfoundland have been
working to streamline their regulatory regimes for offshore
energy exploration, but industry calls for combining the two
federal-provincial offshore boards will not be acted upon any
time soon. The Premiers of Nova Scotia and Newfoundland and
Labrador are both pushing hard for a better deal on energy
royalties from offshore production: Paul Martin says he's
considering the plan while Stephen Harper has already said he
agrees with it. The relatively slow pace of exploration
offshore Nova Scotia is dramatically illustrated by the presence
of two jack-up drilling rigs in Halifax harbor. Irving Oil
Company is moving ahead with plans for a liquefied natural gas
terminal near St. John on the Bay of Fundy, action that may
preclude development of an LNG facility in Nova Scotia.
Newfoundland and Labrador's Premier is keen to press ahead with
the Lower Churchill Falls hydroelectric development, but he
would like to minimize Quebec's participation in the project.
New Brunswick Power and the provincial energy ministry have come
under stinging criticism for mishandling the conversion of a
power plant to allow it to burn bitumen-based "orimulsion" fuel
from Venezuela. END SUMMARY.

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2. (SBU) Both Nova Scotia and Newfoundland and Labrador
government officials have said that they are looking for ways to
streamline and make more transparent regulations regarding
offshore energy exploration. Nova Scotia, in particular, is
concerned that the pace of offshore exploration has fallen (see
para 5 below), with a resulting slowdown in support industry
work and revenues. NS Energy Minister Cecil Clarke and his
Deputy Minister Dan McFadyen have come to the conclusion that
they need to do a better job of selling the province's offshore
potential to the energy industry, particularly to U.S. firms.
Clarke plans trips to major offshore energy shows and Washington
to meet with the industry and U.S. regulators to draw attention
to what Clarke call's the province's "steady, go-forward plan"
for offshore development.

3. (SBU) Streamlining, however, will probably not extend to
combining the two federal-provincial offshore energy boards, as
many in the industry have called for. Premier Danny Williams in
St. John's was categorical that his government saw no advantage
to a combined board, something Fred Way, vice-chairman of the
Canada-N-L board, confirmed with CG recently. In practice,
differing rules in the two jurisdictions add inefficiencies to
the hunt for energy in Atlantic Canada's offshore areas, but
neither province wants to suffer the potential job losses in
support industries that combining the boards and rationalizing
their rules would entail. N-L's level of offshore activity is
much higher right now than Nova Scotia's, so St. John's
perceives that it has the most to lose by creating a single
joint offshore board.


4. (U) Newfoundland and Labrador Premier Danny Williams and
his Nova Scotia counterpart John Hamm are leading the charge for
a new deal with Ottawa that would give the provinces a larger
share of the royalties. A key issue will be whether the federal
government "claws back" equalization payments if offshore
royalties rise -- as things currently stand the provinces lose
70 cents of equalization for every additional dollar of offshore
revenue they collect. Williams, in particular, has made
re-negotiation of the Atlantic Accord a top priority and told CG
that he has tried hard to cultivate a relationship with PM Paul
Martin to advance this and other provincial goals. Martin said
recently during a visit to Nova Scotia that he was considering
changing the formula; Conservative Party leader Stephen Harper
beat him to the punch by announcing that he supports increased
royalties with no clawback.


5. (U/PROPIN) One indication of the relatively slow pace of
exploration in Nova Scotia's offshore in recent months is that
there are now two jack-up drilling rigs parked in Halifax harbor
between jobs. GlobalSantaFe's "Galaxy II," designed and built
specifically to work in this region, has been in port since
November 2003 after about five years of drilling in the
relatively shallow waters around Sable Island. Rowan's "Gorilla
V" joined its competitor in the harbor in March. There is
currently only one rig working in Nova Scotia's offshore, but
both GSF and Rowan tell us they expect to be back out by June.
Keeping a rig in port for prolonged periods is a costly
proposition: GSF told us that they spend US$60-70,000 per day
keeping the "Galaxy II" at the dock; when the rig is working it
can be billed at 10 to 15 times that amount.

6. (SBU) As reported in reftel, Irving Oil Ltd. is moving
forward with plans for a liquefied natural gas (LNG) plant near
St. John, New Brunswick, on the Bay of Fundy. Senior NB energy
official recently told CG that Irving delivered its
environmental impact statement for the plant to the NB
government in mid-March, and that the area proposed for the
plant had been set aside for industrial development. Irving,
they said, was "very serious" about LNG. This is probably bad
news for the firm ANE, which is proposing to build an LNG
facility near Port Hawksbury, NS. A Nova Scotia cabinet member
who represents the area told CG in fall 2003 that a cabinet
decision and announcement about the project would be made before
Christmas, but it does not seem to have materialized yet.
COMMENT: There is a good case to be made for one LNG plant in
the area in the medium term, but it is hard to see how two could
make economic and financial sense. Whichever group gets going
first will probably win. END COMMENT.


7. (SBU) Newfoundland and Labrador Premier Danny Williams told
CG during a recent trip to St. John's that his government was
committed to development of the Lower Churchill Falls
hydroelectric power project. Williams clearly would love to
find a way to push the project forward without involving Quebec,
perhaps by cutting a deal directly with U.S. electricity
consumers that would permit financing for the project.
Unfortunately, geography seems to make a deal with N-L's
neighboring province inevitable, since there seems to be no
realistic way to send electricity to the U.S. without using
Quebec's lines or building new ones that pass through the

8. (SBU) COMMENT: The existing deal with Quebec for Upper
Churchill Falls electricity is widely seen in N-L as a textbook
example of poor negotiation, so it is not all that surprising
that Williams would love to gain the near-universal acclaim in
the province that would follow a Lower Churchill deal which
somehow managed to exclude Quebec. Interestingly, one of the
justifications offered for the multi-billion dollar proposed
rail tunnel under the Strait of Belle Isle that would link
Newfoundland to the Labrador mainland is that the tunnel could
be used to house electric transmission lines. END COMMENT.


9. (SBU) And finally, in New Brunswick, a committee of the
legislature is pondering what to do about the orimulsion scandal
after hearing hours of testimony from provincial officials. The
short version of this story is that NB Power, which has worked
with a Venezuelan firm for more than 15 years on ways to use the
bitumen-based fuel and has had one power plant burning
orimulsion for a decade, went ahead with C$600-700 million worth
of renovations on another plant to allow it to burn orimulsion.
Unfortunately, there was apparently nothing but a handshake deal
to provide fuel to the second plant, and the supplier has
recently decided that there are more profitable things to do
with orimulsion than ship it to New Brunswick. Provincial
energy officials told CG that about half of the modifications to
the plant were emissions control and other upgrades that were
needed regardless of the type of fuel, but that about C$350
million would be wasted if indeed the plant had to be converted
to burn something other than orimulsion. News of mismanagement
on such a scale comes at a bad time for the province: the budget
is tight, civil service salaries are frozen and services are
being cut back.


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