Cablegate: November 8 Meeting of the North American Energy

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. (U) Sensitive but unclassified. Not for distribution
outside USG channels.

2. (SBU) Summary: Representatives of the United States,
Canada and Mexico attended the ninth meeting of the North
American Energy Working Group (NAEWG-9) on November 8 in
Montreal, reviewing a broad range of common energy issues and
cooperative projects under the umbrella of the Security and
Prosperity Partnership (SPP) for North America. The meeting
covered diverse issues such as post-hurricane energy
supplies, global energy markets, and natural gas issues. In
addition, NAEWG's Experts Groups reported on their progress
on topics such as regulatory frameworks, hydrocarbons, oil
sands development, electricity, nuclear power, energy
efficiency, science and technology, natural gas
interconnections, and energy data exchange. In addition, the
Canadian head of delegation made a presentation to the North
American Steel Trade Committee, joined by the U.S. and
Mexican delegation heads (the Steel Trade Committee
coincidentally also met in Montreal on November 8). The
NAEWG members also discussed plans for the World Energy
Council North American Forum. The U.S. delegation was led by
Karen Harbert, Assistant Secretary of Energy for Policy and
International Affairs, and included EB, WHA, and Emboff.
Howard Brown, Assistant Deputy Minister in the Energy Policy
Sector, Natural Resources Canada, led the Canadian
delegation, which also included representatives of Foreign
Affairs Canada and the National Energy Board. The Mexican
delegation was led by Assistant Secretary Salvador Beltran
del Rio M., Office of International Affairs, Secretariat of
Energy and the National Commission for Energy Savings. End

Post-Hurricane Energy Supplies

3. (SBU) The United States thanked Canada and Mexico for
their assistance after Hurricanes Rita and Katrina. The
United States reported that about half of oil and gas
refining and production on the Gulf Coast is still shut-in,
but a surplus of refined products in Europe has helped
stabilize the market. Hurricane Rita was more damaging to
U.S. energy infrastructure than Hurricane Katrina, and full
production in the affected areas will not resume until next
March at the earliest. The most pressing need in the Gulf is
for skilled workers and new rigs to replace those lost or
damaged. Loans from the U.S. Strategic Petroleum Reserve are
still available to refiners who are facing a loss of supply
from the Gulf Coast. Largely as a result of the hurricanes,
in North America natural gas prices are about 30-40 percent
higher than a year ago, heating oil is about 30 percent
higher, and electricity 3-5 percent higher.

4. (SBU) Mexico reported that in addition to lost production
from Hurricane Wilma, six large refineries on the U.S. Gulf
Coast that process Mexican petroleum still have not resumed
full operations. This has effectively shut in a considerable
amount of Mexico's production.

Global Markets and Oil Prices

5. (SBU) Canada reported that oil prices appear to have
peaked for now, but may continue to move up and down in a
wide band. The IEA forecasts a significant drop in prices,
but the International Monetary Fund (IMF) contends that price
changes are in line with market fundamentals (i.e., factoring
in significant political risk). Short-term price
inelasticity has greatly contributed to unstable prices, but
even if petroleum returns to $30-35 per barrel, the price
would still be 50 percent higher than in the 1990s. There is
concern that high oil prices could further strengthen the
Canadian dollar against the U.S. dollar, with negative
consequences for much of the Canadian economy. Canada
commented that for both developed and developing economies,
the main focus should be on increasing energy efficiency,
which benefits poor people more proportionally because they
have to spend less of their income on energy as efficiency
increases. The United States noted that the Joint Oil Data
Initiative (JODI) will create greater transparency in oil
markets and will allow more informed pricing decisions, which
should contribute to market stability.

Natural Gas Issues

6. (SBU) Mexico noted that its power industry is the
country's largest gas consumer, accounting for 61 percent of
consumption (not including natural gas used in oil production
and refining). Mexico is exploring new means of electrical
generation, but high natural gas prices are impeding an
expansion of gas powered plants. Currently, imports account
for about 19 percent of Mexico's gas consumption.

7. (SBU) Canada noted that in the integrated U.S. and
Canadian natural gas market, demand is slightly down this
year and production is slightly up, although many more wells
have been drilled in 2005 than 2004. Canadian storage
supplies are at about 480 billion cubic feet, above the
five-year average. Forecasts in Canada are for a price of
about C$11.80 per gigajoule (C$1 equals $.84 U.S.), although
much depends on the severity of winter weather.

8. (SBU) In the United States, natural gas demand is down
slightly this year, but supplies are also down and prices are
considerably higher than last year. The United States also
has ample natural gas in storage, about 3.2 trillion cubic
feet, higher than last year's pre-winter levels. U.S.
liquefied natural gas terminals are only operating at about
50 percent of capacity, primarily because supply is locked up
in long-term contracts, and there have been delays in
anticipated new supplies from Trinidad. Canadian and U.S.
figures on bilateral gas trade differ widely, and the two
countries agreed to examine the data more closely.

Regulatory Experts Group

9. (SBU) The Regulatory Experts Group meets three times a
year to discuss cross-border energy regulation issues in the
United States, Canada and Mexico. Canada reported that the
work of the group is continuing, and that the benefits
include updates on regulations, policies, the status of
projects, operational and market issues, and staff exchanges.
Two key projects that are under active discussion by the
group are the Alaska and Mackenzie natural gas pipelines.

Hydrocarbons Working Group

10. (SBU) The Hydrocarbons Working Group, a new group
proposed and led by Mexico, is planning a series of workshops
by June 2006 which will focus on three topics: exploration
and exploitation of deepwater reserves, production from
marginal fields, and commercialization of heavy oils, a
growth area for Mexico. In addition, the group discussed
adding a fourth topic, methane hydrates, with Canada
volunteering to host a workshop next year. A workshop on
deepwater exploration will be hosted by Florida International
University, the University of Texas, and the Baker Institute
at Rice University in January 2006.

Oil Sands Experts Group

11. (SBU) Canada will host a workshop in January 2006, and
issue a report on mid- to long-term development prospects in
the Athabasca Oil Sands, which contain proven reserves of 175
billion barrels of oil. In addition, the Experts Group will
produce a report in 2007 regarding carbon dioxide (CO2)
recovery in the oil sands. The United States commented that
the two countries will have to initiate discussions on
refining capacity in the oil sands, as it has the potential
to greatly constrain production. Canada responded that
currently, the most severe limitation on oil sands production
is the labor shortage in the Fort McMurray area. The United
States re-emphasized that refining is an important topic on
which the hydrocarbon and oil sands groups should cooperate.

12. (SBU) Regarding energy consumption and use in the oil
sands, Canada noted that, contrary to industry speculation,
the oil sands will probably not use all of the natural gas
from the proposed Mackenzie gas pipeline. Petroleum coke is
a byproduct of bitumen (oil sands) refining, and gasification
of the coke is being explored as a source of both energy and
hydrogen, as well as an opportunity for CO2 sequestration.
Although the Alberta government remains opposed to a proposal
for a nuclear power plant to provide electricity for oil
sands production, such a plant would provide adequate energy
as well as hydrogen, and produce no CO2 emissions. The oil
sands, Canada noted, are at least 30 years away from full
production potential.

Electricity Experts Group

13. (SBU) The U.S.-Canada Bilateral Electric Reliability
Oversight Group held a workshop on June 22, with Mexico as an
observer, to discuss implementation of a cross-border
Electricity Reliability Organization (ERO). At the workshop,
which was a deliverable under the SPP, the U.S. and Canada
agreed to the principles which will guide an ERO, and will
follow up with an additional workshop in San Diego on cross
border electricity infrastructure in the first quarter of
2006, in which Mexico will also participate as an observer.
Further SPP deliverables that the group is engaged in are
enhanced cooperation on renewable energy, and development of
a website to serve as a clearinghouse for electricity

Nuclear Energy Experts Group

14. (SBU) The United States commented that all three
countries appear to be moving in the direction of a nuclear
resurgence. The Experts Group is proceeding with three
workshops: plant materials, integrity and re-licensing;
economic analysis of building new plants; and development of
nuclear work force and nuclear education. Canada noted that
its Nuclear Waste Management Organization (NWMO), after
several years of study, has recommended deep geologic
sequestration of nuclear waste in Canada. The NWMO further
recommended that the storage not be irrevocable, so that
waste material may be retrieved for further processing should
there be future breakthroughs in processing technology.
Mexico said that it is developing a program to engage the
public on nuclear issues, and that it is considering two
additional reactors to complement the relatively new units at
its Laguna Verde facility.

Energy Efficiency Experts Group

15. (SBU) Mexico reported that the group is planning
workshops on standby power and vehicle transportation
technology. Mexico is also launching a national campaign,
"Vive con Energia," or Live with Energy, to raise public
awareness of energy efficiency. Canada noted that it is
instituting rebates for energy efficiency and instituting new
automobile efficiency standards. In addition, Canada is
finalizing its long-awaited Large Final Emitters program, a
key part of its greenhouse gas reduction strategy, which will
require a 12 percent reduction in emissions per output of
selected industries. The United States advised that under
the Energy Policy Act, it is adopting new standards for
residential furnaces, transformers, and commercial energy
use, among other areas. The United States invited the other
two countries to participate in the workshops designed to
determine those standards.

Science and Technology (S&T) Experts Group

16. (SBU) The S&T Experts Group has pursued several
different initiatives, including the Las Casa Nueva project
for affordable, energy efficient housing. Other possible
areas for collaboration include hydrogen, biofuels, and wind
power. Canada noted that the model for the S&T group should
be the Generation-IV nuclear project, in which member
countries are free to collaboratively pursue whatever
technologies they believe are the most promising, with
whichever partners they wish. For Canada, the number one S&T
priority is clean coal, which includes a variety of
technologies such as integrated combined cycle gasification,
as well as oxyfuel. The United States commented that the
group should consider whether there are areas of S&T research
that are uniquely suited to the region, and concentrate on
those issues.

Natural Gas Trade and Interconnections Experts Group
--------------------------------------------- -------

17. (SBU) Mexico reported that the Experts Group's
integrated report, North America Natural Gas Vision, has been
completed in Spanish, English, and French. The next
milestone will be a workshop in June 2006 to discuss market
issues. The group is also working on a webpage for the
"SPP.GOV" site that would allow for posting of regulatory
information on natural gas issues.

Energy Picture Experts Group (Data Exchange)

18. (SBU) The Untied States reported that an updated
side-by-side data compendium, North America: The Energy
Picture II, is on track for publication in January 2006. The
group also discussed joint modeling opportunities.

North American Steel Trade Committee

19. (SBU) The heads of delegation briefly attended the
meeting of the North American Steel Trade Committee (NASTC),
which took place in Montreal on the same day as the NAEWG
meeting. The Canadian principal briefed the NASTC members on
NAEWG activities, noting that stakeholder input is crucial to
NAEWG's activities. At the session, the U.S. and Mexican
principals were available for questions. The reliability and
cost competitiveness of energy is a key concern of the steel
industry in North America, where natural gas and electricity
prices are substantially higher than in other parts of the

World Energy Council North American Forum

20. (SBU) The U.S., Canadian, and Mexican member
organizations of the World Energy Council are hosting a joint
North American Energy Forum in Washington, November 20-22.
The Forum will provide an opportunity for extensive
interaction with the private sector, drawing major energy
actors from throughout the continent. The United States
suggested that for the Forum and all future events, the three
countries should draft common speaking notes so that
principals can deliver a consistent message regarding NAEWG.

21. (U) This message has been cleared by the Department of

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