Cablegate: Atlantic Canada Energy Update: Energy Exports to the U.S.

DE RUEHHA #0058/01 2711320
P R 281320Z SEP 09




E.O. 12958: N/A


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1. The Atlantic Provinces Economic Council (APEC), a
well-respected regional think tank, focused its latest
analytical report on the importance of the energy sector in
Atlantic Canada. APEC economists concluded that the sector has
grown to become the most important group of industries in
Atlantic Canada, spurred on by strong demand in U.S. markets,
particularly in the northeast. Atlantic Canada's energy exports
to the United States in 2008 were over C$37 billion,
approximately 89 percent of the region's total. The energy
industry continues to make a significant contribution to the
regional economy, especially in Newfoundland-Labrador where
energy developments have brought about the biggest economic
turnaround in Canadian history.

2. For all this activity the APEC economists also see many
challenges in the months and years ahead. Of immediate concern
has been the drop in demand for energy products as a result of
the North American economic downturn. A more serious situation
could develop if potential mega-projects are delayed or
cancelled due to market conditions illustrated already by
Irving's recent announcement that it was shelving its plans to
build a second oil refinery in Saint John, New Brunswick.
Nonetheless, there could be a silver lining ahead in that the
demand for clean energy could spur growth in the region's
renewable energy sector, where wind generated power is taking

3. Following are highlights of the APEC Report entitled,
"Energy Production and Projects in Atlantic Canada."

Energy - Now the Region's Most Important Industry
--------------------------------------------- ----

4. Until recently, fishing and forestry were the main
industries that dominated economic activity in the four
provinces of Atlantic Canada: New Brunswick,
Newfoundland-Labrador, Nova Scotia and Prince Edward Island.
There have been sharp declines in those industries over the
years due to the collapse of fish stocks, competition from
low-wage countries and shifts in demand. Since the mid-1990s,
energy industries have gradually taken over and have now become
the dominant sector in the regional economy. For example, in
2009, energy developments in APEC's regional project inventory,
including those in the proposal stage and those already
underway, total nearly C$42 billon, or approximately 55% of the
total list.

The Economic Impact: A Massive Turnaround for N-L
--------------------------------------------- -----

5. In term of direct employment, the impact of the energy
industry is actually quite small - just over 18,000 jobs or 1.6%
of total employment in Atlantic Canada. However, its economic
influence is much greater as 8% percent of Atlantic Canada's GDP
now comes from the energy sector. Newfoundland-Labrador has
seen the most drastic impact as energy now accounts for 21% of
the province's GDP, compared to Nova Scotia with 4%. In fact,
Newfoundland-Labrador has had the fastest growing economy in
Canada since 2000, with an estimated 70% of this growth
attributed to the mining and oil and gas sectors. To
illustrate, Newfoundland-Labrador's GDP per capita in 2008 was
C$61,938 compared to a Canada-wide average of C$48,106. This
growth has meant that the province has gone from being the
poorest province in Canada to one of the richest, representing
the biggest economic turnaround in Canadian history.

Energy Exports - the Importance of the U.S. Market
--------------------------------------------- -----

6. In terms of exports, energy products are critically
important, accounting for approximately C$42 billon in 2008 or
about 63% of the region's total merchandise exports. Of these
energy exports, 89% are destined for the United States. Crude
and refined oil accounts for 80% of marine tonnage into and out
of seaports in the Atlantic region.

Newfoundland-Labrador Offshore Oil: Where It's All At
--------------------------------------------- ---------

7. The overall investment trend continues to be driven by mega
energy projects, those over C$250 million, with offshore oil
developments in Newfoundland-Labrador the major contributor to
energy investment in Atlantic Canada. There are now three oil

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fields in production off Newfoundland-Labrador which make up 25%
of Canada's crude oil and 12.5% of all oil: Hibernia (1,244
million barrels) where production will be increased and
sustained by development of the Hibernia South field (223
million barrels), Terra Nova (354 million barrels) and White
Rose (305 million barrels). Currently, the expansion of the
White Rose project (an investment of C$3.5 billion) and other
exploration activity (C$1.1. billion) will support growth in the
Newfoundland-Labrador economy until the end of 2011, at which
point construction of the province's fourth offshore oil
project, Hebron, (581 million barrels when completed in 2017) is
anticipated to ramp up at a total cost of C$5 billion. There is
robust exploration activity underway in Newfoundland-Labrador as
well, although there is an ongoing problem with a lack of
deepwater drilling rigs.

Natural Gas: Nova Scotia the Major Player

8. Investment in Nova Scotia's offshore natural gas sector
remains strong which includes the upgrading of the existing
Sable natural gas project (85 billion cubic meters) and
development of the second natural gas project, Deep Panuke, (18
billion cubic meters) which will come on stream in 2010.
Currently Nova Scotia produces approximately 2.5% of all natural
gas in Canada. However, there are questions about the sector's
long-term future. There is no active exploration underway and
the last exploration well in Nova Scotia's offshore was begun in
2005. The result is that gas production could begin its decline
by 2024 when the two projects start to wind down.
Newfoundland-Labrador has significant offshore natural gas
potential with an estimated 306 billion cubic meters for future
development. (FYI: Exploitation of these reserves is not
commercially viable at present because of harsh environmental
conditions and a lack of transportation options. END FYI.)
There is also a producing onshore natural gas project in New
Brunswick - the McCully field - which has an estimated 9 billion
cubic meters of gas. Some is used for local consumption, some
for export to the United States.

LNG: The New Guy on the Block

9. The Canaport LNG regassification plant in Saint John, New
Brunswick, (owners are Irving Oil and Repsol of Spain) began
shipping gas to the U.S. market in July 2009. The plant has a
capacity of 1.2 billion cubic feet per day, equal to
approximately 20% of demand in the U.S. northeast. Gas supplies
are currently coming from Trinidad and Tobago but long term
plans include utilizing offshore natural gas from
Newfoundland-Labrador. Canaport appears to be the only LNG
project that will actually reach production in the near future.
There are other LNG projects under consideration in Atlantic
Canada, but low prices and weak demand for natural gas have
slowed the progress on these proposals. Also there is strong
competition from new sources of energy such as shale gas.

Natural Gas Pipelines: New and Old

10. The Maritimes and Northeast Pipeline (M&NP) transports
Sable natural gas from Nova Scotia's offshore to landfall in
Nova Scotia, over New Brunswick and then across the U.S.-Canada
border to New England. The Canadian portion has a capacity of
440 million cubic feet per day, the U.S. portion, 800 million
cubic feet per day. Tied into the M&NP is the
recently-completed Brunswick Pipeline which provides
connectivity between the Canaport LNG plant in Saint John and
the M&NP. It has a capacity of 850 million cubic feet per day.

Refineries: Expansion Stymied by Economic Forces
--------------------------------------------- ----

11. There are three operating refineries in Atlantic Canada:
Come-by-Chance, Newfoundland-Labrador (Harvest Energy) producing
115,000 barrels per day; Dartmouth, Nova Scotia (Imperial Oil)
producing 89,000 barrels per day; and, Saint John, New Brunswick
(Irving Oil) with daily production of 300,000 barrels of oil per
day, making it Canada's largest refinery. Up until the spring
of 2009, Irving had contemplated building a second refinery at
its Saint John site, but the company recently shelved the plan
because of the current economic downturn in the North American
economy. That development will have an immediate impact on
investment in New Brunswick and comes as a major setback for
those working towards making Saint John an energy hub for the

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Hydroelectricity: Labrador's potential

12. Newfoundland-Labrador's Upper Churchill Falls hydro project
is the second largest in Canada and the ninth largest in the
world, producing 5,428 MW. The province, through its energy
corporation Nalcor, is now targeting the development of the
Lower Churchill River which would see development of two
components: Gull Island (2250 MW) and Muskrat Falls (824 MW).
Construction could begin as early as late 2010 with first
delivery by 2015. Nalcor's proposal is to provide a portion of
the power to the Island of Newfoundland to reduce its dependence
on thermal power generation. However, it would require the
construction of an expensive power line across Labrador and
under the Strait of Belle Island. An equally important focus
will be on selling the power outside the province, which would
require new transmission arrangements either through the
province of Quebec or through an undersea transmission line to
Nova Scotia and New Brunswick.

Renewables: Wind and Other Ideas under Consideration
--------------------------------------------- --

13. While most of the region's energy success has focused on oil
and gas, a new area of interest is on the renewable energy side,
spurred on by the demand for cleaner fuels and the desire for
reduced emissions of greenhouse gases. Wind power in particular
is highly popular in all four provinces, with nine wind farms in
production and two slated to come on stream. One of the largest
projects is in Prince Edward Island where the C$220 million West
Cape Wind Park will eventually produce 99 MW of power, partly
for local consumption, partly for export into New England.
However, several other wind projects have been delayed due to
financing and profitability concerns: five in Nova Scotia and
two in New Brunswick. Tidal power is also a possibility as
there are sites along the shores of the Bay of Fundy in Nova
Scotia and New Brunswick that appear promising. To add to the
mix, there are biomass power projects under consideration.

Nuclear Power: Concern over an Expensive Refurbishment
--------------------------------------------- ----------

14. Nuclear power is also an important component in the
region's energy sector, although the delay in completing the C$1
billion project to refurbish the Point Lepreau nuclear plant in
New Brunswick is causing much concern. While not mentioned in
the APEC report, the province's energy minister recently said
that the project is 16 months behind schedule. The costs
associated with the delay could cripple the provincially-owned
utility and casts doubt on whether the province could proceed
with a much-anticipated second reactor at the site. Half of the
intended 1085 MW from the new reactor could replace coal and oil
fired generation within New Brunswick, Nova Scotia and Prince
Edward Island, so there could be an additional environmental
impact should these plans be shelved.

Electrical Transmission/Energy Corridors

15. Transmission capacity has been recently expanded between New
Brunswick and Maine with 345 kV added in 2007 to handle more
electricity exports. However, additional transmission capacity
will be required throughout the Atlantic region to accommodate
the export of renewables especially from Prince Edward Island.
Meanwhile the New Brunswick and Maine governments and Irving Oil
are examining the feasibility of developing an energy corridor
which would include up to 1,500 MW of electrical transmission
capability, new wind power and a 500 MW natural-gas-fired
co-generation plant. However, there have been no new recent
developments in this project.

Future Developments: The Impact of Recessionary Forces
--------------------------------------------- ---------

16. For all this activity, the APEC economists noted there are
definite challenges surrounding future growth in the energy
sector. First and foremost has been the drop in demand for
energy products as the recession has taken hold, and the
corresponding influence on the price of various energy products.
Already there is evidence that the recession is hampering
future development as illustrated by the decision to shelve a
second refinery in Saint John and delay new LNG plants. APEC
noted that there could be serious challenges emerging if other
potential mega-projects are delayed or cancelled due to a
re-evaluation of market potential. A second challenge to the
industry lies in attracting and retaining highly-skilled
workers. The failure to do so would have a drastic impact for

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some future developments, especially when a concentration of new
project construction comes along in 2015-16.

17. As the economists noted there are positive signs in the
industry outside the traditional oil and gas sector, the most
promising coming from the need to address climate change.
Ending the region's reliance on coal-fired electricity
generation and a greater focus in the U.S. on renewable energy
is prompting all provincial governments to look at new cleaner
energy sources. This new focus could open up considerable new
growth in the region's energy sector and would help in easing
some of the effects of a prolonged negative economic climate.


© Scoop Media

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