ALBERTA ENERGY LEADERS ON GOOD NEWS, WORRIES

UNCLAS SECTION 01 OF 03 OTTAWA 001149

SIPDIS

SENSITIVE

STATE FOR P STAFF (HAMMER),E STAFF (PENCE) EB (A/S WAYNE
AND DAS BORG),EB/ESC (MCMANUS AND DUDLEY),WHA/CAN
(MASON AND RUNNING),OES/EGC (REIFSNYDER AND DEROSA)

EMBASSY MEXICO CITY FOR ROSENMAN

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DOE FOR S STAFF (HUDOME) AND I/A (A/S BAILEY AND KATHLEEN
DEUTSCH)

STATE PLEASE PASS FERC FOR CHAIRMAN WOOD, KEVIN KELLY AND
DONALD LEKANG


E.O. 12958: N/A
TAGS: ENRG EPET ECON SENV CA
SUBJECT: ALBERTA ENERGY LEADERS ON GOOD NEWS, WORRIES


SENSITIVE BUT UNCLASSIFIED - NOT FOR RELEASE OUTSIDE USG.


1. (SBU) SUMMARY AND INTRODUCTION. ALBERTA ENERGY
SECTOR LEADERS SUPPORT U.S. GOALS IN IRAQ, ARE VERY
PLEASED THE U.S. ENERGY INFORMATION ADMINISTRATION (EIA)
HAS BEGUN TO TREAT OIL SANDS AS PROVEN RESERVES AND ARE
CONCERNED THAT NORTH AMERICA IS BECOMING OVERLY RELIANT
ON NATURAL GAS FOR ELECTRICITY GENERATION. ALTHOUGH
HARDLY SURPRISING IN U.S.-FRIENDLY ALBERTA, DURING
MEETINGS THE WEEK OF APRIL 7, CALGARY CG CHAVERA AND
EMBASSY ENERGY OFFICER ALL BUT HAD TO CUT OFF PRO-
WASHINGTON, ANTI-OTTAWA TIRADES BY BOTH PROVINCIAL
MINISTERS AND ENERGY EXECUTIVES, WHO NOT ONLY BROADLY
SUPPORT U.S. POLICY IN IRAQ, BUT EVEN MORE INTENSELY
RESENT THE FACT THAT "THEIR MINISTER" (FEDERAL NATURAL
RESOURCES MINISTER HERB DHALIWAL) CALLED THE PRESIDENT A
"FAILED STATESMAN" AND WAS NOT REBUKED BY PRIME MINISTER
CHRETIEN. CG AND ENERGY OFFICER ASSURED THEM THAT WHILE
THE DISAPPOINTMENT AMBASSADOR CELLUCCI EXPRESSED WITH THE
GOC OVER IRAQ POLICY IS VERY REAL AND OUR DISMAY AT
DHALIWAL'S STATEMENT IS DEEP, OUR FRUSTRATION HAS NOTHING
TO DO WITH OUR ENERGY RELATIONSHIP, WHICH WE VALUE
GREATLY.


2. (SBU) A NUMBER OF THESE SAME INTERLOCUTORS NOTED HOW
PLEASED THEY WERE BY EIA'S NEW DATA SHOWING CANADA WITH
180 BILLION BARRELS OF TOTAL PROVEN RESERVES, SECOND ONLY
TO SAUDI ARABIA AND WELL AHEAD OF NUMBER THREE IRAQ. AT
THE SAME TIME THEY RAISED CONCERNS ABOUT FUTURE PIPELINE
AND REFINERY CAPACITY FOR HEAVY CRUDE, ESPECIALLY AS OIL
SANDS OUTPUT NEARS ONE MILLION BARRELS PER DAY (BPD) AND
STARTS ON WHAT IS EXPECTED TO BE A 5-10 YEAR ROAD TO THE
SECOND MILLION. WE ALSO HEARD GREAT ENTHUSIASM FOR
BRINGING THE ARCTIC GAS RESERVES OF CANADA'S MACKENZIE
BASIN (FIRST) AND THEN ALASKA'S PRUDHOE BAY TO MARKET,
COUPLED WITH CONCERN THAT EVEN THESE LARGE DEPOSITS WILL
ONLY HELP NORTH AMERICA TO KEEP TREADING WATER ON GAS
SUPPLIES AS WE BUILD MORE AND MORE GAS-FIRED GENERATION.
THE ALBERTA LEADERSHIP ALSO CONTINUES TO HAVE CLIMATE
CHANGE AND CANADA'S KYOTO IMPLEMENTATION PLANS MUCH ON
ITS MINDS, BUT SEEMS NOW TO FEEL THAT THE "DAMAGE COMING
FROM OTTAWA" CAN BE MANAGED. PROVINCIAL ENERGY MINISTER
MURRAY SMITH LOOKS FORWARD TO A PLANNED EARLY JUNE TRIP
TO WASHINGTON AT WHICH TIME HE HOPES TO MEET WITH U/S
LARSON AND A/S WAYNE. WE RECOMMEND GRANTING SMITH AT
LEAST ONE OF THESE MEETINGS AS HE IS VERY WELL-INFORMED
AND INFLUENTIAL. END SUMMARY AND INTRODUCTION.

OIL SANDS: GOOD NEWS AND FUTURE WORRIES
--------------


3. (SBU) MINISTER SMITH, CANADIAN ASSOCIATION OF
PETROLEUM PRODUCERS (CAPP) PRESIDENT PIERRE Alvarez_ AND
EXECUTIVES FROM BP AND PETROCANADA WERE UNITED IN
EXPRESSING PLEASURE AND APPRECIATE FOR U.S. EIA'S RECENT
DECISION TO REFERENCE THE "OIL AND GAS JOURNAL'S"
TREATMENT OF OIL SANDS AS "PROVEN RESERVES" ON THE ORDER
OF 175 BILLION BARRELS. THEY HAILED THIS AS A BIG WIN
FOR THE OIL SANDS INVESTMENT CLIMATE AND AT LEAST A
SYMBOLIC VICTORY FOR NORTH AMERICAN ENERGY SECURITY. AT
THE SAME TIME, BP CANADA CEO TIM FAITHFUL AND OTHERS
NOTED THAT WITH MOST OIL SANDS PROJECTS RUNNING WELL OVER
BUDGET THAT THE INDUSTRY IS GOING THROUGH A TOUGH
DIGESTION PROBLEM AS IT APPROACHES ONE MILLION BPD IN
OUTPUT. MINISTER SMITH, CAPP OFFICIALS AND FAITHFUL ALL
NOTED THAT THE STRAINS ON LABOR SUPPLIES WILL BECOME
GREATER IN THE NEXT FIVE OR TEN YEARS AS OIL SANDS OUTPUT
REACHES TWO MILLION BPD. SOME ALSO EXPRESSED CONCERN
THAT WITH NO NEW REFINERIES BUILT IN NORTH AMERICA IN
DECADES THAT OUR CAPACITY TO SHIP AND REFINE ALL THIS
HEAVY CRUDE WILL BE CHALLENGED. SOME NOTED THAT WITH
MORE BLENDS OF EVER CLEANER GASOLINE REQUIRED, THAT
LOOKING STRATEGICALLY AT PIPELINE AND REFINING CAPACITY
WILL BE NEEDED FOR INCREASING OIL SANDS PRODUCTION IN THE
FUTURE, ESPECIALLY FURTHER OUT AS IT MOVES BEYOND TWO
MILLION BPD. IN THEIR VIEW, COORDINATED
ENVIRONMENTAL/AIR QUALITY POLICIES WILL BE INCREASINGLY
IMPORTANT AS WE DEAL WITH RISING OUTPUT AND USE OF HEAVY
CRUDE.


4. (SBU) SMITH AND OTHERS ALSO WANT TO MAKE SURE THAT
THE USG IS AWARE THAT OVER TIME THERE WILL BE TREMENDOUS
ELECTRICITY CO-GENERATION AVAILABLE AS A RESULT OF THE
HUGE THERMAL NEEDS OF THE OIL SANDS REFINING PROCESS.
THIS COULD OVER TIME MAKE SIGNIFICANT NEW ELECTRICITY
EXPORTS AVAILABLE TO THE UNITED STATES, BUT AT LEAST FOR
NOW THERE IS LIMITED CAPACITY TO MOVE THIS WEST AND THEN
SOUTH THROUGH BRITISH COLUMBIA AND ON TO OUR PACIFIC
NORTHWEST. THERE IS ALMOST NO CAPACITY TO MOVE IT SOUTH
INTO THE U.S. ROCKY MOUNTAIN STATES AND MARKETS FURTHER
AFIELD. ALBERTANS SEE THIS AS A PROMISING ISSUE FOR
FUTURE PROVINCIAL-STATE, WASHINGTON-OTTAWA AND REGULATOR
TO REGULATOR COORDINATION.

ARCTIC GAS IS GREAT, BUT WHERE IS THE REST?
--------------


5. (SBU) AS ALWAYS, ALBERTANS IN THE ENERGY SECTOR ARE
FOLLOWING ARCTIC GAS DEVELOPMENTS, INCLUDING ON THE
LEGISLATIVE FRONT IN WASHINGTON, VERY CLOSELY. THE
WIDELY HELD VIEW IN ALBERTA THAT THE SMALLER MACKENZIE
LINE WILL BEAT THE MAMMOTH PRUDHOE BAY PROJECT TO THE
PERMITTING PROCESS AND TO MARKET IS VIEWED AS GOOD NEWS
FOR CANADA AND FOR BILATERAL RELATIONS. ALBERTA, AS A
TRANSIT POINT FOR ANY PRUDHOE BAY LINE, LOOKS FORWARD TO
SEEING THAT PROJECT BUILT AS WELL, BUT OFFICIALS SUCH AS
SMITH AND SENIOR INDUSTRY EXECUTIVES REMAIN CONCERNED
THAT WASHINGTON NOT APPROVE A FISCAL REGIME FOR PRUDHOE
BAY GAS THAT CREATES INVESTMENT DISINCENTIVES FOR OTHER
BASINS OR THAT ARTIFICIALLY CREATES A HUGE, SUDDEN JUMP
IN SUPPLY. THE KEY TO MOLLIFYING AT LEAST CANADIAN
ENERGY ELITES IN ALBERTA SEEMS TO LIE IN FINDING A SET OF
FISCAL AND REGULATORY MEASURES FOR PRUDHOE BAY THAT D0ES
NOT APPEAR TO DEPART TOO SEVERELY FROM THOSE DEPLOYED
ELSEWHERE. THUS, LOAN GUARANTEES AND ACCELERATED
DEPRECIATION SEEM ACCEPTABLE, WHILE AT LEAST LAST YEAR'S
VERSION OF A PRICE FLOOR OR GUARANTEE CAUSES OFFENSE.


6. (SBU) AT THE SAME TIME AS THESE SOPHISTICATED
OBSERVERS WORRY ABOUT AN OVERLY-GENEROUS PRUDHOE REGIME
BRINGING TOO MUCH GAS ON-LINE TOO SUDDENLY AND WITH TOO
LITTLE RISK, THEY ALMOST ALL WORRY THAT NORTH AMERICA IS
BECOMING OVERLY RELIANT ON NATURAL GAS FOR ELECTRICITY
GENERATION. MANY ARGUE THAT EVEN MACKENZIE PLUS PRUDHOE
BAY WOULD ONLY SUPPLY ABOUT ONE THIRD OF WHAT NORTH
AMERICA MUST REPLACE EVERY YEAR JUST TO TREAD WATER.
ELDER STATESMAN AND GAS EXPERT JIM GRAY, IN PARTICULAR,
JUST DOES NOT SEE WHERE ALL THE GAS WILL COME FROM FOR
OUR INCREASINGLY GAS-DRIVEN ELECTRICITY SUPPLY GROWTH.
AND ON ARCTIC GAS, HE VARIES FROM THE CROWD IN BELIEVING
THAT LNG IS MORE ECONOMIC THAN PRUDHOE BAY AND WONDERS IF
WE WILL NOT MOVE TO LNG AND GAS AS A "GLOBAL COMMODITY"
LONG BEFORE A PRUDHOE BAY LINE IS BUILT. MINISTER SMITH
IS CONCERNED THAT BY THE TIME THE U.S. IS IN FULL
ECONOMIC RECOVERY THAT INADEQUATE GAS SUPPLIES COULD
CHOKE OFF GROWTH, WHICH HE NOTES IS JUST WHAT THE VICE
PRESIDENT'S 2002 REPORT WARNED ABOUT AND CALLED FOR
MEASURES TO AVOID. TRANSCANADA PIPELINE SENIOR VP ROBERT
DAY THINKS GAS DEMAND WILL SO OUTSTRIP SUPPLY FROM
TRADITIONAL NORTH AMERICAN SOURCES THAT BOTH ARCTIC
RESERVES AND LARGE IMPORTS OF LNG WILL BE THE TREND OVER
THE NEXT TEN YEARS. ALL OF THESE GENTLEMEN CAUTION THAT
RATHER THAN VIEWING THE WINTER OF 2003 AS AN UNUSUALLY
COLD ONE, WE SHOULD VIEW IT AS MERELY A RETURN TO
NORMALCY AND VERY HIGH GAS DEMAND.

CLIMATE CHANGE: BETTER MADE IN EDMONTON THAN OTTAWA
-------------- --------------


7. (SBU) WHILE DISTRUST OF OTTAWA ON CLIMATE CHANGE AND
KYOTO IMPLEMENTATION (AND MOST OTHER THINGS) REMAINS THE
NORM IN ALBERTA, THE EXTREME HOSTILITY TO OTTAWA-DRIVEN
POLICY OF A FEW MONTHS AGO HAS MODERATED. FROM WHAT
ALBERTA ENVIRONMENT MINISTER LOREN TAYLOR TOLD US,
ALBERTA IS HOPING TO HAVE ITS "MADE IN ALBERTA" CLIMATE
CHANGE PROGRAM (PERHAPS INCLUDING EMISSIONS TRADING) UP
AND RUNNING LONG BEFORE OTTAWA HAS ITS KYOTO
IMPLEMENTATION PLAN OPERATIONAL. THE ALBERTA PLAN WOULD
BE MODELED IN MANY RESPECTS ON THE MARKET-DRIVEN U.S.
"EMISSIONS EFFICIENCY" APPROACH RATHER THAN THE MORE
"COMMAND AND CONTROL" VERSION THEY SEE AS COMING FROM
OTTAWA. TAYLOR ALSO EXPRESSED ENTHUSIASM FOR THE
PRESIDENT'S CLEAN SKIES INITIATIVE TO REDUCE NOX, SOX AND
MERCURY EMISSIONS FROM POWER PLANTS AND IS INTERESTED IN
A SIMILAR MODEL FOR ALBERTA AND CANADA. FOR THEIR PART,
WHILE SUCH INDUSTRY LEADERS AS CAPP'S Alvarez_, BP'S
FAITHFULL AND MIDDLE-MANAGERS AT PETROCANADA ARE ANYTHING
BUT ENTHUSIASTIC ABOUT OTTAWA APPROACH TO KYOTO, THEY
VIEW IT AS MERELY ONE MORE FORM OF RISK TO BE MANAGED.
MOST SEEM TO TAKE THE VIEW THAT BY THE TIME
IMPLEMENTATION IS FAR ADVANCED "PAUL MARTIN WILL BE PM'
AND HE "UNDERSTANDS AND SUPPORTS" THE OIL AND GAS
INDUSTRY. IN THE MEANTIME, THEY ARE NEGOTIATING
FURIOUSLY WITH WHAT THEY DESCRIBE AS A STILL DEEPLY
FRACTURED FEDERAL GOVERNMENT WHILE WORRYING AS MUCH OR
MORE ABOUT COST-OVERRUNS AS THEY ARE ABOUT KYOTO. FROM
OUR END, WE HAVE TO AGREE THAT THE NATURAL RESOURCES
CANADA-ENVIRONMENT CANADA FEUD THAT KYOTO RATIFICATION
LAST DECEMBER WAS SUPPOSED TO END, IS ALIVE AND WELL AND
PROBABLY TAKING MORE VICTIMS. CELLUCCI