U.S.-CANADA ENERGY CONSULTATIVE MECHANISM:

UNCLAS SECTION 01 OF 04 OTTAWA 002078

SIPDIS

SENSITIVE

DEPT FOR WHA (DAS JEWELL),WHA/CAN (HOLST) AND INR (SALCEDO)

USDOC FOR 4310/MAC/ONA

E.O. 12958: N/A
TAGS: ECON SOCI EFIN PGOV CA
SUBJECT: U.S.-CANADA ENERGY CONSULTATIVE MECHANISM:
SCENE-SETTER

REF:

SUMMARY/INTRODUCTION
--------------


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


2. (U) Canada is the United States' largest foreign
supplier of energy, and (when its oil sands are
considered) the world's second largest holder of
petroleum reserves. While high energy prices are
boosting Canada's export values and stock markets, they
also hurt Canadian consumers, who use significantly more
energy per capita than Americans. Canadian energy
policymakers face many of the same problems as their
U.S. counterparts: declining conventional oil
production; tightening natural gas supplies;
policy/regulatory decisions on northern natural gas
pipeline developments; a need for more investment in the
electrical transmission grid; formation of an electrical
reliability organization; pressure to reduce greenhouse
gas emissions; a desire to exploit new energy
technologies; and how to respond to Chinese investor
interest in oil resources.


3. (U) Canadians also face some more country-specific
problems of long standing, including how best to
encourage development of frontier resources (in oil
sands, the Atlantic offshore, and the North where
natives are key stakeholders); and whether to try to
diversify its trade away from the United States, which
is currently the destination for virtually all of
Canada's energy exports.
END SUMMARY/INTRODUCTION.


THE WORLD'S LARGEST ENERGY PARTNERSHIP
--------------


4. (SBU) Energy exports are vital to Canada's economy.
Oil, gas and petroleum products accounted for 18 percent
of Canada's total exports to the United States, and 15
percent of Canada's total exports worldwide, in 2004.
The value of Canada's energy exports - which also
include electric power, coal and uranium - was over US$
50 billion last year. Partly due to its cold climate
and resource-intensive industries, Canada's economy is
intensively energy-consuming: on a per capita basis,
Canadians used over 23 percent more energy than
Americans in 2002.


5. (SBU) The U.S.-Canada energy relationship is unique
in the world, in both the sheer size of bilateral energy
trade and the very high level of integration and
coordination. The August 2003 power outage and the
collaborative investigation that resulted highlight this
interdependency, as well as the need to synchronize or
coordinate the regulatory environment and electricity
reliability standards. A wide range of other energy
issues demand similarly close bilateral coordination.


6. (SBU) The Security and Prosperity Partnership
announced by the three North American leaders in March
2005 has started or invigorated cross-border initiatives
in many areas, including energy. For example, on June
27 Ministers announced a trilateral gas initiative to
address a range of issues related to the natural gas
market in North America, such as the transparency of
regulations, laws and site selection processes in the
three countries. We also established a regulators'
expert group to improve communication and cooperation on
matters before FERC, Canada's National Energy Board, and
Mexico's Comision Reguladora de Energia.

OIL AND OILSANDS
--------------


7. (U) Canadian production of crude oil currently stands
at about 2.5 million barrels per day. In 2004 Canada
exported an average of more than 1.6 million bpd, nearly
all of it to the United States. At the same time,
because Canadian consumers tend to live far from most of
Canada's oil producing regions, eastern Canada imports
some 1.5 million bpd, including some from the United
States.


8. (SBU) The vast resources of Alberta's oil sands
constitute proven petroleum reserves greater than in any
country except Saudi Arabia, with 175 billion barrels
(the rest of Canada's proven reserves are around five
billion barrels, and declining). The oil sands could
hold as much as 315 billion barrels of ultimately
recoverable petroleum. Oil sands production now exceeds
one million barrels per day and is growing strongly due
to massive capital investment. American awareness of
the oil sands has heightened in recent years, and
Treasury Secretary Snow visited the region in early July

2005.


9. (SBU) There are significant constraints on
development in the oil sands, including high labor
costs, high water usage, lack of pipeline and refinery
capacity, high energy inputs (particularly of natural
gas) and high greenhouse gas emissions. Producers are
working on all fronts to address these issues, and high
oil prices give them the margins to do so.



10. (SBU) Production of oil from beneath the continental
shelf off Newfoundland began in the late 1990's, and
daily oil production there exceeds 200,000 barrels.
Offshore production in the Arctic (Beaufort Sea) awaits
construction of the Mackenzie pipeline project (see
below),while development on the Pacific coast is
currently blocked by federal and provincial moratoria on
drilling.

NATURAL GAS
--------------


11. (SBU) Natural gas production in Canada in 2004
totaled about six trillion cubic feet (TCF),or around
17 billion cubic feet per day (BCF/D),of which about 55
percent was exported to the United States by pipeline.
Canadian gas accounts for more than 15 percent of U.S.
natural gas consumption. However, compared to its very
high production rate, Canada's proven natural gas
reserves, at about 56 TCF, are relatively small and have
been declining since 1996. As with oil, one new area
that has opened up in recent years is the Atlantic
offshore, where about 200 BCF per year is being
produced, mostly for export by pipeline to New England.


12. (SBU) The next major new supply to enter the
Canadian market will likely be gas from the Mackenzie
Delta and Beaufort Sea area in the Northwest
Territories, which is expected to be brought to market
when the proposed Mackenzie Gas Project begins
delivering around 2010. The area in question contains
about 9 TCF in proven reserves and up to 61 TCF ultimate
potential. The regulatory and permitting process for
this pipeline is proceeding, but has been delayed by
difficult negotiations mainly involving the Deh Cho
natives in the southern part of the Mackenzie River
valley. Currently, a deal involving the GOC, the
territorial Government and the Deh Cho appears to have
been reached but has not been finalized.


13. (SBU) North America's natural gas market is now
substantially disconnected from those on other
continents, but this will change if major new liquefied
natural gas (LNG) infrastructure - including specialized
port facilities and ships - is built. In Saint John,
New Brunswick, the Irving Oil Company has begun
construction on an LNG port, and there are less advanced
proposals for facilities in Nova Scotia and near Quebec
City.

ELECTRIC POWER
--------------


14. (SBU) Our two countries' electric power grids are
closely connected - trading some 50 billion kilowatt-
hours in both directions each year, and sharing the
effects of the August 2003 Northeast power outage.
Nevertheless, most of the Canadian grid was developed by
provincial government-owned monopoly utilities, and this
heritage continues to be revealed by a relative shortage
of inter-provincial and cross-border links.


15. (SBU) Canada's net exports of electric power to the
United States have declined steeply over the past
decade, due to growing demand and a lack of investment
in new generating capacity. Manitoba, which has major
undeveloped hydroelectric generating sites, advocates
government-led investment in an east-west transmission
line to distribute its power to Ontario and elsewhere.
Newfoundland and Labrador also has major undeveloped
hydro capacity, but has been unable to negotiate an
agreement with Quebec to transmit this power to market.

16. (SBU) Ontario has made a commitment to shut its coal-
fired generating plants. While it is re-starting some
aging nuclear units, and planning for new gas-fired and
renewable generation, it continues to be severely
challenged to close its supply gap. This could open up
opportunities for U.S. players, either in constructing
new capacity within Ontario, or in exporting power to
the province. In the short term, a strike by managers
and engineers, combined with high hot-weather demand, is
putting Ontario's grid under real strain this summer.


17. (SBU) Canadian players support U.S. steps toward
mandatory electrical reliability standards, including
creation of an Electric Reliability Organization, and
toward facilitating investment in electrical grid
infrastructure. The Canadian Electricity Association
views the recent progress of U.S. energy legislation as
being positive for this industry.

NUCLEAR ISSUES
--------------


18. (SBU) Canada is the world's largest uranium
producer. One Canadian company, Cameco, supplies half
the U.S. uranium market and about 20 percent of the
market worldwide. Nuclear power accounts for about 13
percent of electricity generation in Canada, with 20 of
the country's 22 electricity-producing reactors located
in Ontario. All of these reactors are of the Canadian-
developed "Candu" design, cooled and moderated by heavy
water. Efforts to license the newest version of the
Candu, the Advanced Candu Reactor (ACR),in the United
States were set back during the past year when a U.S.
private sector partner withdrew. The ACR uses slightly
enriched uranium as fuel, and attempts to limit the
spread of enrichment technology could hamper efforts to
sell the reactors worldwide.



19. (SBU) Canada does not have a national nuclear waste
repository. Most nuclear waste is stored at reactor
sites. The Nuclear Waste Management Organization,
created in 2002, is studying various alternatives and is
expected to issue a recommendation in November 2005.
Discussion reports are available at website nwmo.ca.

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


20. (SBU) Canada formally ratified the Kyoto Accord at
the end of 2002, despite vocal criticism from provincial
governments and industries. Critics have been concerned
that the burden of compliance would fall
disproportionately on certain regions and industries, and
also that compliance would place Canada's economy at a
lasting competitive disadvantage vis--vis the United
States.


21. (SBU) In April 2005, Canada announced its long-
awaited strategy to meet its greenhouse gas emission
reduction commitments under the Kyoto Protocol. Most
players acknowledge that Canada's Kyoto target (emissions
six percent below 1990 levels by 2012) is no longer

attainable, if it ever was. The need to maintain a
competitive industry environment vis--vis the United
States was a major constraint in crafting the plan, but
the GOC touts the economic, technological and
environmental benefits of reducing emissions.


22. (SBU) FULL TEXT OF THE STRATEGY IS AVAILABLE AT
WEBSITE CLIMATECHANGE.GC.CA. EXPERTS HAVE EXPRESSED
DISAPPOINTMENT AT THE LACK OF DETAIL, PARTICULARLY GIVEN
THAT THIS POLICY HAS BEEN UNDER DEVELOPMENT THROUGHOUT THE
GOVERNING LIBERAL PARTY'S ELEVEN-PLUS YEARS IN POWER. PRESS
AND SOME POLITICIANS ARE CRITICAL OF THE PROSPECT OF BUYING
EMISSION CREDITS FROM ABROAD (TRADING "TAXPAYER DOLLARS FOR
THIN AIR") AND ALLEGE THAT THE PLAN PUTS MORE BURDEN ON
INDIVIDUALS AND HOUSEHOLDS THAN ON INDUSTRY.


23. (SBU) While our political approaches to the climate
change issue have differed, practical U.S.-Canada
cooperation on this issue has been close. In 2002, the
two governments signed agreements on Renewable Energy and

Climate Science, and formed a bilateral Working Group on
Climate Change. Canada participates in the U.S.-led,
international Carbon Sequestration Leadership Forum,
which researches effective ways to capture and store
carbon dioxide. Canada is also a founding member of the
International Partnership for the Hydrogen Economy and
the Global Earth Observation System of Systems, both of
which are U.S. international initiatives designed to
address climate change. In early 2005, Canada joined the
U.S.-led international initiative, Methane to Markets,
which focuses on transferring technology to developing
countries for the capture and use of methane from
pipelines, landfills and other sources.

WILKINS