HURRICANES AND NATURAL GAS DISRUPTIONS: THE VIEW

UNCLAS OTTAWA 002966 SIPDIS SENSITIVE DEPT FOR WHA/CAN AND EB/ESC/IEC DOE FOR INTERNATIONAL AFFAIRS: PUMPHREY, DEUTSCH E.O. 12958: N/A TAGS: ENRG EPET PGOV CA SUBJECT: HURRICANES AND NATURAL GAS DISRUPTIONS: THE VIEW FROM CANADA REF: OTTAWA 2688 ¶1. (U) Sensitive but unclassified. ¶2. (SBU) Summary: With Canada's natural gas production at nearly full capacity, there is little that government or industry can do in the short-term to add to North America's natural gas supply. Interlocutors say that in the wake of Hurricanes Katrina and Rita, at least the debate within the GOC is headed in the right direction, focusing on capacity and demand rather than pricing. In the long term, the record high prices could serve to spur new drilling and new investment. End summary. ¶3. (SBU) According to representatives of the Canadian Gas Association (CGA),the recent hurricanes have dramatically illustrated how little excess capacity exists in the North American natural gas system. For several years Canada's natural gas production has been essentially flat at about 6.4 trillion cubic feet (TCF) per year, with about 3.6 TCF exported to the United States. Although natural gas from Canada represents about 17 percent of total U.S. consumption, Canada's proven reserves have declined by more than 13 percent since 1996, and currently stand at 56.1 TCF. ¶4. (SBU) The CGA representatives believe that, at least in private and in committee, members of Parliament have generally displayed a good understanding of the tight natural gas market in North America. MPs, they say, have correctly keyed in on capacity and demand, recognizing that, much like petroleum (see reftel),there is no easy way to boost production in the short-term. ¶5. (U) Approximately 47 percent of Canadian households use natural gas for heating, and most areas of the country are expected to experience record consumer prices this winter. For many consumers, high prices may be somewhat mitigated by the practice of many gas providers to purchase gas in the summer, when prices are lower. Ironically, hedging prices in this manner is specifically forbidden in Alberta, where most Canadian gas is produced, so Albertans may pay some of the highest prices in Canada this winter for natural gas (the province has a rebate program for lower income residents if prices go above a certain level). ¶6. (U) Even before the hurricanes, high prices were driving increased drilling activity throughout western Canada, but especially in northeast British Columbia. New drilling for natural gas has increased 69 percent over last year in British Columbia, and labor shortages have become one of the industry's biggest challenges. The combined effects of higher prices and the hurricanes may also give new momentum to the Mackenzie Valley gas pipeline project, which would transport at least 6 TCF of proven gas reserves from the Mackenzie River delta to existing gas infrastructure in Alberta. ¶7. (SBU) Comment: With its natural gas production system operating at near full capacity, there is little that Canada can do in the short-term to add significantly to North America's gas supply. In the longer term, high prices may serve to spur new investment, increased drilling, and build momentum for projects such as the Mackenzie Valley pipeline and various proposals for liquefied natural gas (LNG). For Canadian consumers, however, the long-term projects will do little to alleviate the pain they will experience this winter over record natural gas prices. With the country heading into election mode, it may prove difficult for industry to keep the debate focused on supply and capacity, rather than pricing. Visit Canada's Classified Web Site at http://www.state.sgov.gov/p/wha/ottawa WILKINS