NEWS FROM ATLANTIC CANADA'S ENERGY SECTOR

UNCLAS SECTION 01 OF 03 HALIFAX 000058

SIPDIS

STATE FOR WHA/CAN, EB/ESC/ISC
USDOE FOR IA (DEUTSCH)

E.O. 12958: N/A
TAGS: EPET ENRG PGOV CA
SUBJECT: NEWS FROM ATLANTIC CANADA'S ENERGY SECTOR

REF: HALIFAX 0045

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SUMMARY:
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1. With annual energy exports from Atlantic Canada to the
United States now exceeding $14 billion, the region is poised to
become an even more important energy supplier in the future.
This cable reports on the latest developments across the region.
Overall, it has been a busy summer with good and bad news from
Nova Scotia's offshore sector. The province received its first
cash from a new federal-provincial offshore agreement, but it
also received money from penalties levied against three
companies for not fulfilling their exploration commitments.
While that was a stinging example of the slowdown in offshore
exploration, there was some good news as two U.S. companies were
the successful bidders for offshore parcels near Sable Island.
There is also new optimism in Nova Scotia's onshore oil and gas
sectors. In LNG news, the Quoddy Bay LNG project has been
delayed while Newfoundland-Labrador's Grassy Point LNG project
has received provincial approval.


2. In other energy sectors, parties interested in developing
the Churchill Falls project now know the guidelines that will be
used to conduct the environmental assessment of the project.
Work on New Brunswick's Point Lepreau nuclear power plant
refurbishment project is on schedule and the province is seeing
some new export possibilities with the proposed expansion of the
Maine power grid. At the same time, New Brunswick officials are
pondering the merits of turning to the private sector to develop
new power generation projects rather than involving its
financially-strapped utility. Nova Scotia's utility,
investor-owned Nova Scotia Power Inc., has a new CEO, who takes
over the helm at a time when there is new emphasis in the
province on developing alternative power sources. END SUMMARY

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Good and Bad News from Nova Scotia's Offshore Sector
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3. The government of Nova Scotia released a budget update on
August 5 to include new money from its offshore sector. The
province just received $234.4 million from the federal
government as a result of an agreement both levels of government
signed on June 13 that ended a decades-long dispute over
offshore payments. This issue began in 1986 when Nova Scotia
gave up its right to any provincial (Crown) share of offshore
projects on the assurance that the federal government would
compensate the province for doing so. The compensation plan
never materialized, and after years of political wrangling, in
January 2008, both levels of government agreed to appoint a
joint panel to settle the issue. The panel eventually worked
out an agreement that will give the province $870 million -
$234.4 million upfront, with the rest to be paid out over 15
years. Furthermore, the funds will be excluded from any
equalization payments the province will receive from Ottawa, a
contentious factor in previous attempts to resolve the issue.


4. Nova Scotia also got another $107 million in extra cash from
its offshore, although not the way provincial politicians and
industry stakeholders had hoped. On July 28 ExxonMobil Canada,
Marathon Canada and Imperial all let their exploration licenses
expire which saw them pay the province $107 million in penalties
for not having fulfilled their drilling commitments. That
leaves just three companies holding exploration licenses but
none are actively engaged in exploration work: Canadian
Superior, BepCo Canada and EnCana. BP Canada and Chevron also
hold acreage but it is on the Canadian side of Georges Bank in
the Gulf of Maine, an area under a federal-provincial
moratorium. There was some good news on July 10, however, when
two U.S. companies, partners Ammonite Corporation and Catheart
Energy, were the successful bidders for two offshore exploration
parcels near Sable Island. Under the terms of their bid, the
companies are committed to spending $103 million and $114
million respectively in the search for hydrocarbons. Ammonite
is a small, private petroleum exploration company headquartered
Connecticut, while partner Catheart Energy is based in Texas.

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Onshore oil and gas: New Optimism for Nova Scotia
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5. While Nova Scotia's offshore exploration scene has slowed,
there is increased interest in the potential of the province's
onshore oil and gas reserves. Unlike in neighboring New
Brunswick, there has never been a commercial onshore discovery
in Nova Scotia. Now three Calgary-based firms are hoping to
change that: Triangle Petroleum Corp., Stealth Ventures and the

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newest player, Forent Energy. Triangle announced in June that it
plans to spend $35 million to drill up to six wells in its
search for shale gas; Stealth Ventures is exploring the
potential of developing an old coal mine that contains an
estimated 30 billion cubic meters of coal-bed methane gas; and,
on July 16, Forent received approval from the provincial
government for an exploration program for eastern Nova Scotia.

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LNG News: Quoddy Project Delayed/NL Project Clears a Hurdle
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6. The members of a New Brunswick group fighting the
construction of three proposed LNG terminals in Maine are
encouraged by the news that one of the companies is delaying its
project. Quoddy Bay LNG announced on July 16 that it would
delay upcoming hearings by the State of Maine because it has not
finalized gas supplies. A spokesperson said the company cannot
determine the precise chemical composition of the gas or what
processing equipment would be required until it can get a
supplier. Inflation in construction costs was another factor in
the decision. The company said it will use the time to review
its development plan which may include co-locating its project
with the other proposals: Downeast LNG and Calais LNG. In
other LNG news, on July 7 the Newfoundland-Labrador provincial
government approved the environmental assessment plan for the
proposed LNG terminal in Grassy Point Newfoundland-Labrador.
The proponent, Newfoundland LNG, is still waiting for the
federal environmental assessment to be finished.

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Update on Lower Churchill and Lepreau Projects
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7. On July 15, the Canadian Environmental Assessment Agency and
the Newfoundland-Labrador Dept. of the Environment issued the
final guidelines for the preparation of the Environmental Impact
Statement for the Lower Churchill hydro project. The guidelines
will provide direction to the eventual proponent of the project
and will identify the information that will be required in the
statement of the anticipated effects of the project on the
environment. In other energy project news, New Brunswick Power
officials have said that the $1.4 billion Lepreau nuclear power
plant refurbishment project is on schedule. The fuel and heavy
water have been removed from the plant and the project has now
moved to the major work - refurbishment of the reactor itself.

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Future Electricity Exports from New Brunswick
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8. New Brunswick is seeing the possibility of new U.S. export
opportunities with the news that two private Maine utility
companies want to upgrade their power grid. Central Maine Power
and the Maine Public Service Company announced on July 3 they
are proposing to invest $1.9 billion in a project which would
connect northern Maine to the rest of the State's power grid for
the first time. Should the project go ahead, the two companies
would also look at making a connection to neighboring New
Brunswick. If that goes ahead, it would give New Brunswick some
new capacity to expand its exports to New England.


9. In planning for future export sales, New Brunswick
government officials have said the province will soon have to
decide on just what role its provincially owned power utility,
New Brunswick Power, will play in generating more electricity
for export. There is concern over the ability of NB Power to
take on new projects given its current fiscal status. In July
the New Brunswick cabinet approved more than $600 million in
loans to the utility: $200 million towards the Lepreau
refurbishment project, another $230 million to pay for
replacement fuel while Lepreau is offline and another $190
million to refinance the utility's debt which now stands at $3.4
billion. The alternative to having NB Power build new
generation capacity would be for the province to invite the
private sector to get involved. Provincial officials point to
the fact that there is already private interest in a possible
second reactor at Point Lepreau and in developing new wind
projects.

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News from Nova Scotia Power Inc.
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10. The former President and CEO of Bangor Hydro, Rob Bennett,
is now the new top executive at Nova Scotia Power Inc. (NSPI).
Both Bangor Hydro and NSPI are owned by Emera, a Nova Scotia
energy company. Bennett, a long-time NSPI executive and Nova

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Scotia native, went to Bangor Hydro in 2002 to oversee Emera's
takeover of the utility. Also NSPI announced on August 1 that
it plans to use more biomass, including wood waste, to provide
electricity to power homes in the province. NSPI said it will
seek proposals from various sectors and independent power
producers for renewable energy projects fueled by biomass.
Since 2003, NSPI has signed agreements with independent power
producers for more than 300 megawatts of electricity from
renewable sources. Most of the agreements are for energy
generated by wind, but also include landfill gas and biomass.

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COMMENT:
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11. Atlantic Canada clearly has great potential to be a secure,
long-term energy supplier for the United States--especially for
New England. U.S. Energy Under Secretary Albright underscored
this theme during his June visit to Saint John, New Brunswick,
when he described the province as a very valuable energy partner
with the New England states. Newfoundland-Labrador and Nova
Scotia are similarly poised to be our strong energy partners.
The combined total of annual energy exports to the U.S. from
Atlantic Canada already exceeds $14 billion, with each Province
focusing on different energy exports: electricity from New
Brunswick, oil from Newfoundland-Labrador, and natural gas from
Nova Scotia. There are prospects for future growth in several
areas (reftel),but much will depend on how the demand for
energy in the U.S. northeast shapes up in the coming months and
on overall developments in global energy markets. END COMMENT
FOSTER