ATLANTIC CANADA ENERGY UPDATE

UNCLAS SECTION 01 OF 03 HALIFAX 000025

SIPDIS

STATE FOR WHA/CAN
USDOE FOR IA (DEUTSCH)

E.O. 12958: N/A
TAGS: ENRG EPET PGOV PBTS PREL FR CA
SUBJECT: ATLANTIC CANADA ENERGY UPDATE

REF: HALIFAX 0012 AND PREVIOUS

HALIFAX 00000025 001.2 OF 003


--------------
SUMMARY:
--------------


1. Canadian federal government plans to develop an Atlantic
energy gateway to the United States ignited a political war of
words with the province of New Brunswick, which was already
working on a similar concept with the State of Maine. The
political wrangling, however, has had no effect on
Newfoundland-Labrador's study into different power transmission
options from its proposed Lower Churchill project.
Newfoundland-Labrador (N-L) signed an historic agreement with
Quebec to allow the N-L to sell power from its existing Upper
Churchill Falls facility directly into the energy market for the
first time. In other energy developments, utility companies in
Nova Scotia and Ontario have teamed up to buy a California power
distribution company; the Canaport LNG partners are aiming to
have their project up and running in time to compensate for a
planned shutdown of the Sable gas project;
Newfoundland-Labrador's Hebron project is finally a work in
progress; StratoilHydro Canada made an exciting discovery in a
new deepwater offshore area; there will be an inquiry into
offshore transportation safety following a fatal helicopter
crash off Newfoundland; and, Nova Scotia and
Newfoundland-Labrador are upset by French plans to press for
more of the seabed around their islands of St. Pierre and
Miquelon. END SUMMARY.

-------------- --------------
POLITICS AND ENERGY: WRANGLING OVER U.S. EXPORT POTENTIAL
-------------- --------------


2. Canadian Prime Minister Steven Harper had to do some damage
control in New Brunswick in early April when provincial premier
Shawn Graham got into a public row over energy issues with Peter
MacKay, the PM's key cabinet minister from Atlantic Canada.
MacKay was in his home province of Nova Scotia on March 29 to
unveil a C$4 million plan to study the feasibility of building
an Atlantic energy gateway to provide increased energy exports
to the United States. The focus would be to develop the
region's energy potential both as a means to spur economic
development and to lower the region's carbon footprint through
an emphasis on cleaner energy sources. However, New Brunswick
Premier Shawn Graham bristled at the idea, since he already
considers his province to be the region's energy hub and the
lynchpin for a cross-border energy corridor/gateway. Graham
accused the federal minister of trying to undercut his
three-year plan to develop the hub and corridor vision, the most
recent milestone of which was the agreement he signed in March
with Governor Baldacci of Maine to study the feasibility of an
energy corridor (ref).


3. Premier Graham's response and further comments by his energy
minister that the other provinces could not expect to simply
"ram their power" through New Brunswick prompted Minister MacKay
and Graham's regional counterparts, Premiers Danny Williams of
Newfoundland-Labrador and Rodney MacDonald of Nova Scotia, to
voice their own opinions. Each suggested that they could bypass
New Brunswick in exporting their new energy supplies if the
Graham government tried to thwart the energy flow through his
province. It took the involvement of Prime Minister Harper to
ease the tension between all parties. Premier Graham appeared
to accept the PM's assurances that this new federal plan would
not adversely affect New Brunswick and in fact, as the PM
explained, the intent would be to marry New Brunswick's long
term energy plans with the new federal focus. For now all seems
quiet on the political front. Interestingly, there are some in
New Brunswick who like the federal involvement, seeing this
small investment of seed money as possibly leading to more
significant federal support down the road.

-------------- --------------
The Lower Churchill Project and Transmission Options
-------------- --------------


4. This political wrangling has had no apparent effect on
ongoing regional energy cooperation. The Government of
Newfoundland-Labrador (GoN-L) is continuing its work in
identifying possible transmission routes for the power from its
proposed hydro development on the Lower Churchill River. The
choice of a transmission route to North American markets is a
key factor in assessing the project's viability and the province
is doing a thorough investigation into the several options. One
option is to transmit the power via a sub-sea power line to Nova
Scotia and on to New Brunswick. The GoN-L has commissioned the
New Brunswick System Operator (NBSO),a subsidiary of the

HALIFAX 00000025 002.2 OF 003


provincially-owned utility New Brunswick Power, to assess if the
province's electrical grid can handle the extra power from Lower
Churchill. There is some debate as to how much increased
capacity NBSO would need and whether NBSO might consider
displacing existing users on the system. The GoN-L has also
commissioned Hydro Quebec (HQ) to do a similar study, since HQ
offers a competitive geographic advantage over other proposals.
A third option is for the power to land in Nova Scotia where
Emera, the province's energy corporation, would come up with its
own plan to ship the power directly into New England via another
sub-sea cable.

-------------- --------------
Upper Churchill Project: Historic Agreement with Quebec
-------------- --------------


5. Newfoundland-Labrador Premier Danny Williams announced on
April 2 that for the first time, his province will be selling
power directly into the North American electricity market from
its existing Upper Churchill Falls hydro project in Labrador.
Previously, all the power produced at the facility went to Hydro
Quebec (HQ),which in turn sold the power to other
jurisdictions. In 1998, the GoN-L negotiated an agreement with
HQ whereby N-L would have the right to recall 300 MW of the
Churchill power for use in Labrador during peak periods.
Customers in Labrador typically only use approximately 170 MW of
the power, and the province has been returning the remainder to
HQ for reselling. The 1998 agreement expired on March 31 this
year and the Williams government negotiated a new deal whereby
it would sell the power itself in the North American energy
market under HQ's Open Access Transmission Tariff system. Since
Newfoundland-Labrador has never been a direct seller of
electricity, the government contracted with Nova Scotia's Emera
to sell the power for N-L until the GoN-L can develop the
expertise to conduct the sales on its own.

-------------- --------------
Utilities Partner to Buy California Electrical Distributor
-------------- --------------


6. Emera, the parent company of Nova Scotia Power and Bangor
(Maine) Hydro, announced on April 23 that it has entered into a
partnership agreement with Algonquin Power Income Fund of
Ontario (APIF) to invest in utility infrastructure and renewable
generation facilities. As a first step in their partnership,
Emera and APIF have committed to acquiring the California-based
electricity distribution and related generation assets of Sierra
Pacific Power Company, which currently provides electric power
to approximately 47,000 customers in the Lake Tahoe region.
Under the terms of the agreement, Emera and Algonquin will
jointly own and operate the utility through a newly formed
entity, California Pacific Electric Company (Calpeco). The
transaction, which is costing the two partners US$116 million,
is subject to approval by the California Public Utilities
Commission.

-------------- --------------
Canaport LNG Exports Expected to Offset Sable Shutdown
-------------- --------------


7. Irving Oil and Spanish partner Repsol expect that Canaport,
their new liquefied natural gas terminal in Saint John New
Brunswick, will be ready to receive the first shipment of
natural gas from Trinidad and Tobago in June. At that point the
partners can begin the terminal's cool-down and commissioning
process. Timing is a critical factor as the partners are hoping
that their project is fully operational in time to offset the
scheduled 20-day shutdown of the Sable Offshore Energy project
in August. The Sable project produces 400 million to 500
million cubic feet of natural gas and 20,000 barrels of natural
gas liquids per day. Approximately 75 percent of Sable's daily
output is exported to the United States.

-------------- --------------
Hebron Update: Looking for a 2012 Construction Start
-------------- --------------


8. Hebron, the fourth oil project offshore
Newfoundland-Labrador, is finally a work in progress. In March,
Exxon-Mobil, the lead company in the development consortium,
filed documents with the joint federal-provincial regulator, the
Canada-Newfoundland and Labrador Offshore Petroleum Board, to
begin the environmental assessment of the project. The partners
have also set up an office in St. John's and have started
holding information sessions with local contractors.
Exxon-Mobil intends to start construction in 2012 and
anticipates a production start-up date for some time in 2017.

HALIFAX 00000025 003.2 OF 003



-------------- --
Excitement over Discovery in Flemish Pass Basin
-------------- --


9. Norwegian-owned StatoilHydro Canada announced on April 8
that it had made a significant discovery on its Mizzen prospect
in the deep waters of the Flemish Pass Basin, approximately 310
miles east northeast of St. John's, Newfoundland-Labrador.
Husky Oil of Calgary also participated in the project with a 35
percent interest. The company will have to conduct further work
to determine the size of the discovery and its commercial
viability. Nonetheless, news of the drilling results caused
much excitement in Newfoundland-Labrador as this was the first
promising find outside the Jeanne d'Arc basin where the Hibernia
and other producing fields are located. The drilling operation,
conducted at a water depth of 3,600 feet and during the heart of
the North Atlantic winter storm season, "was very challenging,"
according to company officials.

--------------
Regulator to Hold Inquiry on Helicopter Crash
--------------


10. The joint federal-provincial regulator, the
Canada-Newfoundland and Labrador Offshore Petroleum Board,
announced on April 16 that it will hold a public inquiry into
safety issues associated with helicopter travel to and from the
province's offshore oil and gas projects. This follows the
crash of a helicopter off Newfoundland on March 12 which killed
17 people who were on their way to two offshore oil production
facilities. The Board expects it will release further details
over the coming weeks.

-------------- ---
Provinces Upset with France over Boundary Claims
-------------- ---


11. The provincial governments of Newfoundland-Labrador and
Nova Scotia are upset over the French government's intention to
lay claim to a larger swath of the seabed around the French
islands of St. Pierre and Miquelon. The islands lie just off
the south coast of Newfoundland and France and Canada have had a
long dispute over jurisdiction of the surrounding waters. Both
countries settled on a maritime boundary in 1992 but according
to a post contact, the French have never been happy with their
allotted territory. Accordingly, he is not surprised that the
French want to reopen the issue especially since the 6,000
French inhabitants of the Islands want to exploit the rich
hydrocarbon resources. The Canadian government is promising to
take what it called "all necessary steps to defend and protect"
its rights, a move welcomed by the two provinces who are just as
anxious as the St. Pierrais to develop the undersea resources.
FOSTER