This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 OTTAWA 001924 
 
SIPDIS 
 
STATE FOR EB/ESC/ISC (MCMANUS AND DUDLEY), WHA/CAN 
(RUNNING), OES/EGC (REIFSNYDER AND DEROSA) 
 
USDOC FOR ITA/MAC -- OFFICE OF NAFTA 
 
DOE FOR IA (A/S BAILEY, DAS DOBRIANSKY, PUMPHREY AND 
DEUTSCH) 
 
DEPT PASS USTR FOR MELLE AND CHANDLER 
 
DEPT PASS INTERIOR FOR INT'L AFFAIRS 
 
DEPT PASS FERC FOR KEVIN KELLY AND DONALD LEKANG 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG ETRD CA
SUBJECT:  SCENE-SETTER FOR TRI- AND BILATERAL ENERGY MEETINGS 
 
REF: (A) Ottawa 1812  (Uranium) 
 
     (B) Ottawa 1721  (Hydrogen Economy Partnership) 
     (C) Ottawa 1578  (NOAA Administrator's visit) 
     (D) Ottawa 687  (GOC climate change measures) 
     (E) Ottawa 566  (2002 energy trade data) 
     (F) Ottawa 503  (Natural gas in North America) 
     (G) Ottawa 334  (Protecting oil/gas pipelines) 
     (H) Halifax 52  (Atlantic offshore outlook) 
     (J) Calgary 44  (Alberta electric restructuring) 
     (K) 02 Vancouver 1153  (BC energy policy) 
     (L) 02 Calgary 473 (Alberta and Kyoto) 
     (M) 02 Ottawa 3205 (Atlantic offshore overview) 
     (N) 02 Ottawa 2474 (Power transmission barriers) 
 
     SUBJECT                                 PARAS 
 
CANADA ENERGY OVERVIEW                       3 - 9 
 
PARTNERSHIP FOR THE HYDROGEN ECONOMY         10 
 
SHIFTING TO OILSANDS AND FRONTIERS           11 - 15 
 
OILSANDS:  CONTINUING EXPANSION              16 - 19 
 
ARCTIC PIPELINES:  APPROACHING REALITY       20 - 21 
 
ELECTRICITY:  ONTARIO RESTRUCTURING SKIDS    22 - 25 
 
NUCLEAR:  MOVING TOWARD LONG-TERM DISPOSAL   26 
 
CLIMATE CHANGE                               27 - 28 
 
 
 
¶1. THIS MESSAGE IS SENSITIVE, BUT UNCLASSIFIED.  NOT 
FOR DISTRIBUTION OUTSIDE USG CHANNELS. 
 
¶2. In preparation for the forthcoming meetings of the 
North American Energy Working Group (NAEWG) and U.S.- 
Canada Energy Consultative Mechanism (ECM) in Ottawa 
July 15-17, post provides the following updated 
overview of the very dynamic Canadian energy scene. 
 
 
CANADIAN ENERGY OVERVIEW 
------------------------ 
 
¶3. Since the early 1980's, Canada has been the single 
largest foreign supplier of energy to the United 
States; measured in total energy, it is our number one 
energy supplier by a wide margin.  Canada is the 
world's fifth largest energy producer and a net 
exporter of all major energy products including oil and 
petroleum products, natural gas, electric power, 
uranium, and energy technology and services.  The 
United States is virtually Canada's sole customer for 
crude oil and natural gas exports, which grew steeply 
over the past decade and a half, as well as its sole 
customer for exports of electric power. 
 
¶4. Canadian and U.S. government efforts are coordinated 
across the full range of energy-related technologies 
including climate monitoring, carbon sequestration, 
clean coal, hydrogen and nuclear.  Canada has been 
invited to participate in the Carbon Sequestration 
Leadership Forum (CSLF) and the International 
Partnership for the Hydrogen Economy (IPHE). 
 
¶5. OIL:  Canada supplies more oil and oil products to 
Americans than any other country, including Saudi 
Arabia.  In 2002 Canada exported approximately 1.4 
million barrels per day of crude oil, plus the 
equivalent of about 500,000 barrels per day in 
petroleum products and partially processed oil.  In 
2002, imports of Canadian oil and petroleum products 
accounted for about about 17 percent of U.S. oil 
imports and nearly 10 percent of total U.S. oil demand. 
 
¶6. GAS:  Natural gas makes up the largest part - more 
than one-third - of Canada's primary energy production. 
In 2002 Canada exported 3.74 trillion cubic feet of 
natural gas, making up 93 percent of U.S. gas imports 
and 18 percent of total U.S. gas demand.  (See ref F 
for a Canadian perspective on North American gas supply 
issues). 
 
¶7. ELECTRIC POWER:  Canada exported about 35 terawatt- 
hours of electric power to the United States in 2002. 
Canada's total electricity exports peaked in 2000 and 
are now on a declining trend, due to changes in demand 
patterns, a lack of capital investment in both the U.S. 
and Canadian electric power industries and the 
difficulty of building new transmission capacity (see 
ref N for analysis). 
 
¶8. NUCLEAR:  Canada is the world's largest uranium 
producer (ref A), supplying about one-third of world 
production and 20 to 30 percent of U.S. demand.  A 
Canadian Government-owned firm, AECL, is one of the 
world's most active vendors of nuclear reactors, having 
supplied units to China and South Korea in the past 
decade. 
 
¶9. For further data on Canadian energy production and 
trade, refer to the EIA's Country Analysis Brief on 
Canada (www.eia.doe.gov/emeu/cabs/canada.html), or the 
GOC's National Energy Board website (www.neb.gc.ca). 
 
 
INTERNATIONAL PARTNERSHIP FOR THE HYDROGEN ECONOMY 
--------------------------------------------- ----- 
 
¶10. Canada has been invited to participate in the IPHE. 
Working-level GOC officials appear to be cautiously 
interested, but have significant concerns about how IPHE 
will relate to the IEA's Hydrogen Coordination Group (ref 
B).  They also have numerous questions about IPHE's possible 
structure and process. 
 
 
SHIFTING TO OILSANDS AND FRONTIERS 
---------------------------------- 
 
¶11. Canada's conventional oil and gas fields are mainly 
located in or adjacent to the western province of 
Alberta, which is north of Montana.  While the cost of 
finding new reserves in this region has risen 
significantly in recent years, the industry continues 
to thrive, notably in the less-exploited northwestern 
portion of the Western Canada Sedimentary Basin which 
extends into the neighboring province of British 
Columbia.  A relatively new energy/mining technology, 
the extraction of oil from oilsands (vast deposits of 
oily dirt) in northern Alberta, became profitable 
during the 1990's.  Multi-billion-dollar investments 
are ongoing in that industry.  See paragraphs 16-19 
below for details. 
 
¶12. The ability of supplies to keep up with North 
America's natural gas demand has been the subject of 
recent controversy in Canada, as it has in the United 
States.  There is now broad, well-developed support 
among stakeholders to construct a pipeline down the 
Mackenzie River Valley, which would allow development 
of natural gas fields in the Mackenzie River Delta and 
Beaufort Sea areas (east of Alaska's North Slope).  The 
first formal steps toward applying for regulatory 
approval for such a pipeline are expected to be taken 
in the second half of 2003.  While the amount of gas 
which will be accessed by this pipeline is a fraction 
as large as that in Prudhoe Bay, the barriers to 
pipeline development are lower, and the gas could begin 
to reach southern markets around 2010. 
 
¶13. Substantial oil and gas deposits under the 
continental shelf off Canada's Atlantic coast entered 
commercial production in the past decade, highlighted 
by the placement of a large fixed platform on the 
"Hibernia" oilfield (east of Newfoundland) in 1997, and 
the inauguration of natural gas exports from Nova 
Scotia to New England through the Maritimes and 
Northeast Pipeline early in 2000. 
 
¶14. The Hibernia oilfield, which is being exploited by 
a consortium of private oil firms (Exxon/Mobil is the 
operator), is estimated to contain more than 600 
million barrels of oil.  Major oil firms are now 
beginning production from the nearby "Terra Nova" 
oilfield, which has reserves of about 300-400 million 
barrels.  Conservative estimates put East Coast 
discovered reserves of oil in the two billion barrels 
range, with possible eventual production rates of up to 
one million barrels per day. 
 
¶15. Offshore natural gas production from the Sable 
Island area, east of Nova Scotia, began early in 2000. 
Most of this gas is exported to New England - bringing 
large-scale natural gas service to these states for the 
first time, and helping to stabilize their winter 
heating costs.  Gas reserves around Sable Island have 
been estimated at 3.5 trillion cubic feet, but more 
drilling is needed to complete this picture (ref H). 
There are much larger gas resources in Newfoundland and 
Labrador, but environmental and distance problems will 
slow these developments. 
 
 
OILSANDS:  CONTINUING EXPANSION 
------------------------------- 
 
¶16. The economically recoverable oil resources in 
Alberta's oilsands are many times larger than the sum 
of Canada's other oil reserves.  Oilsands (aka 
"tarsands" or "heavy oil") are vast deposits of oily 
dirt which can be processed (economically at current 
oil prices) into "synthetic crude" which can then be 
refined in conventional oil refineries.  Canadian 
authorities estimate reserves in the oilsands to be the 
equivalent of 175 billion barrels assuming current 
technology and economic conditions, and up to 315 
billion barrels with technological advances and some 
price increases.  Oilsands already account for more 
than half of Canada's crude oil output, and for most of 
the recent increases in Canada's production. 
 
¶17. Crude bitumen production from oilsands increased by 
about 25 percent in 2002, due to large ongoing capital 
investments.  The Canadian government has predicted 
that if currently planned projects are realized, by 
2010 Canada will provide approximately 20.5 percent of 
U.S. oil imports and 14.1 percent of total U.S. oil 
supply.  The Alberta Energy and Utilities Board 
projects that synthetic crude oil production from 
Alberta's oilsands will expand by 237 percent from 2002 
to 2012. 
 
¶18. During the past year, first Oil and Gas Journal and 
subsequently the U.S. Energy Information Administration 
began to recognize Canada's oil sands as "proven 
reserves" -- a decision which dramatically increases 
Canada's petroleum reserves on paper, to about 180 
billion barrels, making Canada the world's second- 
largest reserve holder after Saudi Arabia.  While the 
validity of counting the oilsands as "proven reserves" 
has been subject to some ongoing controversy (notably 
following a critical item by Jeff Gerth in the New York 
Times on June 18), their economic reality is affirmed 
by the many billions in actual capital investment which 
they are attracting and the resulting current increases 
in oil output. 
 
¶19. COMMENT:  There is growing confidence among 
Canadian stakeholders and analysts that this resource 
imposes an effective limit on the price which North 
America must pay for overseas oil in the long run, 
absent severe foreign supply disruptions.  Embassy 
shares this view.  END COMMENT. 
 
 
ARCTIC PIPELINES:  MACKENZIE LINE CLOSER TO REALITY 
--------------------------------------------- ------ 
 
¶20. IN RECENT MONTHS, STAKEHOLDERS IN AN ANTICIPATED NATURAL 
GAS PIPELINE DOWN THE MACKENZIE RIVER VALLEY IN NORTHWESTERN 
CANADA HAVE TAKEN FURTHER STEPS TO PAVE THE ROAD FOR A 
FORMAL DEVELOPMENT PROPOSAL.  TRANSCANADA PIPELINES (TCPL), 
ONE OF THE WORLD'S LARGEST PIPELINE OPERATORS, SIGNED A DEAL 
IN JUNE TO PROVIDE FINANCING TO ABORIGINAL PIPELINE GROUP 
(APG), ENABLING APG TO TAKE A ONE-THIRD OWNERSHIP SHARE IN 
THE PIPELINE.  THE MAIN PRODUCING PARTNER IS IMPERIAL OIL, 
THE CANADIAN SUBSIDIARY OF EXXON.  AN INITIAL APPLICATION TO 
REGULATORS IS EXPECTED IN THE FALL OF 2003. 
 
¶21.  STAKEHOLDERS LESS AND LESS VIEW THE MACKENZIE LINE AND 
ANOTHER, LARGER PIPELINE TO ALASKA'S PRUDHOE BAY AS BEING 
INCOMPATIBLE.  THIS IS BECAUSE IT APPEARS INCREASINGLY 
LIKELY THAT THE SMALLER AND SHORTER MACKENZIE LINE WILL BE 
CONSTRUCTED FIRST, AND BECAUSE THERE IS INCREASING CONCERN 
THAT NORTH AMERICA'S DEMAND FOR NATURAL GAS MAY OUTSTRIP 
SUPPLIES OVER THE COMING DECADE (REF F).  CANADIAN 
OBJECTIONS TO POSSIBLE FISCAL INCENTIVES TO SUPPORT THE 
ALASKA PIPELINE FOCUS ON THE POSSIBLE MARKET-DISTORTING 
EFFECTS OF SUCH SUBSIDIES - PARTICULARLY IF THEY GO BEYOND 
THE SCOPE OF MEASURES TAKEN TO ENCOURAGE INVESTMENT IN OTHER 
GAS PRODUCING REGIONS. 
 
 
ELECTRICITY:  RESTRUCTURING SKIDS IN ONTARIO 
-------------------------------------------- 
 
¶22. Electric power is primarily under provincial 
jurisdiction in Canada, and is traditionally dominated by 
provincial government-owned firms.  Several provinces have 
taken steps to restructure their electricity sectors on 
competitive principles.  Alberta has achieved a degree of 
competition at both wholesale and retail levels which has 
been characterized as a "messy success" (ref J). 
 
¶23. In Ontario in recent years, the provincial monopoly 
utility was split up into generation, transmission and 
distribution components, and some competition was introduced 
at the retail level.  However, in April 2002 a planned 
initial public offering of the provincial government-owned 
transmission grid operator, Hydro One, was blocked by a 
court ruling.  Transmission grid issues quickly became 
politicized, particularly when power prices rose during the 
peak summer period.  In November 2002, the Ontario 
government froze retail power rates at 4.3 cents/KWH for 
most customers until 2006.  Since then, the government has 
struggled to increase generating capacity with little help 
from private investment.  Re-starting mothballed nuclear 
plants is crucial to its survival strategy, but the first re- 
starts - expected this summer and fall - have been delayed. 
 
¶24. Canada's National Energy Board (NEB) predicts that 
domestic electricity demand will grow slightly faster than 
supply through 2025, causing electricity exports to the 
United States to decline significantly from current levels 
in the long run.  This is driven by the trend for generating 
facilities to be located closer to end users.  One major 
reason for this is the difficulty of constructing new 
transmission capacity due to a range of concerns including 
environmental/agricultural opposition, regulatory hurdles, 
and uncertainty associated with the evolving market 
environment for electric power.  Another is the growing 
availability of natural gas and the efficiency of gas-driven 
generating technology. 
 
¶25. Canada still has abundant undeveloped hydroelectric 
potential, but these resources tend to be located far from 
densely populated markets.  Provinces with large undeveloped 
sites include Newfoundland and Labrador (Churchill Falls 
II), Quebec (Great Whale) and Manitoba (Nelson River). 
There is significant potential for cogeneration of electric 
power in oilsands operations, but here as well, it will be 
difficult for the resulting power to reach major markets 
unless construction of long-distance power lines becomes 
easier. 
 
 
NUCLEAR:  MOVING FORWARD ON LONG-TERM DISPOSAL 
--------------------------------------------- - 
 
¶26. Like the United States, Canada has no permanent disposal 
facility for its nuclear waste, which is currently stored at 
reactor sites.  As in the U.S., proposals to move this waste 
to any other site(s) provoke strong local resistance. 
During 2002, Canada passed legislation which creates a Waste 
Management Organization, funded by nuclear energy firms, to 
develop a long-term approach to storing radioactive waste. 
The GOC plans to make a decision by 2006 in favor of one of 
the three major options (deep geological storage, 
centralized surface/subsurface, or continued storage at 
reactor sites). 
 
 
CLIMATE CHANGE 
-------------- 
 
¶27.  In the spring of 2002 the USG and GOC announced a more 
concerted effort to coordinate our climate change programs, 
with a particular focus on energy, especially energy 
efficiency, clean energy, clean coal, renewable and 
alternative energy and carbon sequestration.  At Prime 
Minister Chretien's initiative, Canada formally ratified the 
Kyoto Accord at the end of 2002, despite vocal criticism 
from provincial governments and industries (with Alberta and 
the oil and gas sector leading the way - ref L).  Critics 
were concerned that the burden of compliance would fall 
disproportionately on certain regions/industries and also 
that compliance would place Canada's economy at a lasting 
competitive disadvantage vis--vis the United States. 
 
¶28. In its spring 2003 budget, the GOC committed C$1.5 
billion (about US$1 billion) over five years directly to 
achieving greenhouse gas emission reductions, plus modest 
additional funds for research and long-term technology 
development.  GOC officials are now engaged in determining 
what process will be used to allocate this spending. 
 
CELLUCCI