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

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