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 CALGARY 000656 
 
SIPDIS 
 
STATE FOR WHA/CAN, EB/ESC/ISC, EB/PPD 
 
USDOE FOR IA (DEVITO, PUMPHREY, DEUTSCH) 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ETRD PGOV SENV CA CH UK
SUBJECT: CALGARY ENERGY ROUND-UP:  OCTOBER 2005 
 
¶1. Alberta Minister Melchin Warns Ottawa to Keep Energy out of 
Softwood Lumber Dispute: "Hands off Our Oil" 
¶2. NEP2 on the Horizon? 
¶3. Alberta Energy Company Buys North Sea Developer 
¶4. New Terasen-Pembina Partnership Proposes Condensate Pipeline 
¶5. New Oilsands Regulations Raise Environmental Concerns 
¶6. Kitimat Chosen as Western Port for New Pipeline System 
¶7. CEPA Head Warns That Lack of Regulatory Reform Threatens 
Mackenzie Pipeline 
¶8. Revenues from Oil and Gas Promise to Make 2005 Banner Year 
for Saskatchewan 
¶9. Saskatchewan Officials Strengthen Business Ties in China, 
Hong Kong 
¶10. Alberta Considering Building Refinery Facilities 
¶11. Retiring EnCana Founder Lauded as "Visionary" 
¶12. Gas Output in US Rockies to Overtake Western Canada's, 
Predicts Think Tank 
¶13. Enough Natural Gas for Everyone, Claims Melchin 
¶14. New Road Aids Flow of Labor Between Saskatchewan and Alberta 
¶15. Albertans Not Surprised at Findings that Province is Top 
Polluter 
 
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¶1. ALBERTA MINISTER MELCHIN WARNS OTTAWA TO KEEP ENERGY OUT 
OF SOFTWOOD LUMBER DISPUTE: "HANDS OFF OUR OIL" 
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Alberta Energy Minister Greg Melchin made public in October his 
opposition to using energy policy as a bargaining chip in the 
softwood lumber dispute, after meeting with top US energy 
officials. The provincial government has been dismissive of 
those in Ottawa calling for the linkage of energy and lumber, 
reminding Canadians that Prime Minister Martin can "talk all he 
wants, but the fact is the resources~are owned by the 
provinces". Tariffs imposed by the United States on Canadian 
softwood lumber continues to be the major point of contention in 
the Washington-Ottawa relationship, with Secretary Rice's recent 
talks with Martin bringing the issue to the forefront. With 
Canada supplying an increasingly large portion of the United 
States' seemingly insatiable energy consumption, energy 
resources are seen as one of the few areas of trade where Ottawa 
is negotiating from a position of strength. Support for 
restricting energy exports has grown exponentially since August, 
when the United States called for further talks following a 
NAFTA ruling ordered Washington to compensate Canada for the 
US$5 billion in tariffs levied against the Canadian lumber 
industry. 
 
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¶2. NEP2 ON THE HORIZON? 
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The 25th anniversary of Canada's National Energy Program (NEP) 
this month saw an Alberta eerily similar to its 1980s 
counterpart; the province is booming as a result of high energy 
prices, a Liberal government in Ottawa is beginning to see a 
smaller and smaller part of a larger and larger royalty pie, and 
a Conservative government in Alberta is beginning to get 
suspicious. Although a repeat of the NEP is almost universally 
considered impossible, Alberta Premier Ralph Klein has been 
public about his concerns that another "threat is on the 
horizon". Several highly visible events over the past two months 
have combined to form the proverbial perfect storm in the 
oilsands: Alberta's almost obscenely large budget surplus, 
budget deficits in some of the eastern provinces, and the 
softwood lumber dispute with the United States. Ottawa has 
mentioned utilizing Canada's booming energy trade as a 
negotiating tool in the softwood lumber fight, infuriating 
Albertans who still remember the last time the federal 
government encroached on what is legally the property of the 
provinces. Premier Klein has lead the fight against a possible 
politicization of oil and gas, telling Ottawa to "keep its hands 
off" Alberta's resources. While a revival of the NEP is 
unlikely, several proposals which Albertans say has the same 
effect are on the table. One such idea, which would increase 
Ottawa's resource revenue take without violating NAFTA or 
provincial property rights, would link energy directly to 
Canada's commitments under the Kyoto Protocol. Although the 
details of the plan are still sketchy, proponents suggest a tax 
on carbon, directly affecting Alberta's "dirty energy" oilsands 
industry. This proposal was pushed to the forefront in October 
when a report by Environment Canada found that Alberta is now 
the top provincial air polluter in Canada, surpassing Ontario 
for the first time in eight years. Whether a grab is made for 
Alberta's energy revenue or not will ultimately depend on 
popular support for the federal Liberals. 
 
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¶3. ALBERTA ENERGY COMPANY BUYS NORTH SEA DEVELOPER 
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Calgary-based Talisman Energy Inc. announced Friday that it 
would buy Britain's Paladin Resources PLC for C$2.52 billion, 
giving a huge boost to Talisman's oil reserves and exploration 
potential. Nearly three-quarters of Paladin's reserves and 
production are in the North Sea, where the company produces 
145,000 bbls per day. Talisman has aggressively pursued growth 
in the region since its acquisition of Bow Valley Energy Inc. 
over a decade ago. The purchase also gives Talisman 600,000 
acres of properties in the Norwegian sector of the North Sea, 
greatly enhancing the company's opportunities for exploration. 
The buyout was surprisingly unpopular with investors. 
Jarislowsky Fraser, Talisman's largest shareholder, believes the 
company's dropping share value is a result of their lack of 
long-term vision: "When the price of oil is high, you pay a high 
price~the rule of buying low and selling high is not being 
observed". In good news for petroleum consumers worldwide, 
Talisman told reporters that before the end of the decade, 
production by Paladin's oil facilities is expected to increase 
by half, to 70,000 bbls per day, before the end of the decade. 
 
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¶4. NEW TERASEN-PEMBINA PARTNERSHIP PROPOSES CONDENSATE PIPELINE 
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Calgary-based pipeline companies Terasen and Pembina made public 
the creation of a new partnership between the two to oversee the 
possible development of a new condensate delivery system. The 
C$1 billion Spirit Pipeline would transport offshore condensate 
from a deepwater port in Kitimat, British Columbia to Edmonton. 
Condensate is an ultra light oil used to dilute the heavy crude 
oil produced in the northern Alberta oilsands, allowing it to be 
transported by traditional oil pipelines. Demand for condensate 
in Alberta has been increasing along with development of the 
oilsands, while its supply from natural gas wells has dropped. 
The pipeline will be designed to transport 100,000 bbls of 
condensate a day, considerably less than the quarter-million 
bbls a day expected from Enbridge's proposed delivery system. 
Terasen and Pembina believe they have one advantage over rival 
pipeline designs however: timing. The Spirit Pipeline is 
expected to be in place by mid-2009, a full year earlier than 
that of Enbridge. Also working in the partnership's favor is the 
proposed route of Spirit, which will avoid most of British 
Columbia's greenfield, requiring fewer regulatory approvals and 
falling mainly under provincial jurisdiction. The construction 
of the pipeline will occur simultaneously with new condensate 
import facilities in British Columbia, with several energy 
companies planning to expand terminaling and port capacity in 
Kitimat. 
 
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¶5. NEW OILSANDS REGULATIONS RAISE ENVIRONMENTAL CONCERNS 
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A newly published Alberta Government plan would give oilsands 
development highest priority in northern Alberta. The new 
regulatory scheme creates a development zone around Fort 
McMurray, promising oil companies they now have the right to 
mine anywhere in the region. Previously, oil companies had to 
compete with producers of other resources, such as the lumber 
industry. The new plan, called a "Mineable Oil Sands Strategy" 
(MOSS) is still in the process of being drafted by the Oil Sands 
Ministerial Strategy Committee. While new mining projects are 
still required to pass environmental assessments, as well as 
receiving approval from the Alberta Energy and Utilities Board 
(EUB), critics say the new plan will lead to the destruction of 
the pristine forests of northern Alberta. Chris Severson-Baker, 
director of the energy watch program at the Drayton Valley, 
Alberta-based Pembina Institute, an environmental think tank, 
claims the new regulations will essentially demolish 2,800 
kilometers of old-growth forests. The plan also has the 
potential to generate friction between Edmonton and local First 
Nations; the development region surrounds the Fort McKay 
reserve, and it is possible that hunting and fishing by 
aboriginals will be prohibited inside the zone. 
 
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¶6. KITIMAT CHOSEN AS WESTERN PORT FOR NEW PIPELINE SYSTEM 
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Calgary-based Enbridge Inc. announced this month that the 
company had chosen Kitimat, British Columbia as the western 
terminus for the proposed C$4 billion Gateway pipeline project. 
Kitimat's deep water port will enable easy loading for the oil 
tankers, which will carry heavy crude from Gateway to markets in 
Asia and California. Gateway would consist of two pipelines, one 
transporting up to 400,000 bbls of heavy crude oil a day, and 
the other a 150,000 bbl a day condensate supply system. 
Condensate is used in the oilsands to facilitate flow of the 
heavy crude through traditional pipeline systems. If the 
National Energy Board (NEB) accepts the proposal, Enbridge hopes 
to complete construction by 2010. Discussions are underway 
between the company and several entities concerning use of the 
pipeline, including China government-owned Petro-China, which 
last April finalized a preliminary deal with Enbridge for half 
of Gateway's daily shipping capacity. 
 
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¶7. CEPA HEAD WARNS THAT LACK OF REGULATORY REFORM THREATENS 
PROPOSED 
 MACKENZIE VALLEY PIPELINE 
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The recent announcement that an agreement has been reached with 
Conoco Phillips to build a US$20 billion oil pipeline in Alaska 
has raised doubts that the proposed Mackenzie Valley natural gas 
pipeline will be completed on schedule, if at all.  David 
MacInnis, President of the Calgary-based Canadian Energy 
Pipeline Association says the Alberta assumption that Mackenzie 
has a two or three year head start on the Alaska pipeline is 
inaccurate.  The US$20 billion pipeline would deliver 4 bcf of 
natural gas from the North Slope oil fields to US markets in the 
Midwest. The State of Alaska will hold an equity share of about 
US$4 billion, or 20%. The state government is also considering 
two competing pipeline proposals; TransCanada is bidding for a 
similar pipeline, and another proposal would parallel the 
existing trans-Alaska line, delivering LNG to the port of 
Valdez. Energy officials argue that the delays in processing the 
Mackenzie project demonstrate the need for regulatory and fiscal 
reform. Although Ottawa has spent C$75 million on improving 
regulatory capacity in the Northwest Territories, where the 
pipeline would originate, none of the 24 benefiting regulatory 
bodies are fully staffed. A recent study found that a two-year 
delay in construction of a pipeline in the region (either the 
Alaska or Mackenzie pipelines) would cost Canadian consumers 
C$57.7 billion in higher natural gas prices over the next 20 
years. 
 
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¶8. REVENUES FROM OIL AND GAS PROMISE TO MAKE 2005 BANNER YEAR 
FOR SASKATCHEWAN 
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Strong interest in Saskatchewan's oil and gas resources promise 
to make 2005 a record year for the province. With one sale still 
to go this year, 2005 is already one of the province's top seven 
years in terms of revenues from the sale of crown lands and 
resource rights. Sale of petroleum and natural gas rights has 
reaped Saskatchewan a total of C$114 million as of October 31st. 
The largest single sale was for a permit allowing Canadian 
Landmasters Resource Service Ltd. to work over 156,000 hectares 
near Chamberlain, costing the company C$3.5 million. 
 
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¶9. SASKATCHEWAN STRENGTHENS BUSINESS TIES IN CHINA, HONG KONG 
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Saskatchewan Premier Lorne Calvert and provincial Industry and 
Resources Minister Eric Cline wrapped up their meetings with top 
Chinese and Hong Kong businessmen in October. The pair 
reportedly used the meetings as a forum to promote 
Saskatchewan's growing energy and agricultural trade with the 
Far East. Premier Calvert reminded his audiences that China is 
now Saskatchewan's largest trading partner, besides the United 
States. Two-way trade between China and the province has 
increased in recent years, especially in potash shipments and 
agricultural commodities. Saskatchewan is the world's largest 
producer of potash, and is China's fourth largest trading 
partner in Canada. As a result of the meetings, China National 
Petroleum Corporation (CNPC) gave Saskatchewan high priority as 
a future strategic partner in energy related investment. The 
premier also applauded the close ties between Chinese and 
Saskatchewan universities; Calvert presided over the signing of 
two Memorandums of Understanding (MOUs) while in Beijing: one 
between the University of Regina and the CNPC, and one between 
the University of Saskatchewan and the Beijing Institute of 
Technology. Premier Calvert and Minister Cline concluded their 
four-nation tour with trips to Kazakhstan and Tokyo this week. 
 
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¶10. ALBERTA CONSIDERING BUILDING REFINERY FACILITIES 
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While Alberta Government officials have downplayed rumors that a 
C$7 billion refinery project will soon receive regulatory 
permits, they have confirmed that the province is spending 
C$200,000 to study the proposal. The study, commissioned by the 
Hydrocarbon Upgrading Task Force, is also funded in part by a 
group of industry sponsors interested in adding value to 
Albertan bitumen before being shipped to American markets. The 
task force initially looked simply at upgrading bitumen to 
synthetic light oil, but soon expanded the study's scope to 
review a broad range of value-adding petroleum products. 
However, provincial officials have attempted to minimize news of 
the project, saying it is still several steps removed from even 
becoming a feasibility proposal. Cindy Goodyear of Alberta 
Economic Development stated, "It's a hypothetical refinery used 
to illustrate the potential benefits of integrating a refinery 
with existing plants".  Alberta Economic Development is 
organizing a group of 16 corporate participants in the study. If 
completed, the proposed refinery would be the first in North 
America in over a quarter century, and with a 300,000 bbls per 
day refining capacity, the largest in Canada. 
 
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¶11. RETIRING ENCANA FOUNDER LAUDED AS "VISIONARY" 
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The resignation announcement of Gwyn Morgan, President and CEO 
of Calgary-based EnCana, one of Canada's largest corporations, 
came as a surprise to an energy industry that has watched the 
company's share price grow more than 80% this year. Morgan has 
been credited with the strong performance of the company since 
its inception in 2002, when he brokered a merger deal between 
homegrown entities Alberta Energy Company (AEC) and PanCanadian 
Petroleum Limited. The resulting company was the largest in 
Canada in recent months, a result of high oil and gas prices. 
Morgan was responsible for many controversial changes in the 
corporation, including the re-focusing of EnCana on North 
American energy projects, when the company sold many of its 
foreign assets in South America and the North Sea. Morgan 
downplayed reports that his resignation was in response to the 
rumored acquisition of EnCana by Royal Dutch Shell. Morgan will 
remain as an officer of the company until 2006, working in an 
advisory capacity for new president and CEO Randall Eresman. 
Eresman has been with EnCana and its predecessor, AEC, since 
1980, and played a key role in the early development of EnCana 
after the 2002 merger. 
 
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¶12. GAS OUTPUT IN US ROCKIES TO OVERTAKE WESTERN CANADA'S, 
PREDICTS 
 ENERGY THINK TANK 
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Highly-respected energy consulting firm Ziff Energy has 
predicted that natural gas production in the US Rockies could 
overtake western Canadian output as early as 2012, mainly from 
increased exploitation of low-permeability rock. Production is 
expected to increase by about 2.5 bcf a day to 16 bcf in 2012, 
although Dennis Elias, manager of gas consulting for 
Calgary-based Ziff, warned that expansion could be seriously 
hampered by a lack of pipeline capacity in the region. A number 
of new pipeline projects have been proposed to meet the expected 
rise in demand for gas transportation systems, including a US$3 
billion pipeline from Wyoming to eastern Ohio and a much larger, 
1,500 mile project outlined by Kinder Morgan Energy Partners. 
 
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¶13. ENOUGH NATURAL GAS FOR EVERYONE, CLAIMS MELCHIN 
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Alberta Energy Minister Greg Melchin assured Canadians this week 
that the expanding oilsands will not consume an overly large 
portion of the province's natural gas. Environmental and 
consumer groups have been concerned that oilsands production, 
which uses natural gas to extract bitumen from the ground, would 
eventually take the lion's share of natural gas, raising already 
record high prices. Several alternatives to using natural gas in 
the oilsands are being studied. One promising proposal is to use 
gasified coke, a byproduct of the oilsands mining, as a 
replacement fuel for the process. According to Melchin, even if 
a cost-effective alternative is not discovered, the northern 
Alberta oilsands would require only one-third to one-half of the 
natural gas being transported by the proposed Mackenzie Valley 
pipeline, which, if built, should be in operation early next 
decade. 
 
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¶14. NEW ROAD AIDS FLOW OF LABOR BETWEEN SASKATCHEWAN AND ALBERTA 
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Alberta Premier Ralph Klein and Saskatchewan Premier Lorne 
Calvert released plans this September to strengthen 
infrastructure ties between the two provinces with a C$45 
million all-weather road linking La Loche, Saskatchewan with 
Fort McMurray, Alberta. Klein's government will provide the 
majority of funding; the cost of the Alberta leg of the proposed 
road will top C$40 million, while Saskatchewan's portion is 
estimated at approximately C$5 million. The project was hailed 
by both premiers, with Klein predicting that "the La Loche Road 
will give employers in the Athabasca oilsands access to a 
valuable new resource-the labour pool in northern Saskatchewan." 
The road is expected to provide relief to Fort McMurray's 
strained labor force. The northern Alberta town has boomed in 
recent years, a response to exponential increases in labor 
demand from local oil and gas companies. Construction on the La 
Loche Road could begin as early as the first months of 2006, and 
is expected to be completed by 2009. 
 
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¶15. ALBERTANS NOT SURPRISED AT FINDINGS THAT PROVINCE IS TOP 
POLLUTER 
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A recent survey conducted by Environment Canada has reported 
that Alberta is the nation's biggest polluter in 2003, 
surpassing Ontario for the first time in eight years and 
accounting for nearly a quarter of Canada's total emissions. 
"The numbers weren't a surprise to us because we are such a 
heavy petroleum producer in the country", said Alberta 
Environment spokesperson Erin Gregg. The provincial government 
has begun to address rising environmental concerns by 
encouraging companies to use cleaner technologies and enforcing 
tougher emissions standards for coal-fired power plants. 
However, many environmental groups believe Edmonton could do 
better. Chris Severson-Baker, an energy specialist with the 
Drayton Valley, Alberta-based Pembina Institute, argues that the 
province has yet to make substantial improvements in the 
environment; certain emissions, such as sulfur dioxide may be 
down, but increases in other hazardous pollutants bring into 
question Alberta's commitment to air quality.   Severson-Baker 
noted, "Those reductions are being outstripped by the sheer 
growth of the oilsands". The Pollution Watch report also showed 
that Canada was beginning to lag behind the United States in 
reducing emissions. 
 
 
 
AHMED