US embassy cable - 04HALIFAX115

UNCLAS SECTION 01 OF 02 HALIFAX 000115 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, PGOV, CA, Energy, Petrolium 
SUBJECT: ATLANTIC CANADA:  ENERGY TOPICS 
 
REF: HALIFAX 40 (NOTAL) 
 
 
SENSITIVE BUT UNCLASSIFIED.  ALSO CONTAINS PROPRIETARY 
INFORMATION.  PROTECT ACCORDINGLY. 
 
1.  (SBU)  SUMMARY:  Nova Scotia and Newfoundland have been 
working to streamline their regulatory regimes for offshore 
energy exploration, but industry calls for combining the two 
federal-provincial offshore boards will not be acted upon any 
time soon.  The Premiers of Nova Scotia and Newfoundland and 
Labrador are both pushing hard for a better deal on energy 
royalties from offshore production:  Paul Martin says he's 
considering the plan while Stephen Harper has already said he 
agrees with it.  The relatively slow pace of exploration 
offshore Nova Scotia is dramatically illustrated by the presence 
of two jack-up drilling rigs in Halifax harbor.  Irving Oil 
Company is moving ahead with plans for a liquefied natural gas 
terminal near St. John on the Bay of Fundy, action that may 
preclude development of an LNG facility in Nova Scotia. 
Newfoundland and Labrador's Premier is keen to press ahead with 
the Lower Churchill Falls hydroelectric development, but he 
would like to minimize Quebec's participation in the project. 
New Brunswick Power and the provincial energy ministry have come 
under stinging criticism for mishandling the conversion of a 
power plant to allow it to burn bitumen-based "orimulsion" fuel 
from Venezuela.  END SUMMARY. 
 
PUSH TO STREAMLINE OFFSHORE REGULATIONS ... 
 
2.  (SBU)  Both Nova Scotia and Newfoundland and Labrador 
government officials have said that they are looking for ways to 
streamline and make more transparent regulations regarding 
offshore energy exploration.  Nova Scotia, in particular, is 
concerned that the pace of offshore exploration has fallen (see 
para 5 below), with a resulting slowdown in support industry 
work and revenues.  NS Energy Minister Cecil Clarke and his 
Deputy Minister Dan McFadyen have come to the conclusion that 
they need to do a better job of selling the province's offshore 
potential to the energy industry, particularly to U.S. firms. 
Clarke plans trips to major offshore energy shows and Washington 
to meet with the industry and U.S. regulators to draw attention 
to what Clarke call's the province's "steady, go-forward plan" 
for offshore development. 
 
3.  (SBU)  Streamlining, however, will probably not extend to 
combining the two federal-provincial offshore energy boards, as 
many in the industry have called for.  Premier Danny Williams in 
St. John's was categorical that his government saw no advantage 
to a combined board, something Fred Way, vice-chairman of the 
Canada-N-L board, confirmed with CG recently.  In practice, 
differing rules in the two jurisdictions add inefficiencies to 
the hunt for energy in Atlantic Canada's offshore areas, but 
neither province wants to suffer the potential job losses in 
support industries that combining the boards and rationalizing 
their rules would entail.  N-L's level of offshore activity is 
much higher right now than Nova Scotia's, so St. John's 
perceives that it has the most to lose by creating a single 
joint offshore board. 
 
... AND KEEP MORE OF THE REVENUES 
 
4.  (U)  Newfoundland and Labrador Premier Danny Williams and 
his Nova Scotia counterpart John Hamm are leading the charge for 
a new deal with Ottawa that would give the provinces a larger 
share of the royalties.  A key issue will be whether the federal 
government "claws back" equalization payments if offshore 
royalties rise -- as things currently stand the provinces lose 
70 cents of equalization for every additional dollar of offshore 
revenue they collect.  Williams, in particular, has made 
re-negotiation of the Atlantic Accord a top priority and told CG 
that he has tried hard to cultivate a relationship with PM Paul 
Martin to advance this and other provincial goals.  Martin said 
recently during a visit to Nova Scotia that he was considering 
changing the formula; Conservative Party leader Stephen Harper 
beat him to the punch by announcing that he supports increased 
royalties with no clawback. 
 
RIGS IN THE HARBOR 
 
5.  (U/PROPIN)  One indication of the relatively slow pace of 
exploration in Nova Scotia's offshore in recent months is that 
there are now two jack-up drilling rigs parked in Halifax harbor 
between jobs.  GlobalSantaFe's "Galaxy II," designed and built 
specifically to work in this region, has been in port since 
November 2003 after about five years of drilling in the 
relatively shallow waters around Sable Island.  Rowan's "Gorilla 
V" joined its competitor in the harbor in March.  There is 
currently only one rig working in Nova Scotia's offshore, but 
both GSF and Rowan tell us they expect to be back out by June. 
Keeping a rig in port for prolonged periods is a costly 
proposition:  GSF told us that they spend US$60-70,000 per day 
keeping the "Galaxy II" at the dock; when the rig is working it 
can be billed at 10 to 15 times that amount. 
LNG:  NEW BRUNSWICK STEALING A MARCH ON NOVA SCOTIA? 
 
6.  (SBU)  As reported in reftel, Irving Oil Ltd. is moving 
forward with plans for a liquefied natural gas (LNG) plant near 
St. John, New Brunswick, on the Bay of Fundy.  Senior NB energy 
official recently told CG that Irving delivered its 
environmental impact statement for the plant to the NB 
government in mid-March, and that the area proposed for the 
plant had been set aside for industrial development.  Irving, 
they said, was "very serious" about LNG.  This is probably bad 
news for the firm ANE, which is proposing to build an LNG 
facility near Port Hawksbury, NS.  A Nova Scotia cabinet member 
who represents the area told CG in fall 2003 that a cabinet 
decision and announcement about the project would be made before 
Christmas, but it does not seem to have materialized yet. 
COMMENT:  There is a good case to be made for one LNG plant in 
the area in the medium term, but it is hard to see how two could 
make economic and financial sense.  Whichever group gets going 
first will probably win.  END COMMENT. 
 
LOWER CHURCHILL HYDROELECTRIC DEVELOPMENT 
 
7.  (SBU)  Newfoundland and Labrador Premier Danny Williams told 
CG during a recent trip to St. John's that his government was 
committed to development of the Lower Churchill Falls 
hydroelectric power project.  Williams clearly would love to 
find a way to push the project forward without involving Quebec, 
perhaps by cutting a deal directly with U.S. electricity 
consumers that would permit financing for the project. 
Unfortunately, geography seems to make a deal with N-L's 
neighboring province inevitable, since there seems to be no 
realistic way to send electricity to the U.S. without using 
Quebec's lines or building new ones that pass through the 
province. 
 
8.  (SBU)  COMMENT:  The existing deal with Quebec for Upper 
Churchill Falls electricity is widely seen in N-L as a textbook 
example of poor negotiation, so it is not all that surprising 
that Williams would love to gain the near-universal acclaim in 
the province that would follow a Lower Churchill deal which 
somehow managed to exclude Quebec.  Interestingly, one of the 
justifications offered for the multi-billion dollar proposed 
rail tunnel under the Strait of Belle Isle that would link 
Newfoundland to the Labrador mainland is that the tunnel could 
be used to house electric transmission lines.  END COMMENT. 
 
 
WHAT WERE THEY THINKING? 
 
9.   (SBU)  And finally, in New Brunswick, a committee of the 
legislature is pondering what to do about the orimulsion scandal 
after hearing hours of testimony from provincial officials.  The 
short version of this story is that NB Power, which has worked 
with a Venezuelan firm for more than 15 years on ways to use the 
bitumen-based fuel and has had one power plant burning 
orimulsion for a decade, went ahead with C$600-700 million worth 
of renovations on another plant to allow it to burn orimulsion. 
Unfortunately, there was apparently nothing but a handshake deal 
to provide fuel to the second plant, and the supplier has 
recently decided that there are more profitable things to do 
with orimulsion than ship it to New Brunswick.  Provincial 
energy officials told CG that about half of the modifications to 
the plant were emissions control and other upgrades that were 
needed regardless of the type of fuel, but that about C$350 
million would be wasted if indeed the plant had to be converted 
to burn something other than orimulsion.  News of mismanagement 
on such a scale comes at a bad time for the province: the budget 
is tight, civil service salaries are frozen and services are 
being cut back. 
 
HILL