US embassy cable - 05OTTAWA2966

UNCLAS OTTAWA 002966 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/CAN AND EB/ESC/IEC 
DOE FOR INTERNATIONAL AFFAIRS: PUMPHREY, DEUTSCH 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, PGOV, CA 
SUBJECT: HURRICANES AND NATURAL GAS DISRUPTIONS: THE VIEW 
FROM CANADA 
 
REF: OTTAWA 2688 
 
1.  (U) Sensitive but unclassified. 
 
2.  (SBU) Summary:  With Canada's natural gas production at 
nearly full capacity, there is little that government or 
industry can do in the short-term to add to North America's 
natural gas supply.  Interlocutors say that in the wake of 
Hurricanes Katrina and Rita, at least the debate within the 
GOC is headed in the right direction, focusing on capacity 
and demand rather than pricing.  In the long term, the record 
high prices could serve to spur new drilling and new 
investment.  End summary. 
 
3.  (SBU) According to representatives of the Canadian Gas 
Association (CGA), the recent hurricanes have dramatically 
illustrated how little excess capacity exists in the North 
American natural gas system.  For several years Canada's 
natural gas production has been essentially flat at about 6.4 
trillion cubic feet (TCF) per year, with about 3.6 TCF 
exported to the United States.  Although natural gas from 
Canada represents about 17 percent of total U.S. consumption, 
Canada's proven reserves have declined by more than 13 
percent since 1996, and currently stand at 56.1 TCF. 
 
4.  (SBU) The CGA representatives believe that, at least in 
private and in committee, members of Parliament have 
generally displayed a good understanding of the tight natural 
gas market in North America.  MPs, they say, have correctly 
keyed in on capacity and demand, recognizing that, much like 
petroleum (see reftel), there is no easy way to boost 
production in the short-term. 
 
5.  (U) Approximately 47 percent of Canadian households use 
natural gas for heating, and most areas of the country are 
expected to experience record consumer prices this winter. 
For many consumers, high prices may be somewhat mitigated by 
the practice of many gas providers to purchase gas in the 
summer, when  prices are lower.  Ironically, hedging prices 
in this manner is specifically forbidden in Alberta, where 
most Canadian gas is produced, so Albertans may pay some of 
the highest prices in Canada this winter for natural gas (the 
province has a rebate program for lower income residents if 
prices go above a certain level). 
 
6.  (U) Even before the hurricanes, high prices were driving 
increased drilling activity throughout western Canada, but 
especially in northeast British Columbia.  New drilling for 
natural gas has increased 69 percent over last year in 
British Columbia, and labor shortages have become one of the 
industry's biggest challenges.  The combined effects of 
higher prices and the hurricanes may also give new momentum 
to the Mackenzie Valley gas pipeline project, which would 
transport at least 6 TCF of proven gas reserves from the 
Mackenzie River delta to existing gas infrastructure in 
Alberta. 
 
7.  (SBU) Comment: With its natural gas production system 
operating at near full capacity, there is little that Canada 
can do in the short-term to add significantly to North 
America's gas supply.  In the longer term, high prices may 
serve to spur new investment, increased drilling, and build 
momentum for projects such as the Mackenzie Valley pipeline 
and various proposals for liquefied natural gas (LNG).  For 
Canadian consumers, however, the long-term projects will do 
little to alleviate the pain they will experience this winter 
over record natural gas prices.  With the country heading 
into election mode, it may prove difficult for industry to 
keep the debate focused on supply and capacity, rather than 
pricing. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
WILKINS