US embassy cable - 05CALGARY599

UNCLAS SECTION 01 OF 04 CALGARY 000599 
 
SIPDIS 
 
STATE FOR WHA/CAN, EB/ESC/ISC/ EB/EPPD 
 
USDOE FOR IA (DEVITO, PUMPHREY, DEUTSCH) 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, ETRD, PGOV, CA, Petrolium 
SUBJECT: USDOE OFFICIALS LEARN ALBERTA OILPATCH DOES ALL IT CAN TO 
ASSIST HURRICANE STRICKEN STATES 
 
REF: CALGARY 248 AND PREVIOUS 
 
1.  (SBU) Summary:  Calgary welcomed USDOE officials Mr. Gary 
Ward, Director, American Affairs, and Ms. Kathleen Deutsch, 
Senior Analyst, American Affairs, to Calgary September 27 - 30, 
2005.  In addition to presenting a speech at the Far North Oil 
and Gas Conference and touring northern Alberta's massive 
oilsands operations (hosted by Syncrude), Mr. Ward and Ms. 
Deutsch participated in a series of Alberta Government and 
oilpatch meetings that provided updates of Alberta's efforts 
aimed at ramping up oil and gas production in light of 
hurricanes Katrina and Rita, as well as briefings on other 
current Canadian energy issues, notably the proposed Mackenzie 
Valley pipeline.  During their visit, the USDOE officials met 
with the Alberta Government, the Canadian Association of 
Petroleum Producers (CAPP), the University of Calgary, Imperial 
Oil, ConocoPhillips, TransCanada Corp., the Canadian Energy 
Research Institute (CERI), Petro-Canada, EnCana, and Devon 
Corporation.  Highlights of the meetings follow.  Pol/Econ 
Assistant accompanied Ward and Deutsch to all meetings and Vice 
Consul Pidgeon participated in the Syncrude oilsands tour.  End 
summary. 
 
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Alberta Temporarily Suspends Rate Limitations In Light of 
Hurricane Katrina and Rita 
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2. (SBU) In the aftermath of hurricanes Katrina and Rita, many 
of our interlocutors addressed the ability of Alberta producers 
to increase oil and natural gas production, and all agreed that 
the industry and the provincial government are doing all they 
can.  In September, and for the first time in its history, the 
Alberta Energy and Utilities Board (EUB) temporarily suspended 
its Maximum Rate Limitations (MRL) systems allowing for an 
additional 18,000 - 30,000 barrels of oil production per day 
(Calgary 515).  Joe Miller, Executive Director of Policy 
Planning and External Relations for Alberta Energy, told us that 
the same is being done for natural gas production.  Miller and 
Greg Stringham, VP of Marks and Fiscal Policy for the Canadian 
Association of Petroleum Producers (CAPP) stated that the 
industry is running full out, and everything that can be done by 
the EUB to expedite and streamline applications and allow for 
increased production is being done.  For example, in addition to 
temporary suspension of the MRL, other measures include 
efficient approval of co-mingling gas production; temporary 
suspension of gas removal permits and export licenses; and 
efficient processing of down-spacing and coalbed methane 
applications.  Stringham stated that, even with these measures, 
natural gas output will only amount to approximately one half 
bcf/day, and will not come close to replacing the three bcf/day 
that was taken out by the hurricanes. 
 
3. (SBU) Alberta Energy's Miller also addressed the lack of 
refining capacity in North America.  He stated that there is 
"much talk" about expanding refining capacity within Alberta 
under the Hydrocarbon Upgrading Task Force (HUTF), which was 
established in 2004 to produce an action plan for achieving 
maximum upgrading of Alberta's bitumen resources.  The HUTF, 
comprised of 75 industry participants (including chemical 
companies), most recently held a strategic planning workshop in 
June 2005.  Oilpatch officials such as Henry Sykes of 
ConocoPhillips, however, acknowledge that the Alberta Government 
would like to see refining investment take place in the 
province, but he pointed out that ConocoPhillips has an 
integrated heavy oil team in Canada and the U.S., and has no 
plans to refine in Alberta.  Sykes noted that ConocoPhillips 
prefers incremental investments in U.S. refineries. 
 
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Alberta Energy Flexes Its Muscles 
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4. (SBU) Alberta Energy's Miller noted the visit of Mexican 
President Vicente Fox to Calgary on September 29, adding that 
the province is trying to get a draft MOU signed with the 
country.  Acknowledging that MOU's often provide little more 
than a gentleman's handshake to be open to more deals, Miller 
said it was a step in the right direction, adding that Alberta 
had also recently signed an MOU with India.  When asked how the 
Canadian federal government reacts to the province signing 
province-to-federal government agreements, Miller stated that 
the Canadian federal government recognizes that Alberta has 
jurisdiction over its natural resources.   Miller, who has long 
lamented over provincial exclusion at federal level energy 
meetings, said the federal government has a tendency to promise 
things at the national level to other countries that it cannot 
deliver without provincial agreement.  Miller added that there 
is "not much movement" in Canada politically at this point 
(read: Mackenzie Valley pipeline).  He said the GOC has an 
interim energy minister, and the deputy minister seems 
enthusiastic, but not much will happen until the next federal 
election, expected sometime in early 2006. 
 
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CAPP Pleased Interim Energy Minister Will Not/Not Link Energy to 
Trade Disputes 
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5. (SBU) Greg Stringham, Vice President of Markets and Fiscal 
Policy for the Canadian Association of Petroleum Producers 
(CAPP), provided a thorough briefing of Canadian energy issues. 
Stringham, who stated that he had had an "excellent" breakfast 
meeting with interim federal Energy Minister John McCallum, said 
he was particularly pleased that the new minister said energy 
would "not" repeat "not" be linked to other Canada-U.S. trade 
disputes.  In light of those trade disputes, Stringham noted 
that there is a general desire to move away from the U.S. market 
and diversify into other areas.  Stringham has long said that, 
because energy works so well, it should be used as a model, not 
a tool in resolving trade disputes. 
 
6. (SBU) Stringham continued with his briefing noting the 
changes in the industry that have taken place over the last 
decade.  While producers in the U.S. initially expressed concern 
that Canadian production might flood their market, now, 10 years 
later, they are calling for Canada to "bring it on".  Stringham, 
who said that natural gas exports to the U.S. have essentially 
tripled in the last 10 years, pointed out that there are 
currently 700 rigs active in Canada, up from 400 about a year 
ago.  He added that CAPP forecasts 24,500 wells would be drilled 
in Canada in 2006, 17,000 of which would be natural gas. 
Stringham stated that, for as often as he gets to Washington 
(about 8 times per year), there continues to be officials "on 
the hill" who remain unaware that Canada is the largest supplier 
of energy to the United States.  He emphasized that Canada is 
the world's third largest natural gas producer and the world's 
ninth largest crude oil producer and, by 2015, Canada will move 
from ninth place to fifth place in production as a result of 
oilsands production.  Other key items noted by Stringham 
include:  oilsands production, which now exceeds one million 
barrels per day, is forecast to reach 2.7 million barrels per 
day by 2015; the amount of natural gas used to produce oilsands 
has decreased over the last 10 years as a result of new 
technologies; and coal-bed methane wells drilled in Western 
Canada will rise to some 6,000 by 2010, up from about 3,000 in 
2005. 
 
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Aboriginal Benefits Agreements Continue to Delay Mackenzie 
Valley Pipeline 
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7. (SBU) Imperial Oil officials provided a status review of the 
proposed C$7.7 billion Mackenzie Valley Gas Project, a 
1900-kilometre, natural gas pipeline aimed at delivering some 
1.2 billion cubic feet (bcf) per day from Inuvik in the 
Northwest Territories to northern Alberta and markets beyond. 
Imperial leads the Producers Group (PG), which includes 
ConocoPhillips, Shell Canada, ExxonMobil, and the Aboriginal 
Pipeline Group (APG).  Sandy Martin, Imperial's Manager of 
Regulatory Affairs, noted that the biggest obstacle to the 
project, first proposed in 2000, is now socio-economic.  Martin, 
who pointed out that the PG has spent C$400 million on the 
proposal to date, echoed media reports that noted talks hit a 
wall in April this year as aboriginal groups located along the 
proposed pipeline route attempted to add taxes through the 
access and benefits negotiations.  Their attempts failed as both 
the federal and territorial governments said the issue was a 
non-starter because none of the communities has the right to 
collect taxes until they first negotiate a pact with Ottawa to 
acquire self-government. 
 
8. (SBU) Martin said the PG has offered a one-time payment to 
the aboriginal groups, and they would also receive C$500 million 
from the federal government over 10 years to address socio 
economic issues in the region, but only if the project moves 
forward.  Martin added that, while more time is warranted to 
address remaining issues, the PG hopes to announce in November 
whether it will proceed to public hearings in 2006.  Martin said 
it is not necessary to have access and benefits agreements 
secured for that to happen, and also suggested that unanimous 
support from all of the aboriginal groups is not necessary. 
Martin added that frustration among members of the PG is at an 
all time high and they may be reaching a point where the group 
might walk away from the project.  Most oilpatch officials we 
met with expressed similar sentiments, notably ConocoPhillips 
President Henry Sykes, who added that his company would not 
hesitate to pull out of the project if benefits agreements with 
the aboriginal groups are not resolved before the end of the 
year.  Sykes added that, despite some recent media reports that 
suggest negotiations might be moving along favorably, Sykes 
stated it was "news to him". 
 
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Alaska Natural Gas Pipeline - TCPL Still Claims Route Exclusivity 
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9. (SBU) Little was said of the proposed Alaska Natural Gas 
Pipeline during any of our meetings.  It appeared that those 
directly involved in the project with whom we met 
(ConocoPhillips) had nothing to offer with respect to when a 
decision on the pipeline will be made, given several outstanding 
issues including fiscal arrangements with the State of Alaska, 
and a yet to be defined regulatory process in Canada that will 
address whether the Canadian portion falls under the auspices of 
the Northern Pipeline Act (NPA) or Canada's national regulator, 
the National Energy Board (NEB).  That said, at least one of our 
sources indicated that there is plenty of work for everyone to 
go around (read: not one single pipeline will be able to handle 
construction).  Not surprisingly, during a brief meeting with 
TransCanada Corp. (TCPL), the company maintained its route 
exclusivity for the Canadian portion of the pipeline through the 
certificate it obtained some 25 years ago under the NPA. 
 
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Devon to Re-enters Beaufort Sea with $60 Million Well 
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10. (SBU) Devon Canada Corporation VP for Government Affairs, 
Michel Scott, described the company's operations as a 
"microcosm" of Alberta.  Devon is involved in exploring for 
natural gas in deep, shallow, and conventional plays, and is the 
only independent active in Alberta's oilsands.  Scott noted that 
Devon, which produces one bcf/day of natural gas and 200,000 
bp/day of oil in Canada, said the company is not yet "big" into 
coalbed methane, but plans to put more money into general 
unconventional gas developments.  One of the most significant 
projects on Devon's books is the company's return to the 
Beaufort Sea.  Scott explained that the move is a "bit of an 
historic moment", in that it will be drilling the first offshore 
well in the region in 15 years. 
 
11. (SBU) Scott explained that Devon positioned a steel drilling 
caisson (SDC) in 13 metres of water just north of the Mackenzie 
River Delta in the southern Beaufort Sea at the end of August. 
Scott, who referred to the apparatus as a submersible vessel, 
said it would remain there until winter freezes the vessel in 
place.  (The SDC was originally built for Dome Petroleum in 1982 
and valued at $250-300 million in today's dollars; it had been 
mothballed in Alaska for a decade before EnCana Corp. 
refurbished it for an exploration well north of Prudhoe Bay in 
2002-03.  Put back into storage just off the Yukon coast, it was 
reactivated and towed 100 kilometres to the Paktoa well site in 
the Beaufort by a Russian icebreaker in August.)  Scott, who 
said drilling is scheduled to begin in mid-December, said it is 
a gamble for Devon if the $60 million well comes up dry.  In 
that instance, Devon is likely to swallow its losses and abandon 
the Beaufort until a pipeline (read: Mackenzie) is a certainty. 
 Scott said the company, which has already invested $250 million 
since its four offshore licenses were acquired in 2000, is 
looking for a "large structure", pointing to significant onshore 
discoveries of close to three tcf, adding that the potential gas 
resource in the Beaufort is estimated at 55 tcf. 
 
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Comment 
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12. (SBU) All meetings provided a valuable snapshot of how 
important and equally efficient the bilateral energy 
relationship is between Alberta and the United States.  The 
efforts to which the provincial government and the industry are 
working to assist Louisiana in its time of crisis is just one 
example of the importance of the relationship.  In the meantime, 
as the Canadian federal government continues to struggle with 
jurisdictional issues, the Alberta Government and its energy 
producers are clearly eager to ensure that this relationship 
continues with few impediments.   That said, it may be too soon 
to tell whether or how much energy may be used as a link to 
other trade disputes (as PM Martin suggested in his speech to 
the Economic Club of New York on October 6), but we believe 
producers here will do whatever they can to prevent such 
linkages from occurring and tainting what has become one of the 
healthiest sectors in our two-way trading relationship. 
 
 
 
AHMED