US embassy cable - 05OTTAWA3404

UNCLAS SECTION 01 OF 04 OTTAWA 003404 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/ESC/IEC/EPC:MCMANUS; WHA/CAN:NELSON, HOLST; 
WHA/EPSC: CORNEILLE; OES/EGC; WHA/MEX 
DOE FOR OFFICE OF POLICY AND INTERNATIONAL AFFAIRS: HARBERT 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, EIND, CA, MX, KTRD 
SUBJECT: NOVEMBER 8 MEETING OF THE NORTH AMERICAN ENERGY 
WORKING GROUP IN MONTREAL 
 
 
1. (U) Sensitive but unclassified.  Not for distribution 
outside USG channels. 
 
2.  (SBU) Summary:  Representatives of the United States, 
Canada and Mexico attended the ninth meeting of the North 
American Energy Working Group (NAEWG-9) on November 8 in 
Montreal, reviewing a broad range of common energy issues and 
cooperative projects under the umbrella of the Security and 
Prosperity Partnership (SPP) for North America.  The meeting 
covered diverse issues such as post-hurricane energy 
supplies, global energy markets, and natural gas issues.  In 
addition, NAEWG's Experts Groups reported on their progress 
on topics such as regulatory frameworks, hydrocarbons, oil 
sands development, electricity, nuclear power, energy 
efficiency, science and technology, natural gas 
interconnections, and energy data exchange.  In addition, the 
Canadian head of delegation made a presentation to the North 
American Steel Trade Committee, joined by the U.S. and 
Mexican delegation heads (the Steel Trade Committee 
coincidentally also met in Montreal on November 8).  The 
NAEWG members also discussed plans for the World Energy 
Council North American Forum.  The U.S. delegation was led by 
Karen Harbert, Assistant Secretary of Energy for Policy and 
International Affairs, and included EB, WHA, and Emboff. 
Howard Brown, Assistant Deputy Minister in the Energy Policy 
Sector, Natural Resources Canada, led the Canadian 
delegation, which also included representatives of Foreign 
Affairs Canada and the National Energy Board.  The Mexican 
delegation was led by Assistant Secretary Salvador Beltran 
del Rio M., Office of International Affairs, Secretariat of 
Energy and the National Commission for Energy Savings.  End 
summary. 
 
Post-Hurricane Energy Supplies 
------------------------------ 
 
3.  (SBU) The United States thanked Canada and Mexico for 
their assistance after Hurricanes Rita and Katrina.  The 
United States reported that about half of oil and gas 
refining and production on the Gulf Coast is still shut-in, 
but a surplus of refined products in Europe has helped 
stabilize the market.  Hurricane Rita was more damaging to 
U.S. energy infrastructure than Hurricane Katrina, and full 
production in the affected areas will not resume until next 
March at the earliest.  The most pressing need in the Gulf is 
for skilled workers and new rigs to replace those lost or 
damaged.  Loans from the U.S. Strategic Petroleum Reserve are 
still available to refiners who are facing a loss of supply 
from the Gulf Coast.  Largely as a result of the hurricanes, 
in North America natural gas prices are about 30-40 percent 
higher than a year ago, heating oil is about 30 percent 
higher, and electricity 3-5 percent higher. 
 
4.  (SBU) Mexico reported that in addition to lost production 
from Hurricane Wilma, six large refineries on the U.S. Gulf 
Coast that process Mexican petroleum still have not resumed 
full operations.  This has effectively shut in a considerable 
amount of Mexico's production. 
 
Global Markets and Oil Prices 
----------------------------- 
 
5.  (SBU) Canada reported that oil prices appear to have 
peaked for now, but may continue to move up and down in a 
wide band.  The IEA forecasts a significant drop in prices, 
but the International Monetary Fund (IMF) contends that price 
changes are in line with market fundamentals (i.e., factoring 
in significant political risk).  Short-term price 
inelasticity has greatly contributed to unstable prices, but 
even if petroleum returns to $30-35 per barrel, the price 
would still be 50 percent higher than in the 1990s.  There is 
concern that high oil prices could further strengthen the 
Canadian dollar against the U.S. dollar, with negative 
consequences for much of the Canadian economy.  Canada 
commented that for both developed and developing economies, 
the main focus should be on increasing energy efficiency, 
which benefits poor people more proportionally because they 
have to spend less of their income on energy as efficiency 
increases.  The United States noted that the Joint Oil Data 
Initiative (JODI) will create greater transparency in oil 
markets and will allow more informed pricing decisions, which 
should contribute to market stability. 
 
Natural Gas Issues 
------------------ 
 
6.  (SBU) Mexico noted that its power industry is the 
country's largest gas consumer, accounting for 61 percent of 
consumption (not including natural gas used in oil production 
and refining).  Mexico is exploring new means of electrical 
generation, but high natural gas prices are impeding an 
expansion of gas powered plants.  Currently, imports account 
for about 19 percent of Mexico's gas consumption. 
 
7.  (SBU) Canada noted that in the integrated U.S. and 
Canadian natural gas market, demand is slightly down this 
year and production is slightly up, although many more wells 
have been drilled in 2005 than 2004.  Canadian storage 
supplies are at about 480 billion cubic feet, above the 
five-year average.  Forecasts in Canada are for a price of 
about C$11.80 per gigajoule (C$1 equals $.84 U.S.), although 
much depends on the severity of winter weather. 
 
8.  (SBU) In the United States, natural gas demand is down 
slightly this year, but supplies are also down and prices are 
considerably higher than last year.  The United States also 
has ample natural gas in storage, about 3.2 trillion cubic 
feet, higher than last year's pre-winter levels.  U.S. 
liquefied natural gas terminals are only operating at about 
50 percent of capacity, primarily because supply is locked up 
in long-term contracts, and there have been delays in 
anticipated new supplies from Trinidad.  Canadian and U.S. 
figures on bilateral gas trade differ widely, and the two 
countries agreed to examine the data more closely. 
 
Regulatory Experts Group 
------------------------ 
 
9.  (SBU) The Regulatory Experts Group meets three times a 
year to discuss cross-border energy regulation issues in the 
United States, Canada and Mexico.  Canada reported that the 
work of the group is continuing, and that the benefits 
include updates on regulations, policies, the status of 
projects, operational and market issues, and staff exchanges. 
 Two key projects that are under active discussion by the 
group are the Alaska and Mackenzie natural gas pipelines. 
 
Hydrocarbons Working Group 
-------------------------- 
 
10.  (SBU) The Hydrocarbons Working Group, a new group 
proposed and led by Mexico, is planning a series of workshops 
by June 2006 which will focus on three topics: exploration 
and exploitation of deepwater reserves, production from 
marginal fields, and commercialization of heavy oils, a 
growth area for Mexico.  In addition, the group discussed 
adding a fourth topic, methane hydrates, with Canada 
volunteering to host a workshop next year.  A workshop on 
deepwater exploration will be hosted by Florida International 
University, the University of Texas, and the Baker Institute 
at Rice University in January 2006. 
 
Oil Sands Experts Group 
----------------------- 
 
11.  (SBU) Canada will host a workshop in January 2006, and 
issue a report on mid- to long-term development prospects in 
the Athabasca Oil Sands, which contain proven reserves of 175 
billion barrels of oil.  In addition, the Experts Group will 
produce a report in 2007 regarding carbon dioxide (CO2) 
recovery in the oil sands.  The United States commented that 
the two countries will have to initiate discussions on 
refining capacity in the oil sands, as it has the potential 
to greatly constrain production.  Canada responded that 
currently, the most severe limitation on oil sands production 
is the labor shortage in the Fort McMurray area.  The United 
States re-emphasized that refining is an important topic on 
which the hydrocarbon and oil sands groups should cooperate. 
 
12.  (SBU) Regarding energy consumption and use in the oil 
sands, Canada noted that, contrary to industry speculation, 
the oil sands will probably not use all of the natural gas 
from the proposed Mackenzie gas pipeline.  Petroleum coke is 
a byproduct of bitumen (oil sands) refining, and gasification 
of the coke is being explored as a source of both energy and 
hydrogen, as well as an opportunity for CO2 sequestration. 
Although the Alberta government remains opposed to a proposal 
for a nuclear power plant to provide electricity for oil 
sands production, such a plant would provide adequate energy 
as well as hydrogen, and produce no CO2 emissions.  The oil 
sands, Canada noted, are at least 30 years away from full 
production potential. 
 
Electricity Experts Group 
------------------------- 
 
13.  (SBU) The U.S.-Canada Bilateral Electric Reliability 
Oversight Group held a workshop on June 22, with Mexico as an 
observer, to discuss implementation of a cross-border 
Electricity Reliability Organization (ERO).  At the workshop, 
which was a deliverable under the SPP, the U.S. and Canada 
agreed to the principles which will guide an ERO, and will 
follow up with an additional workshop in San Diego on cross 
border electricity infrastructure in the first quarter of 
2006, in which Mexico will also participate as an observer. 
Further SPP deliverables that the group is engaged in are 
enhanced cooperation on renewable energy, and development of 
a website to serve as a clearinghouse for electricity 
regulators. 
 
Nuclear Energy Experts Group 
---------------------------- 
 
14.  (SBU) The United States commented that all three 
countries appear to be moving in the direction of a nuclear 
resurgence.  The Experts Group is proceeding with three 
workshops: plant materials, integrity and re-licensing; 
economic analysis of building new plants; and development of 
nuclear work force and nuclear education.  Canada noted that 
its Nuclear Waste Management Organization (NWMO), after 
several years of study, has recommended deep geologic 
sequestration of nuclear waste in Canada.  The NWMO further 
recommended that the storage not be irrevocable, so that 
waste material may be retrieved for further processing should 
there be future breakthroughs in processing technology. 
Mexico said that it is developing a program to engage the 
public on nuclear issues, and that it is considering two 
additional reactors to complement the relatively new units at 
its Laguna Verde facility. 
 
Energy Efficiency Experts Group 
------------------------------- 
 
15.  (SBU) Mexico reported that the group is planning 
workshops on standby power and vehicle transportation 
technology.  Mexico is also launching a national campaign, 
"Vive con Energia," or Live with Energy, to raise public 
awareness of energy efficiency.  Canada noted that it is 
instituting rebates for energy efficiency and instituting new 
automobile efficiency standards.  In addition, Canada is 
finalizing its long-awaited Large Final Emitters program, a 
key part of its greenhouse gas reduction strategy, which will 
require a 12 percent reduction in emissions per output of 
selected industries.  The United States advised that under 
the Energy Policy Act, it is adopting new standards for 
residential furnaces, transformers, and commercial energy 
use, among other areas.  The United States invited the other 
two countries to participate in the workshops designed to 
determine those standards. 
 
Science and Technology (S&T) Experts Group 
------------------------------------------ 
 
16.  (SBU) The S&T Experts Group has pursued several 
different initiatives, including the Las Casa Nueva project 
for affordable, energy efficient housing.  Other possible 
areas for collaboration include hydrogen, biofuels, and wind 
power.  Canada noted that the model for the S&T group should 
be the Generation-IV nuclear project, in which member 
countries are free to collaboratively pursue whatever 
technologies they believe are the most promising, with 
whichever partners they wish.  For Canada, the number one S&T 
priority is clean coal, which includes a variety of 
technologies such as integrated combined cycle gasification, 
as well as oxyfuel.  The United States commented that the 
group should consider whether there are areas of S&T research 
that are uniquely suited to the region, and concentrate on 
those issues. 
 
Natural Gas Trade and Interconnections Experts Group 
--------------------------------------------- ------- 
 
17.  (SBU) Mexico reported that the Experts Group's 
integrated report, North America Natural Gas Vision, has been 
completed in Spanish, English, and French.  The next 
milestone will be a workshop in June 2006 to discuss market 
issues.  The group is also working on a webpage for the 
"SPP.GOV" site that would allow for posting of regulatory 
information on natural gas issues. 
 
Energy Picture Experts Group (Data Exchange) 
-------------------------------------------- 
 
18.  (SBU) The Untied States reported that an updated 
side-by-side data compendium, North America: The Energy 
Picture II, is on track for publication in January 2006.  The 
group also discussed joint modeling opportunities. 
 
North American Steel Trade Committee 
------------------------------------ 
 
19.  (SBU) The heads of delegation briefly attended the 
meeting of the North American Steel Trade Committee (NASTC), 
which took place in Montreal on the same day as the NAEWG 
meeting. The Canadian principal briefed the NASTC members on 
NAEWG activities, noting that stakeholder input is crucial to 
NAEWG's activities.  At the session, the U.S. and Mexican 
principals were available for questions.  The reliability and 
cost competitiveness of energy is a key concern of the steel 
industry in North America, where natural gas and electricity 
prices are substantially higher than in other parts of the 
world. 
 
World Energy Council North American Forum 
----------------------------------------- 
 
20.  (SBU) The U.S., Canadian, and Mexican member 
organizations of the World Energy Council are hosting a joint 
North American Energy Forum in Washington, November 20-22. 
The Forum will provide an opportunity for extensive 
interaction with the private sector, drawing major energy 
actors from throughout the continent.  The United States 
suggested that for the Forum and all future events, the three 
countries should draft common speaking notes so that 
principals can deliver a consistent message regarding NAEWG. 
 
21.  (U) This message has been cleared by the Department of 
Energy. 
 
Visit Canada's Classified Web Site at 
http://www.state.sgov.gov/p/wha/ottawa 
 
WILKINS