US embassy cable - 03OTTAWA1149

UNCLAS SECTION 01 OF 03 OTTAWA 001149 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR P STAFF (HAMMER), E STAFF (PENCE) EB (A/S WAYNE 
AND DAS BORG), EB/ESC (MCMANUS AND DUDLEY), WHA/CAN 
(MASON AND RUNNING), OES/EGC (REIFSNYDER AND DEROSA) 
 
EMBASSY MEXICO CITY FOR ROSENMAN 
 
WHITE HOUSE FOR NSC (BROCK) AND OVP (KNUTSON) 
 
DOE FOR S STAFF (HUDOME) AND I/A (A/S BAILEY AND KATHLEEN 
DEUTSCH) 
 
STATE PLEASE PASS FERC FOR CHAIRMAN WOOD, KEVIN KELLY AND 
DONALD LEKANG 
 
 
E.O. 12958: N/A 
TAGS: ENRG, EPET, ECON, SENV, CA 
SUBJECT: ALBERTA ENERGY LEADERS ON GOOD NEWS, WORRIES 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR RELEASE OUTSIDE USG. 
 
1.  (SBU) SUMMARY AND INTRODUCTION.  ALBERTA ENERGY 
SECTOR LEADERS SUPPORT U.S. GOALS IN IRAQ, ARE VERY 
PLEASED THE U.S. ENERGY INFORMATION ADMINISTRATION (EIA) 
HAS BEGUN TO TREAT OIL SANDS AS PROVEN RESERVES AND ARE 
CONCERNED THAT NORTH AMERICA IS BECOMING OVERLY RELIANT 
ON NATURAL GAS FOR ELECTRICITY GENERATION.  ALTHOUGH 
HARDLY SURPRISING IN U.S.-FRIENDLY ALBERTA, DURING 
MEETINGS THE WEEK OF APRIL 7, CALGARY CG CHAVERA AND 
EMBASSY ENERGY OFFICER ALL BUT HAD TO CUT OFF PRO- 
WASHINGTON, ANTI-OTTAWA TIRADES BY BOTH PROVINCIAL 
MINISTERS AND ENERGY EXECUTIVES, WHO NOT ONLY BROADLY 
SUPPORT U.S. POLICY IN IRAQ, BUT EVEN MORE INTENSELY 
RESENT THE FACT THAT "THEIR MINISTER" (FEDERAL NATURAL 
RESOURCES MINISTER HERB DHALIWAL) CALLED THE PRESIDENT A 
"FAILED STATESMAN" AND WAS NOT REBUKED BY PRIME MINISTER 
CHRETIEN.  CG AND ENERGY OFFICER ASSURED THEM THAT WHILE 
THE DISAPPOINTMENT AMBASSADOR CELLUCCI EXPRESSED WITH THE 
GOC OVER IRAQ POLICY IS VERY REAL AND OUR DISMAY AT 
DHALIWAL'S STATEMENT IS DEEP, OUR FRUSTRATION HAS NOTHING 
TO DO WITH OUR ENERGY RELATIONSHIP, WHICH WE VALUE 
GREATLY. 
 
2.  (SBU) A NUMBER OF THESE SAME INTERLOCUTORS NOTED HOW 
PLEASED THEY WERE BY EIA'S NEW DATA SHOWING CANADA WITH 
180 BILLION BARRELS OF TOTAL PROVEN RESERVES, SECOND ONLY 
TO SAUDI ARABIA AND WELL AHEAD OF NUMBER THREE IRAQ.  AT 
THE SAME TIME THEY RAISED CONCERNS ABOUT FUTURE PIPELINE 
AND REFINERY CAPACITY FOR HEAVY CRUDE, ESPECIALLY AS OIL 
SANDS OUTPUT NEARS ONE MILLION BARRELS PER DAY (BPD) AND 
STARTS ON WHAT IS EXPECTED TO BE A 5-10 YEAR ROAD TO THE 
SECOND MILLION.  WE ALSO HEARD GREAT ENTHUSIASM FOR 
BRINGING THE ARCTIC GAS RESERVES OF CANADA'S MACKENZIE 
BASIN (FIRST) AND THEN ALASKA'S PRUDHOE BAY TO MARKET, 
COUPLED WITH CONCERN THAT EVEN THESE LARGE DEPOSITS WILL 
ONLY HELP NORTH AMERICA TO KEEP TREADING WATER ON GAS 
SUPPLIES AS WE BUILD MORE AND MORE GAS-FIRED GENERATION. 
THE ALBERTA LEADERSHIP ALSO CONTINUES TO HAVE CLIMATE 
CHANGE AND CANADA'S KYOTO IMPLEMENTATION PLANS MUCH ON 
ITS MINDS, BUT SEEMS NOW TO FEEL THAT THE "DAMAGE COMING 
FROM OTTAWA" CAN BE MANAGED.  PROVINCIAL ENERGY MINISTER 
MURRAY SMITH LOOKS FORWARD TO A PLANNED EARLY JUNE TRIP 
TO WASHINGTON AT WHICH TIME HE HOPES TO MEET WITH U/S 
LARSON AND A/S WAYNE.  WE RECOMMEND GRANTING SMITH AT 
LEAST ONE OF THESE MEETINGS AS HE IS VERY WELL-INFORMED 
AND INFLUENTIAL.  END SUMMARY AND INTRODUCTION. 
 
OIL SANDS: GOOD NEWS AND FUTURE WORRIES 
--------------------------------------- 
 
3.  (SBU) MINISTER SMITH, CANADIAN ASSOCIATION OF 
PETROLEUM PRODUCERS (CAPP) PRESIDENT PIERRE Alvarez_ AND 
EXECUTIVES FROM BP AND PETROCANADA WERE UNITED IN 
EXPRESSING PLEASURE AND APPRECIATE FOR U.S. EIA'S RECENT 
DECISION TO REFERENCE THE "OIL AND GAS JOURNAL'S" 
TREATMENT OF OIL SANDS AS "PROVEN RESERVES" ON THE ORDER 
OF 175 BILLION BARRELS.  THEY HAILED THIS AS A BIG WIN 
FOR THE OIL SANDS INVESTMENT CLIMATE AND AT LEAST A 
SYMBOLIC VICTORY FOR NORTH AMERICAN ENERGY SECURITY.  AT 
THE SAME TIME, BP CANADA CEO TIM FAITHFUL AND OTHERS 
NOTED THAT WITH MOST OIL SANDS PROJECTS RUNNING WELL OVER 
BUDGET THAT THE INDUSTRY IS GOING THROUGH A TOUGH 
DIGESTION PROBLEM AS IT APPROACHES ONE MILLION BPD IN 
OUTPUT.  MINISTER SMITH, CAPP OFFICIALS AND FAITHFUL ALL 
NOTED THAT THE STRAINS ON LABOR SUPPLIES WILL BECOME 
GREATER IN THE NEXT FIVE OR TEN YEARS AS OIL SANDS OUTPUT 
REACHES TWO MILLION BPD.  SOME ALSO EXPRESSED CONCERN 
THAT WITH NO NEW REFINERIES BUILT IN NORTH AMERICA IN 
DECADES THAT OUR CAPACITY TO SHIP AND REFINE ALL THIS 
HEAVY CRUDE WILL BE CHALLENGED.  SOME NOTED THAT WITH 
MORE BLENDS OF EVER CLEANER GASOLINE REQUIRED, THAT 
LOOKING STRATEGICALLY AT PIPELINE AND REFINING CAPACITY 
WILL BE NEEDED FOR INCREASING OIL SANDS PRODUCTION IN THE 
FUTURE, ESPECIALLY FURTHER OUT AS IT MOVES BEYOND TWO 
MILLION BPD.  IN THEIR VIEW, COORDINATED 
ENVIRONMENTAL/AIR QUALITY POLICIES WILL BE INCREASINGLY 
IMPORTANT AS WE DEAL WITH RISING OUTPUT AND USE OF HEAVY 
CRUDE. 
 
4.  (SBU) SMITH AND OTHERS ALSO WANT TO MAKE SURE THAT 
THE USG IS AWARE THAT OVER TIME THERE WILL BE TREMENDOUS 
ELECTRICITY CO-GENERATION AVAILABLE AS A RESULT OF THE 
HUGE THERMAL NEEDS OF THE OIL SANDS REFINING PROCESS. 
THIS COULD OVER TIME MAKE SIGNIFICANT NEW ELECTRICITY 
EXPORTS AVAILABLE TO THE UNITED STATES, BUT AT LEAST FOR 
NOW THERE IS LIMITED CAPACITY TO MOVE THIS WEST AND THEN 
SOUTH THROUGH BRITISH COLUMBIA AND ON TO OUR PACIFIC 
NORTHWEST.  THERE IS ALMOST NO CAPACITY TO MOVE IT SOUTH 
INTO THE U.S. ROCKY MOUNTAIN STATES AND MARKETS FURTHER 
AFIELD.  ALBERTANS SEE THIS AS A PROMISING ISSUE FOR 
FUTURE PROVINCIAL-STATE, WASHINGTON-OTTAWA AND REGULATOR 
TO REGULATOR COORDINATION. 
 
ARCTIC GAS IS GREAT, BUT WHERE IS THE REST? 
------------------------------------------- 
 
5.  (SBU) AS ALWAYS, ALBERTANS IN THE ENERGY SECTOR ARE 
FOLLOWING ARCTIC GAS DEVELOPMENTS, INCLUDING ON THE 
LEGISLATIVE FRONT IN WASHINGTON, VERY CLOSELY.  THE 
WIDELY HELD VIEW IN ALBERTA THAT THE SMALLER MACKENZIE 
LINE WILL BEAT THE MAMMOTH PRUDHOE BAY PROJECT TO THE 
PERMITTING PROCESS AND TO MARKET IS VIEWED AS GOOD NEWS 
FOR CANADA AND FOR BILATERAL RELATIONS.  ALBERTA, AS A 
TRANSIT POINT FOR ANY PRUDHOE BAY LINE, LOOKS FORWARD TO 
SEEING THAT PROJECT BUILT AS WELL, BUT OFFICIALS SUCH AS 
SMITH AND SENIOR INDUSTRY EXECUTIVES REMAIN CONCERNED 
THAT WASHINGTON NOT APPROVE A FISCAL REGIME FOR PRUDHOE 
BAY GAS THAT CREATES INVESTMENT DISINCENTIVES FOR OTHER 
BASINS OR THAT ARTIFICIALLY CREATES A HUGE, SUDDEN JUMP 
IN SUPPLY.  THE KEY TO MOLLIFYING AT LEAST CANADIAN 
ENERGY ELITES IN ALBERTA SEEMS TO LIE IN FINDING A SET OF 
FISCAL AND REGULATORY MEASURES FOR PRUDHOE BAY THAT D0ES 
NOT APPEAR TO DEPART TOO SEVERELY FROM THOSE DEPLOYED 
ELSEWHERE.  THUS, LOAN GUARANTEES AND ACCELERATED 
DEPRECIATION SEEM ACCEPTABLE, WHILE AT LEAST LAST YEAR'S 
VERSION OF A PRICE FLOOR OR GUARANTEE CAUSES OFFENSE. 
 
6. (SBU) AT THE SAME TIME AS THESE SOPHISTICATED 
OBSERVERS WORRY ABOUT AN OVERLY-GENEROUS PRUDHOE REGIME 
BRINGING TOO MUCH GAS ON-LINE TOO SUDDENLY AND WITH TOO 
LITTLE RISK, THEY ALMOST ALL WORRY THAT NORTH AMERICA IS 
BECOMING OVERLY RELIANT ON NATURAL GAS FOR ELECTRICITY 
GENERATION.  MANY ARGUE THAT EVEN MACKENZIE PLUS PRUDHOE 
BAY WOULD ONLY SUPPLY ABOUT ONE THIRD OF WHAT NORTH 
AMERICA MUST REPLACE EVERY YEAR JUST TO TREAD WATER. 
ELDER STATESMAN AND GAS EXPERT JIM GRAY, IN PARTICULAR, 
JUST DOES NOT SEE WHERE ALL THE GAS WILL COME FROM FOR 
OUR INCREASINGLY GAS-DRIVEN ELECTRICITY SUPPLY GROWTH. 
AND ON ARCTIC GAS, HE VARIES FROM THE CROWD IN BELIEVING 
THAT LNG IS MORE ECONOMIC THAN PRUDHOE BAY AND WONDERS IF 
WE WILL NOT MOVE TO LNG AND GAS AS A "GLOBAL COMMODITY" 
LONG BEFORE A PRUDHOE BAY LINE IS BUILT.  MINISTER SMITH 
IS CONCERNED THAT BY THE TIME THE U.S. IS IN FULL 
ECONOMIC RECOVERY THAT INADEQUATE GAS SUPPLIES COULD 
CHOKE OFF GROWTH, WHICH HE NOTES IS JUST WHAT THE VICE 
PRESIDENT'S 2002 REPORT WARNED ABOUT AND CALLED FOR 
MEASURES TO AVOID.  TRANSCANADA PIPELINE SENIOR VP ROBERT 
DAY THINKS GAS DEMAND WILL SO OUTSTRIP SUPPLY FROM 
TRADITIONAL NORTH AMERICAN SOURCES THAT BOTH ARCTIC 
RESERVES AND LARGE IMPORTS OF LNG WILL BE THE TREND OVER 
THE NEXT TEN YEARS.  ALL OF THESE GENTLEMEN CAUTION THAT 
RATHER THAN VIEWING THE WINTER OF 2003 AS AN UNUSUALLY 
COLD ONE, WE SHOULD VIEW IT AS MERELY A RETURN TO 
NORMALCY AND VERY HIGH GAS DEMAND. 
 
CLIMATE CHANGE: BETTER MADE IN EDMONTON THAN OTTAWA 
--------------------------------------------- ------ 
 
7.  (SBU) WHILE DISTRUST OF OTTAWA ON CLIMATE CHANGE AND 
KYOTO IMPLEMENTATION (AND MOST OTHER THINGS) REMAINS THE 
NORM IN ALBERTA, THE EXTREME HOSTILITY TO OTTAWA-DRIVEN 
POLICY OF A FEW MONTHS AGO HAS MODERATED.  FROM WHAT 
ALBERTA ENVIRONMENT MINISTER LOREN TAYLOR TOLD US, 
ALBERTA IS HOPING TO HAVE ITS "MADE IN ALBERTA" CLIMATE 
CHANGE PROGRAM (PERHAPS INCLUDING EMISSIONS TRADING) UP 
AND RUNNING LONG BEFORE OTTAWA HAS ITS KYOTO 
IMPLEMENTATION PLAN OPERATIONAL.  THE ALBERTA PLAN WOULD 
BE MODELED IN MANY RESPECTS ON THE MARKET-DRIVEN U.S. 
"EMISSIONS EFFICIENCY" APPROACH RATHER THAN THE MORE 
"COMMAND AND CONTROL" VERSION THEY SEE AS COMING FROM 
OTTAWA.  TAYLOR ALSO EXPRESSED ENTHUSIASM FOR THE 
PRESIDENT'S CLEAN SKIES INITIATIVE TO REDUCE NOX, SOX AND 
MERCURY EMISSIONS FROM POWER PLANTS AND IS INTERESTED IN 
A SIMILAR MODEL FOR ALBERTA AND CANADA.  FOR THEIR PART, 
WHILE SUCH INDUSTRY LEADERS AS CAPP'S Alvarez_, BP'S 
FAITHFULL AND MIDDLE-MANAGERS AT PETROCANADA ARE ANYTHING 
BUT ENTHUSIASTIC ABOUT OTTAWA APPROACH TO KYOTO, THEY 
VIEW IT AS MERELY ONE MORE FORM OF RISK TO BE MANAGED. 
MOST SEEM TO TAKE THE VIEW THAT BY THE TIME 
IMPLEMENTATION IS FAR ADVANCED "PAUL MARTIN WILL BE PM' 
AND HE "UNDERSTANDS AND SUPPORTS" THE OIL AND GAS 
INDUSTRY.  IN THE MEANTIME, THEY ARE NEGOTIATING 
FURIOUSLY WITH WHAT THEY DESCRIBE AS A STILL DEEPLY 
FRACTURED FEDERAL GOVERNMENT WHILE WORRYING AS MUCH OR 
MORE ABOUT COST-OVERRUNS AS THEY ARE ABOUT KYOTO.  FROM 
OUR END, WE HAVE TO AGREE THAT THE NATURAL RESOURCES 
CANADA-ENVIRONMENT CANADA FEUD THAT KYOTO RATIFICATION 
LAST DECEMBER WAS SUPPOSED TO END, IS ALIVE AND WELL AND 
PROBABLY TAKING MORE VICTIMS.  CELLUCCI