BY THE COMPTROLLER GENERAL

Report To The CongressOF THE UNITED STATES

Prospects For Cooperation And TradeOf Energy Resources BetweenThe United States And Canada

The future of the United States and Canadais closely linked by these countries' economic,security, and political interdependencies whichhave expanded into the area of energy. Canadanow supplies the United States with about5 percent of its total gas supply and has thepotential for additional exports. Its conven-tional oil reserves are relatively small and arenot seen as the solution to the continuingU.S. dependence on Organization of Petro-leum Exporting Countries oil.

This year marked an agreement between thetwo countries for joint cooperation in dealingwith mutual energy problems. Because ofthese close relations, initiatives taken byCanada to manage its energy resources maybe of interest to the Congress and the execu-tive branch in connection with U.S. energyplans.

IIII IIIY llIliIlllIlllI1IlIF110805

4Dra@S _'80-2

XCU I NOVEMBER D- 8, 19790-2QCsCou%5lT~ NOVEMBER 8, 1979

COMPTROLLER GENERAL OF THE UNITED STATES

WASHINGTON. D.C. 20548

B-178205 A

To the President of the Senate and theSpeaker of the House of Representatives

This report focuses on the way Canada deals with itsenergy problems and the effects of its policies on the UnitedStates. It also addresses Canada's position as a potentialsource of needed energy resources to the United States; andit discusses the opportunities for continued cooperativenessbetween the two countries on energy matters. This report isone of a series of studies on how energy plays an importantrole in U.S. bilateral relationships.

Copies of this report are being sent to the Secretariesof Energy and State; the Director, Office of Management andBudget; and to interested congressional committees.

Comptroller Generalof the United States

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.\ , ot0

COMPTROLLER GENERAL'S PROSPECTS FOR COOPERATION ANDREPORT TO THE CONGRESS TRADE OF ENERGY RESOURCES

BETWEEN THE UNITED STATES ANDCANADA

DIGEST

The future of the United States and Canadais closely linked. Because the two countriesare each other's largest trading partner,occupy the same continent, and share a stakein the future of Western democracies, theinterdependencies have expanded into the areaof energy. In March 1979, the two countriesagreed to deal cooperatively with mutual energyproblems.

An overview of the Canadian energy situationshows that itsyGovernment, in cooperationwith private industry, began to be concernedwith energy problems, long before the 1973Arab oil embargo. A National Energy Boardwas established in 1959 and 2 years later,a national oil policy was formulated toassist in the development of western Cana- /dian oil. (See pp. 3 and 16.)

In the 1960s, its oil production was limitedby U.S.-imposed oil import quotas. The pres-sure of increasing U.S. demand on Canadian !supplies forced the Canadian Government tobegin controlling exports in March 1973. 1(See p. 17.)

After the oil embargo of 1973, the Canadiansreassessed the new energy situation, andpublished "An Energy Strategy for Canada" in1976. Recognizing the changing role ofgovernment in Canada's energy resource devel- 'opment, the energy plan established goalsto

-- raise domestic oil and natural gas prices Ltoward world levels,

-- increase exploration and developmentactivity,

-- establish a conservation program, /

Tear Sheet. Upon removal, the report ID-80-2cover date should be noted hereon. i

--maintain natural gas self-suffi-ciency, and

--educate the public. (See pp. 5 and 6.)

The actions taken by Canada in implementingits National Energy Plan have resulted inthe conservation of resources, increased

k exploration and development, and increasedsupplies. (See pp. 6 to 9.) Its energyinformation system, mandated in 1959, hasalso provided it with an overview of thesupply/demand situation and a basis forimport/export and other energy policydecisions. (See pp. 4 and 5.)

Canada has been particularly successful infinding additional gas reserves. Not onlyhave proven reserves increased but ,evel-opmental prospects look promising. Canadapresently enjoys a surplus natural gas situ-Jation because reserves have grown faster thandomestic demand. ] This enhances the likeli-hood for additional gas exports to theUnited States, the earnings of which couldprovide capital for further explorationactivity in Canada. Also, the surplussimultaneously reduces the need for devel-oping immediately the more expensivefrontier reserves. (See pp. 11 to 14.)

From 1973-1978 Canada supplied the UnitedStates with about 5 percent of its total gassupply. Questions of continued supply areimminent since most licenses to export to theUnited States expire in the mid-to-late1980s. (See pp. 10 and 11.) The CanadianFederal Government's position on futureexports will become public when the resultsof the latest gas supply/demand inquiryare released later this year. (See p. 13.)

Canada's conventional oil reserves, on theother hand, are relatively small. Duringthe past few years, it has become morerestrictive in its oil exports. In 1974,the United States was importing fromCanada 791,000 barrels a day, down to

ii

172,000 barrels in 1978, with the likeli-hood of the imports being much less inthe future. This quantity is minimal com-pared to the 1973 level of about 1 millionbarrels a day. Development of Canada'sextensl' e tar sands' reserves representmassive oil potential and the Federal andProvincial governments are encouragingadditional exploration and supportingreserves' development.

Canada,.as a source of crude oil in thenear future, therefore, is not the solu-tion to the continuing U.S. dependence onoil imported from the Organization of /Petroleum Exporting Countries. (See ch. 4.)

Because of the close economic, security,and political interrelations between theUnited States and Canada, the energy initiatives taken by Canada may be of interest jto the Congress and the executive branch inimplementing the U.S. energy plan.

The Departments of Energy and State providedGAO comments containing technical clarifica-tions and updated information which have beenincorporated in this report where appropriate.

Tear Sheet i i

Contents

Page

DIGEST - ; i

CHAPTER

1 INTRODUCTION .- 1Scope of study 1

2 THE CANADIAN RESPONSE TO THE ENERGY CRISIS 3Government organization 3

Energy information system 4Enactment of a national energy plan 5

Pricing policies 6Exploration and development 8Conservation efforts 8Public information program 9Energy relations 9

3 CANADIAN NATURAL GAS 10Canadian gas development 10

Pipelines 11Reserves 11Frontier development 13

4 CANADIAN OIL 15Canadian crude oil development 16Tar sands development 19

5 OTHER ENERGY SOURCES 21Electricity 21Nuclear 22Coal 23Forest waste 23

6 OTHER ENERGY PROJECTS AFFECTING U.S.-CANADIAN INTERESTS 25

Pipeline proposals 25Kitimat 25Trans Mountain 26Alaskan Highway oil 27

Other projects 28Alaskan Highway gas 28The New Brunswick proposal 29Strategic Petroleum Reserve

storage 29

PageAPPENDIX

I Letter dated July 9, 1979, from the Direc-tor, Office of GAO Liaison, Department ofEnergy 30

II Map of connected oil pipelines 33

ABBREVIATIONS

b/d barrels per dayGOC Government of Canadatcf trillion cubic feet

CHAPTER 1

INTRODUCTION

The future of Canada and the United States are closelylinked. The two countries (1) are each other's largest trad-ing partner, (2) occupy the same continent, and (3) share astake in the future of Western democracies. These economic,security, and political interdependencies have expanded intothe area of energy. For example, in March 1979, the UnitedStates and Canada agreed to a joint consultative mechanismto deal with mutual energy problems.

Common oil and natural gas delivery systems as well aselectricity interconnections are in place and mutually bene-ficial. Although the volume of oil trade has recentlydecreased, Canada continues to export natural gas, crude oil,and electricity to the United States while importing signifi-cant quantities of coal.

The 1973 Arab oil embargo and the subsequent fourfoldprici-increases caused the United States and most othernations to reassess their energy policies. Before the embargo,the world price of oil imports posed no economic problems forCanada or the United States; however, the situation haschanged dramatically. The embargo exposed the vulnerabilityof nations relying on foreign sources to meet crude oilrequirements.

Canada, together with other countries, attempted to coun-ter the adverse economic impact of Organization of PetroleumExporting Countries pricing policies (i.e., inflation, unem-ployment, eroded currencies, etc.) by developing energy poli-cies and strategies. These included conservation measures,use of lower cost domestic sources of energy, and price con-trols. In 1976, Canada published an energy strategy whichbecame its national energy plan. The Canadian approachencouraged energy conservation and an accelerated developmentof conventional as well as new energy sources. As a result,drilling activity reached record levels and significant oiland natural gas discoveries were made in western Canada. Oilproduction from massive tar sands deposits was expanded andis expected to increase in the years ahead.

SCOPE OF STUDY

Because of the close interrelations between the UnitedStates and Canada, the energy initiatives taken by Canada maybe of interest to the executive branch and the Congress. Inmaking our study, we concentrated on Canada's response to the

energy crisis, Canada's development of natural resources, andenergy projects affecting U.S./Canadian interests. We recog-nize that many other issues affect and interrelate to theenergy problem of each country.

During our study we obtained information from U.S. andCanadian officials representing many public and private agen-cies, departments, organizations, and associations both inCanada and the United States.

Our draft of this study was provided to the Departmentsof Energy and State. The Department of Energy provided uswith written comments (see app. I) and we obtained verbalcomments from the Department of State. Their commentscontained technical clarifications and updated informationwhich have been incorporated where appropriate.

2

CHAPTER 2

THE CANADIAN RESPONSE TO THE ENERGY CRISIS

The Government of Canada (GOC), in cooperation with pri-vate industry, began to address energy problems long beforethe 1973 embargo. In 1959, a National Energy Board was estab-lished and an energy information system developed. In 1961,a national oil policy was formulated. After the 1973 oilembargo, the Canadians began formalizing an energy plan. In1976, the plan--An Energy Strategy for Canada--was issued andprovided for the

-- establishment of oil and natural gas pricingpolicies,

-- institution of tax measures and programsencouraging conservation, and

-- support of exploration and development programs.

Collectively, the above actions have moderated the adverseeffects of the energy problems on Canada's economy.

The energy information system provides an overview of thesupply/demand situation and a basis for import/export andother energy policy decisions. Conservation efforts havedecreased energy consumption from a pre-embargo annual growthrate of 5.5 percent to a current rate of about 3.5 percent.In addition, increased energy prices have stimulated explor-ation and have contributed to new natural gas and oil discov-eries.

GOVERNNENT ORGANIZATION

Both the Federal and Provincial governments have estab-lished organizations to identify and solve energy-relatedproblems. The organizations have both regulatory and policyresponsibilities.

In 1958, Canada, faced with a domestic oil surplus,established the Royal Borden Commission to study the problemand recommend a course of action. As a result, GOC createda National Energy Board in 1959. The Board has two principalroles,. to

-- regulate specific areas of oil, gas, and electricalutility industries, and

-- advise GOC on the development and use of energyresources.

3

According to Canadian Embassy officials, the CanadianFederal Government has the right to impose direct taxes andto regulate interprovincial and international trade. TheProvinces, on the other hand, own the mineral and petroleumdeposits and can require the payment of royalties on resourceproduction.

Because the Provinces own the natural resource, theyalso have established energy agencies. For example, Albertahas the

-- Alberta Energy Resources Conservation Board,which develops supply/demand data;

-- Alberta Petroleum Marketing Commission, whichcontrols the sale of Provincial oil and gas;and

-- Alberta Oil Sand Technology Research Authority, i]

which develops and controls oil sands tech-nology. ·

Energy information system

The National Energy Act of 1959 gave the National EnergyBoard the responsibility for regulating and advising the Cana-dian Government on energy resources. To this end, the Boardholds inquiries, conducts studies, prepares reports, etc., toensure that the interests of the public are protected.

The Board periodically conducts public hearings on thesupply and demand for oil and natural gas. Hearings are heldseparately for oil and for gas to afford the general publicand those involved in the energy sector an opportunity topresent oral and written testimony. In the case of the nat-ural gas inquiry which began in October 1978, the Board plan-ned to determine

--natural gas reserves and production potential,

--domestic demand,

-- the extent to which gas can replace otherenergy forms, and

--the volume of gas which may be surplus andamounts which can be exported.

Industry spokesmen believe that the National Energy Boardwill determine that a surplus exists and that current exportcontracts will be renewed. Additional exports may result.

4

They cautioned, however, that future natural gas contractswill be for shorter lengths of time (probably 6 years) withrenewal, subject to Board approval. Also, Canada will retainthe option to decrease the amount of exports as Canadiandemand rises.

Oil hearings are similar to the gas hearings, with addi-tional emphasis given to foreign imports. In each case, theBoard compares the evidence developed in the hearings withits own estimates and presents its view.

The conclusions reached by the Board constitute the basisupon which Canada arrives at energy policy decisions. Examplesof suggestions made by the Board and adopted by GOC were

--a systematic reduction of oil exports to theUnited States from 1.1 million barrels per day(b/d) in 1973 to 175,000 b/d in 1978; 1/

-- construction of an oil pipeline from thewestern Provinces to eastern markets to reducereliance on imported oil;

-- indications that sales of 55,000 b/d of lightcrude to the United States could be maintainedthrough 1981 based on its 1978 reassessment ofthe oil supply situation (this has since beenmodified, see p. 18); and

--allowance of crude oil exchanges to satisfy geo-graphic shortages in the United States.

In short, the information system has enabled the NationalEnergy Board to advise GOC on current energy policy.

ENACTMENT OF A NATIONAL ENERGY PLAN

In cooperation with the private sector, GOC has beenestablishing energy policy since 1961. The 1973 oil embargoand ensuing energy price increases led to the formalizationof a national energy plan, "An Energy Strategy for Canada,"which outlined objectives and policies.

In 1961 GOC established a national oil policy. However,the private sector continued to have primary responsibilityfor domestic energy resource development. The Government's

1/Actual oil exports to the United States averaged 172,000b/d.

5

role was chiefly advisory. In the summer of 1973, GOC pub-lished a report entitled "An Energy Policy for Canada, PhaseI." This report was a study of the Canadian energy situation,its history, prospects, and problems.

After the energy crisis of 1973, Canada reassessed thenew energy situation. The Canadian Government began toquestion whether industry had the capability to objectivelydeal with a national problem while simultaneously satisfyingthe profit motive. GOC, viewing energy as a potentialnational security problem, began to take a more active rolein the energy area.

To attain its goal of self-reliance, Canada in 1976published "An Energy Strategy for Canada" which outlinedspecific targets and their supporting policies. The majorobjectives of the energy plan were to raise the price of oiland gas toward the world level, increase exploration anddevelopment, establish a conservation program, maintain self-reliance in natural gas, and educate the public. From GOC'spoint of view, the changes that it has introduced have beendirected at accomplishing the following three objectives:

"* * * first, to leave the industry with a fairrate of return on its existing investment aswell as adequate cash flow to meet its financialobligations and to undertake the exploration anddevelopment that Canadians require and expect;second, to allow an appropriate return to theproducing provinces in recognition of boththeir rights of ownership and the depletingnature of their resources; and third, to pre-serve a reasonable share of the resource reven-ues generated by a healthy and mature petroleumindustry for the Federal Government, on behalfof all Canadians."

Because of the importance of energy bilateral relations,Canada also included in their energy plan a chapter entitled"Canada-United States Energy Relations." This plan specifi-cally rejected the concept of a continental energy policy.

Pricing policies

The economic systems of industrialized countries, suchas Canada, had become accustomed to a plentiful energy supplyat low cost. However, within a short period, the price ofcrude increased fourfold, affecting the cost of all relatedcommodities. This situation required GOC to reassess theirpricing policies. Subsequently, GOC implemented a policy

6

of incrementally raising oil and gas prices toward the worldlevel. Canada's gas reserves subsequently increased.

As U.S. demand for imported oil increased during theearly 1970s, international oil prices also rose. Followingthe international trend, Canadian crude oil prices rose to$3.80 a barrel i. August 1973. Then the embargo hit.Although international oil prices rose to $9.60 a barrel inJanuary 1974, Canadian prices remained frozen at $3.80.After the Canadian Provincial governments agreed on a newoil pricing policy, the Alberta wellhead prices rose to $6.50a barrel on April 1, 1974.

With Canadian reserves diminishing, resource developmentcosting more, and a continuing advance of international oilprices, the Prime Minister, in April 1975, stated that theCanadian oil prices had to move toward the world price. Thus,prices were systematically increased until they reached $12.75on July 1, 1978, compared to $16.00 per barrel for foreigncrude landed at Montreal.

By 1978, the Canadian crude oil price reached parity withthe American price. According to industry and GOC officials,Ontario manufacturers are opposed to any further increasesbecause such increases may cause their products to become non-competitive with American goods.

In 1970, the Federal cabinet introduced legislation whichraised almost all export prices. To establish export prices,the National Energy Board reviewed the cost of alternativeenergy supplies for each U.S. gas export market. Both theCanadian and the U.S. Governments agreed that replacement costwas an acceptable basis for pricing export gas. From the 1974price of $0.62 per 1,000 cubic feet, Canada incrementallyraised export prices to $2.16 (U.S.) in June 1977, to $2.30(U.S.) in Pay 1979, and again to $2.80 (U.S.) in August 1979,except for one minor exception.

Accompanying the gas price rises in recent years havebeen significant additions to reserves. Conventional naturalgas reserves increased from 52.5 trillion cubic feet (tcf) in1973 to 66.1 tcf this year. A Canadian official also informedus that this figure does not include unconventional gasreserves of 5.3 tcf in the MacKenzie Delta and 7.3 to 9.2 tcfirm the Artic region. These reserve figures are considered"unconventional" because there is presently no system capable

7

of delivering the gas to the market place. In addition, aCanadian Natural Gas Supply and Requirements report, issuedin February 1979, forecasts an ultimate conventional reservelevel of 147 tcf.

The reserve additions have resulted in a recent AlbertanGovernment estimate that 14 tcf of natural gas could beexported from the Province during the next 4 years. Reservesare expected to increase by about 20 percent or to about 130tcf during the 1980s. In contrast, Canadian oil reserves havedeclined for 8 consecutive years. Activity in the West Pembinaregion of Alberta indicates a find of between 0.5 to 1.5 bil-lion barrels. Although not a large find, when constrastedwith Canada's 1977 yearend reserves of 7.1 billion barrels,the West Pembina find is significant.

Exploration and development

From a Canadian perspective, the average consumer hasbeen forced to pay higher energy prices to "subsidize" accel-erated exploration and development. The higher oil and gasprices have, however, provided the impetus for greater explor-ation and development. According to a trade source, industryexpenditures rose from $3.4 billion in 1974 to an estimated$7.2 billion in 1977. Expenditures for 1978 were forecast at$8.2 billion.

With higher prices, increased drilling incentives, andFederal/Provincial agreement, the number of exploratory anddevelopment wells increased from about 4,419 in 1975 to about6,994 in 1978. During the same period the average number ofdrilling rigs in use rose from 135 to 304.

To help achieve its goal of assuring a future energysupply, Canada, in July 1975, established a national oilcompany--Petro-Canada. Canada's energy policy stated that"Petro-Canada will participate actively in frontier explora-tion." By 1977, Petro-Canada was taking a leading role inexploration in the Artic and off the east coast.

Conservation efforts

Canada's energy conservation program is designed toencourage efficiencies in energy use and to reduce the annualconsumption growth rate to less than 3.5 percent. Statisticsindicate that from 1963-1973 such growth averaged 5.5 percent.To reduce energy consumption, Canada instituted a publicinformation program, moved domestic crude oil and natural gas

8

pricing toward world levels, increased taxes on automobilesand gasoline, and provided grants and loans to encourage theefficient use of energy.

In 1976 Canada imposed a 10 cents a gallon excise taxon gasoline. Cars over a certain weight and cars with air-conditioners were assessed additional taxes. GOC home insul-ation grants and loans have been made available to homeownersand a national building code incorporated new guidelines forthe design and construction of energy-efficient buildings. Tofurther effect conservation, GOC and the private sector haveboth undertaken programs to improve heating unit efficiencies.

Recent reports indicate that the Canadian people are seri-ous about making conservation of energy a way of life and Can-ada expects to keep its annual energy consumption growth rateto about 3.5 percent. During the recent National Energy Boardoil supply/demand hearings, most forecasters predicted anannual energy consumption growth rate of about 2 to 3.5 per-cent to the 1990s.

Public information program

To communicate the seriousness of the energy crisis to thepublic, GOC sponsored a public information and education pro-gram. The effort included the use of several media, includingprint, radio, television, movies, and direct contact throughthe educational community. Results from surveys and question-naires indicate a great amount of interest has been generatedand the Canadians have adopted suggestions outlined in theinformation program.

Energy relations

In its energy plan, Canada stressed the importance ofbilateral energy trading with the United States. Canada alsonoted that a "consultative process has evolved to minimize anydisruptive effects that might occur because of national energydecisions taken in either country." Although the energy planemphasized the need for determining areas of mutually benefi-cial cooperation, the plan noted that the "Government of Can-ada has rejected the concept of a continental energy policy."

Discussions with GOC officials reconfirmed their rejec-tion of a continental energy plan. Several industry spokes-men, however, stated that Canada and the United States maywant to again consider a continental energy strategy.

9

CHAPTER 3

CANADIAN NATURAL GAS

Canadian exports of natural gas to the United States havefallen from 1.027 tcf in 1973 to 0.881 tcf in 1978. In 1978,it amounted to about 30 percent of Canadian production and5 percent of total U.S. consumption.

The National Energy Board concluded in its February 1979report that Canada would have an exportable surplus of 1.6 tcfto 2 tcf of gas per year over the next 4 to 8 years. Thiscould result in significant new exports to the United States;however, as of August 1979, no decision had been made by GOCas to new export licenses.

The following table shows U.S. natural gas consumptionand imports from Canada for 1973 through 1978.

U.S. importsDomestic from

Year consumption Canada

(trillion cubic feet)

1973 22.049 1.027

1974 21.223 0.959

1975 19.538 0.948

1976 19.946 0.954

1977 19.521 0.997

1978 19.390 0.881

The development rate of Canada's Artic and frontier gasreserves will also be affected by the size of the gas surplus.Without sizable domestic or export markets, the producers faceprohibitive development costs. If conventional production cancontinue to supply traditional markets and no additional mar-kets are created, GOC and industry officials believe thatfrontier development will come to a standstill.

CANADIAN GAS DEVELOPMENT

Canada discovered its first, large gas reserves in 1947.Because the gas resource development required heavy capitalexpenditures in processing plants and long-distance

10

transmission pipelines, Canada sought to export the surplusto.the United States. This provided the volume and load fac-tor necessary to make the development economically feasible.

Pipelines

To market and transport natural gas to the United States,several pipelines were built. (See app. II.) Among the prin-cipal ones are the

-- Alberta to Montana line;

-- Alberta to California line;

-- Trans Canada line transporting gas from Albertato Eastern Canada and the United States (thissystem began serving Canada in 1958 and theUnited States in 1960); and

-- Westcoast Transmission line moving British Colum-bian gas to Vancouver (for economic reasons, thispipeline was subsequently extended to serve theU.S. Northwest).

To finance the construction of these pipelines, long-termcontracts were required. The majority of Canadian natural gasexport contracts were consummated during the late 1950s andearly 1960s. Usually granted for more than 20 years, most ofthese licenses will expire around the mid-1980s.

The last major export licenses granted by the NationalEnergy Board were approved in 1970. It was at this time thatconcerns were raised in Canada about the future ability ofdomestic production to meet Canadian demand. Because of this,the 1970 export applications were considerably cut back andonly 6-1/2 tcf were approved for export. Then, in 1971,additional export-applications were turned down completely.Since that time, there have been no significant additionalexport licenses granted.

Reserves

Fourfold increases in world oil prices caused similarincreases in natural gas prices. Accompanying the gas pricerise in recent years have been significant additions toreserves. The Canadian Petroleum Association reported in1977 that Canada's reserves were estimated at 60.2 tcf andanother Canadian report dated February 1979 stated reservesat 66.1 tcf. This represents a considerable increase fromtre Association's 1973 estimate of 52.5 tcf.

11

These estimates do not include natural gas recently dis-covered in the Canadian Artic nor some of the promising areasnow being developed. For example, in the high-risk/high-costElmsworth-Wapiti areas of Alberta and British Columbia, aCanadian gas company report suggests recoverable reserves of440 tcf. However, a conservative estimate of recoverablereserves by another Canadian gas company is in the range of15 tcf.

The dominant producing Province, Alberta, issued a May1978 report entitled "The Supply of and Demand for AlbertaGas." Although the report conservatively estimated the cur-rent reserve situation, it stated that over the next 4 years,14 tcf of natural gas could be exported from the Province. Inthe conservative case, the report stated that Canadian demandand authorized exports can be met until 1985. Under the moreoptimistic assumption, all demand could be met until 1992.These forecasts all assume that Alberta can meet its ownrequirements for 30 years.

Although Canada has a very promising reserve picture,Canada's domestic gas markets are not expanding. Economicdownturn, conservation efforts, and cheaper substitute fuelshave all had an adverse impact on the gas market. The mar-ket depression has even forced a major Canadian gas distrib-utor to implement, with the producers' consent, a plan ofaction. This plan allows the distributor to "reduce aprojected 20 percent excess of available supply over marketrequirements" for the period extending through October 31,1979.

In the U.S. Pacific Northwest, industries have convertedfrom gas to residual fuel oil. The glut of Alaskan oil depres-sed residual oil prices and triggered the conversion to oil.Consequently, a major distributor in the Pacific Northwest hasbeen trying to sell its imported Canadian gas to Californiaand Colorado suppliers. According to several Canadian indus-try and Government officials, the Pacific Northwest conversionto oil from gas might have been averted if Canada had beenable to sell their gas at competitive (i.e., lower) prices.The single-price policy prevented this.

The president of one large firm noted that, because ofthe lack of market development in Canada and the United States,exploration and development efforts are already being cur-tailed. The Alberta Energy Resources Conservation Board esti-mated present surplus productive capacity in Alberta at 300billion cubic feet per year and in Cananda, 400 billion cubicfeet per year.

12

From the U.S. perspective, the surplus productive capa-city and optimistic reserve picture are primary reasons whyadditional gas exports to the United States are possible.Canadian industry officials have slightly contradictory viewson exports. Some industry and financial community spokesmenbelieve that, unless the Alaskan Highway gas pipeline is built(see p. 28.), additional exports might not be forthcoming. Onthe other hand, some industry spokesmen believe that producersof natural gas need the U.S. market, not only to sustain theindustry, but for the cash flow to finance future explorationand development.

The volume of future Canadian gas exports to the UnitedStates was the subject of hearings starting in July 1979before the National Energy Board. Department of State offi-cials said in July 1979 that they expect the findings orresults of the hearings to be available in the fall of 1979.

Frontier development

Canada's frontier region has surfaced potential for fur-ther natural gas discoveries. In the Canadian Artic, reserveestimates range from 10 to 15 tcf while reserves in the Mac-Kenzie Delta area are estimated at 5.1 tcf.

As a step toward bringing the Artic resources to market,a consortium filed applications with the National Energy Boardand the Department of Indian Affairs and Northern Development.The applications proposed the construction of a gas pipelinefrom the Artic Island to southern markets. The proposalassumes that the southern markets would need the gas and thatsufficient reserves (15 to 20 tcf) would be available. Asan alternative to the Dempster Lateral (connecting BeaufordSea/MacKenzie Delta region with the Alaskan Highway gas pipe-line), one industry official indicated that a plan will beproposed to connect Beauford Sea/MacKenzie Delta to the Articpipeline.

Although chief consortium officials believe that suffi-cient Artic gas reserves will be available, the growth ofconventional gas reserves has been strong and demand for gasweak. Even with a lead time of 7 to 10 years, the Canadiandemand will not support the transported volume of gas. Tosupport the system, short-term exports to the United Stateswill likely be required. Otherwise, development may slow toa standstill.

As a complementary means of gas transportation, a con-sortium is considering liquefied natural gas transport of upto 250 million cubic feet per day by icebreaking tankers.Potential markets include the United States.

13

A May 1979 trade magazine article described a new gasstrike in the Artic Islands. Estimates of newly discoveredgas reserves range up to 5 tcf. The strike could boost theArtic Island gas reserves above the minimum 20 tcf neededto support the proposed pipeline to the southern markets.

In summary, Canada has developed a surplus of naturalgas and has potential for additional conventional developmentwhich reduces the need for developing immediately more expen-sive frontier reserves. Transmission facilities are in placeand a contractual framework has been established for export-ing gas to the United States.

14

CHAPTER 4

CANADIAN OIL

Canada was a net importer of crude oil prior to large-scale discoveries in Alberta in 1947. Development of the oilresource required the construction of pipeline transportationnetworks to serve both eastern and western Canada and theUnited States.

Although exports to the United States were deemed essen-tial to Canadian oil development, the United States, in 1959,imposed controls to curtail imports. respite the controls,crude oil exports to the United States continued to rise untilthey reached a peak of about 1 million barrels a day in 1973.It was at this time that Canada, because of a decliningreserve picture, initiated a policy of export curtailment.This systematically brought exports down to a 1978 level of172,000 b/d. As a result of a recent oil assessment, exportsare to be further reduced in the immediate future.

To supplement its traditional production, Canada has twotar sands mining projects. Collectively, these plants areexpected to produce 175,000 b/d in the early 1980s. Becauseof the enormous potential of this resource, the Federal andProvincial governments are encouraging additional explorationand supporting research development.

Canada, as a source of crude oil in the near future,therefore, is not the solution to the continuing U.S. depen-dence on oil imported from the Organization of PetroleumExporting Countries. The table on the following page showsU.S. crude oil consumption, production, and imports from Can-ada for 1967 through 1977.

15

U.S.Total imports Percent

U.S. U.S. U.S. from of importsYear consumption production imports Canada from Canada

------- (millions of barrels)-------1967 4,585 3,216 1,369 150.4 14.11968 4,902 3,329 1,573 169.4 10.81969 5,160 3,372 1,788 203.3 11.41970 5,365 3,517 1,848 245.3 13.31971 5,553 3,454 2,099 263.3 12.51972 5,990 3,455 2,535 312.4 12.31973 6,317 3,361 2,956 365.4 12.41974 6,078 3,203 2,864 288.8 10.11975 5,958 3,057 2,901 219.2 7.61976 6,391 2,976 3,415 135.7 4.01977 6,724 2,999 3,725 101.4 2.7

CANADIAN CRUDE OIL DEVELOPIENT

Until the discovery of oil in Alberta in 1947, Canadawas a net importer of crude oil. The major demand for oilin Canada is about 2,000 miles from the wellhead. The needto develop markets resulted in several pipelines being con-structed to transport the western Canadian crude oil tomarkets in eastern Canada and the United States.

The Interprovincial. Pipeline from Edmonton, Alberta, toSuperior, Wisconsin, was constructed in 1950. By 1953, itwas extended further east through the United States to Sarnia,Ontario. To ease the burden of foreign imports, the Inter-provincial Pipeline was further extended to Montreal in 1976.Soon after 1957, the Trans Mountain Pipeline system was con-structed to transport crude from Alberta to the Pacific coastfor export to the American Northwest and British Columbia.

Oil exports rose rapidly and, during the Suez crisis in1956-57, Canadian exports to the United States reached 100,000b/d. When the crisis ended, the United States introduced con-trols and curtailed Canadian imports. By 1958, Canada onceagain faced the problem of surplus oil. Because of this, theCanadian Government established the National Energy Board in1959 and the National Oil Policy in 1960.

The National Oil Policy basically set aside the marketin Canada west of Ottawa for Canadian production. Torontoand western areas would use domestic crudes whereas Ottawaand eastern areas would use imported crude. Imported oilwas not to penetrate westC of Ottawa.

16

Eastern Canadian refiners import most of their crudeoil requirements. The Maritime refineries have docking facil-ities capable of handling oil tankers. The Montreal refineriesreceive only limited amounts of crude oil by tanker with mostof their crude requirements being supplied by the Portland-to-Montreal pipeline. This pipeline traverses 166 miles fromPortland, Maine, through New Hampshire, Vermont and 70 milesthrough the Province of Quebec to Montreal. The capacity ofthis system is 550,000 b/d.

The National Oil Policy assumed that the desirable devel-opment for western Canadian oil, after meeting Canadian marketdemand, was the export market in the United States. During the1960s, the Canadian oil policy had the effect of constrainingCanadian oil production chiefly because of oil import quotasimposed by the United States.

As Canada's domestic crude oil supply and requirementswere coming into balance (1970), proven reserves began declin-ing rapidly. In December 1972, the National Energy Boardreported that production in Canada would not be able to supplythe potential export and domestic markets after 1973. As aresult of rapidly increasing U.S. demand in the early 1970s,the Board began to regulate crude oil exports in March 1973.U.S. import controls were terminated in May 1973.

In July 1973, the Board held a public hearing to deter-mine the supply of and requirements for oil in Canada. Asnoted above, instead of trying to limit oil imports fromCanada, the United States was now welcoming increased levelsof imports. This was a complete reversal of roles for bothnations.

In October 1974, the National Energy Board reported thatCanadian oil supplies would be inadequate to serve traditionalCanadian markets as well as part of the Montreal area beyond1982 and recommended that exports be phased out.

Starting January 1, 1975, Canada instituted a protectionprocedure which resulted in a scaling down of its crude oilexports. On January 1, 1977, the National Energy Board modi-fied its protection formula to stimulate heavy oil development.After the latest oil supply/demand inquiry, the Board, in itsSeptember 1978 report, decided to hold the level of lightcrude oil exports at the then present amount (55,000 b/d) overthe next 3 years. They had also estimated that heavy oilexports may approximate 110,000 b/d during 1979 for antici-pated total exports of 165,000 b/d. After that, heavy oilexports would be restricted only by actual productive capacityand Canadian demand.

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We were informed by a Department of State official thatin September 1979, the National Energy Board recommended thatthe availability of exports of Canadian crude oil be deter-mined on a monthly basis. Furthermore, we were informed thaton September 19, 1979, the National Energy Board announcedthat, due to Canadian supply and demand conditions, e portsto the United States for October 1979 would be about ±4,000b/d of light and about 94,000 b/d of heavy crude.

Under the protection program, exports to the UnitedStates have been reduced as follows:

Year b/d(000 omitted)

1974 7911975 6011976 3721977 2781978 172

Initially, Canada's phaseout policy included heavy crudeoils as well as light crude. However, this policy seriouslyaffected the industry's ability to develop the heavy oilresource. Canadian demand was only 40,000 of the 165,000b/d production capacity. The National Energy Board decidedto license heavy crude oil seperately. This policy allowedexports of heavy oils surplus to Canadian demand. The indus-try still depends on the export market, particularly U.S."Northern Tier" 1/ refiners, many of which have installedspecial equipment to process this crude.

The Board decision to allow exports of heavy crude oilwill assure continued development and production until thetime when Canada can more fully use this resource. Beforethey can use more heavy oil, Canada must make a choice ofeither modifying existing Canadian refineries or buildingan upgrading plant. Upgrading converts the heavy oil intoa synthetic crude acceptable to existing refineries.

Several industry spokesmen stated it is more economi-cal to continue to export the heavy oils to the UnitedStates rather than upgrading it at a cost of $2 to $4 per

l/Northern Tier is defined as Idaho, Illinois, Indiana, Michi-gan, Minnesota, Montana, North Dakota, Ohio, Oregon, Wash-ington, and Wisconsin.

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barrel. However, industry officials believe that an upgrad-ing plant will be built by the mid-1980s because the CanadianGovernment wants the heavy crude to be used in Canada andbecause the industry fears that Alaskan crude will eventuallyreplace Canadian heavy oils in American markets. A major oilcompany had been negotiating with the Federal Government andSaskatchewan Provincial government for the financial incen-tives to construct an upgrading plant. Another major companyhad also proposed a combination production and upgradingfacility. Negotiations were canceled when both companieswere purchased by other Canadian energy companies.

Canada's phaseout of light crude oil exports has resultedin a current excess productive capacity of 300,000 to 500,000b/d. To decrease part of this excess and to further reducereliance on imports, Canada is planning to increase the oildeliveries in the Interprovincial Pipeline (Sarnia to Montreal)from 250,000 to 315,000 b/d. Industry, financial, and tradeassociation officials are in favor of short-term exports tothe United States to stimulate exploration.

TAR SANDS DEVELOPMENT

The Canadian crude oil situation has been helped by thedevelopment of the Athabasca tar sands in Alberta, which con-tain nearly 600 billion barrels of heavy oil called bitumen.Other tar sands in Alberta contained an estimated 400 billionbarrels of bitumen. The Province of Alberta estimates that26 billion barrels of oil can be economically recovered fromtar sands through existing mining methods. If Canada consumesabout 2.3 million b/d, as projected for 1995, this would beabout a 31-year supply for Canada. In addition, another 200billion barrels may be recoverable by advanced techniques.

Canada has two major mining projects underway. Thefirst project, operated by Great Canadian Oil Sands, Ltd.,is a commercial venture producing 45,000 barrels of oilper day. Syncrude, the second mining project, began oper-ations in July 1978. Built at a cost of $2.1 billion, theplant has a production capacity of 129,000 b/d. Syncrude isunique because it is a consortium of Federal and Provincialgovernments and private industry. In addition to assumingequity positions when a major oil company dropped its sharein 1974, the respective governments provided the followingassurances

-- world price for the synthetic crude,

--no production curtailment, and

-- favorable royalty and tax structures.

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Although the governments do not presently plan to becomeequity partners in future ventures, observers believe theywill have to provide the proper financial incentives toencourage projects. With the return on investment i-:ecastfor Syncrude below industry norms, future projects willrequire some form of GOC support. Although the above projectsare presently the only commercial mining operations, researchofficials advised us that the development of advanced technol-ogy represents a hope for the future.

The Alberta Oil Sands Technology and Research Authority,with a $144 million financial base, was legislatively createdin 1974 to develop the technology needed to establish a bettercommerical method of oil sands recovery. Normally, the Author-ity and private industry work together on specific researchprojects. With a 50-percent interest in each project, theAuthority assures the expeditious completion of experimentsand serves as an intermediary between private companies. TheAuthority is sole owner and licensing agent for all new tech-nology developed through these joint research projects; how-ever, private industry can license the technology outside ofCanada. The Authority and participating private industryjointly own all project assets and share all revenues.

Canadian officials involved in tar sands research anddevelopment were of the opinion that the United States wasduplicating Canadian efforts. The president of one Canadianfirm involved in tar sands research stated, however, thatdespite being asked, his company would not work with theUnited States. He said that the United States would be betteroff if they developed its own oil shale technology. In thisregard, current U.S. Department of Energy estimates indicatethat the United States could recover 600 billion barrels ofoil from domestic oil shale deposits or the equivalent of theexisting world oil resources. Department of Energy scientistsestimate that oil shale deposits can be commercially developedprovided the U.S. Government funds an initial investment ofperhaps as much as $200 million for a demonstration plant.Department of Energy officials pointed out in July 1979, how-ever, that the price of shale oil is still higher than thecurrent world price of conventional oil.

In early June 1979, the United States and Canada agreedto cooperate on oil sands and heavy oil research and develop-ment. This, we believe, is a step in the right direction.

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CHAPTER 5

OTHER ENERGY SOURCES

The United States and Canada have enjoyed a long periodof cooperation in the energy area. Both countries have coop-erated in the development and use of conventional and nuclear-generated electricity and have extensive interconnections oftheir electricity distribution systems. In the future, forestwaste offers a potential energy source for both countries.

ELECTRICITY

Seven of the 10 Canadian Provinces border on the UnitedStates. Four of these seven, New Brunswick, Ontario, Mani-toba, and British Columrbia, have voltage system interconnec-tions with neighboring utilities in the United States. Inrecent years the number of major system interconnectionsbetween the two countries has increased considerably. Sev-eral major international tie lines are presently in variousstages of consideration. If built, they would increase thetotal transfer capability between Canada and the United Statesto well over 10,000 megawatts. Advantages of interconnectionsinclude export potential as well as emergency support duringutility disruptions, etc.

Estimates for 1978 show that Canada exported 20.7 tril-lion watt hours of electricity to the United States andimported 2.2 trillion watt hours-. The net exchange represen-ted 5.5 percent of Canadian production of 336 trillion watthours.

The National Energy Board is in favor of continuedexchanges and supports the exchange activities with the UnitedStates for the following reasons

-- access to electricity when needed,

-- better service to Canadian consumers, and

-- export revenues to help finance capitalprojects.

Both industry and GOC officials believe that the mutual bene-fit relating to interconnecting electrical systems will stim-ulate future activity. Inthis regard, Ontario and BritishColumbian officials stated that their Provinces are interestedin exporting more electricity to the United States. Further,two U.S. governors have approached the British Columbian

21

Government about building future hydroelectric plants basedon firm exports to the United States. This would enableBritish Columbia to construct powerplants in advance of Cana-dian demand and lower future costs to its consumers. BritishColumbian Government officials stated that, because futureplants will be so costly, joint participation is being seri-ously evaluated.

British Columbian officials pointed out that there areproblems between the two nations over water rights. They saidthat under the Columbia River Treaty, Canada can divert someof the Kootenay River flow--which would have gone directly tothe United States--into the Columbia River. This willincrease the amount of electrical generation in Canada, butwill decrease U.S. generation. In a similar vein, Seattle CityLight' has the option, under an agreement between the City ofSeattle and British Columbia, to flood an additional 5,000acres of British Columbian land to increase their generatingcapacity. The British Columbian Government has joined withthe environmentalists in opposition to this flooding. Dis-cussions between Seattle and British Columbia have been futile.According to an industry official in British Columbia, if thewater rights problems are not resolved, future hydroelectricdevelopment in this area might be impaired.

NUCLEAR

Dating back to the beginning of the atomic age, exchangesof data between Canada and the United States helped shape thefuture of nuclear development. Cooperation in the mid-1940sinvolved the supply of critical materials from the UnitedStates for construction of reactors in Canada. In the 1950s,a strong cooperative program involving the construction andoperation of test loops in reactors provided excellent datafor predicting behavior in nuclear submarines and nuclearpowerplants. In the 1960s, the operation of an organic cooledloop in a reactor furnished data for the design of U.S. andCanadian reactors. Also, during the 1960s Canada supported theU.S. Atoms for Peace Program, the Nuclear Safeguard Program(under the International Atomic Energy Agency), and the NuclearNon-Proliferation Treaty. Further, there was a jointly fundedprogram on the development of heavy water-moderated powerreactors. During the 1970s, cooperation continued with tech-nical exchanges in heavy water reactor technology and nuclearwaste management. Among the formal agreements reached betweenthe two nations are

--an Agreement for Cooperation Concerning CivilUses of Atomic Energy, signed on June 15, 1955;

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--a Miemorandum of Understanding for the coopera-tive development of heavy water-moderated powerreactors, signed in 1960; and

-- an Agreement for Information Ex'change in theNuclear Field, signed in 1976.

The Canadians have expressed a strong interest in jointresearch and development projects in nuclear fusion. WhileCanadian research directors concede they have comparativelylittle money or direct knowledge to contribute, they do haveconsiderable expertise in some related areas. One researchdirector suggested a technology swap of Canadian tar sandsexpertise for U.S. nuclear fusion expertise.

COAL

In 1976 and 1977, Canada annually imported from theUnited States about 15 million tons of coal or about 50 per-cent of its total consumption. Preliminary statistics for1978 show that Canada imported 12.9 million tons of coal orabout 40 percent of its total consumption.

A large amount of this coal was used to generate elec-tricity, some of which is exported to the United States. Inspite of the interdependence of the two countries, Canada isconcerned about the security of supply because the UnitedStates is the sole source of Canadian coal imports. It isalso concerned that future U.S. exports of coal may be affec-ted by such varied factors as increased U.S. consumption,mining strikes, and low mining productivity. The concern hasprompted Canada to look to its western Provinces for futuresupplies. Despite the distance to the eastern Canadian mar-kets, Canadians are planning to transport coal via rail fromAlberta to Thunder Bay, Ontario (1,400 miles), and then viabarge across the Great Lakes.

A senior GOC official stated that Canada has had very goodworking relations in energy matters with the United Statesand desires to undertake joint research and developmentefforts--particularly in areas such as coal utilization andtransportation.

FOREST WASTE

Although both the United States and Canadian Governmentshave sponsored studies exploring the potential of forest bio-mass, the subject is novel and is still in its early state.Of importance, however, is that both countries possess largeexpanses of forest. One U.S. Department of Energy report

23

indicated that 3.5 percent of the total energy consumptionin the United States could be fulfilled from unused forestwaste.

In British Columbia, it has been estimated that 8 per-cent of the Province's energy demands are met with forestwastes. Many lumber mills began converting from oil to forestwaste when the Provincial government made it economicallyunattractive to otherwise dispose of wood waste. Now theFederal Government has provided incentive funds for capitalinvestment. Discussions with officials from both countries,including those involved in the research and developmentarea, have supported the belief that cooperative research anddevelopment in forest waste and other areas would benefitboth countries.

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CHAPTER 6

OTHER ENERGY PROJECTS AFFECTING U.S.-CANADIAN INTERESTS

Although Canada and the United States have experienceda long history of energy relations, the energy crisis has dra-matized the importance of increasing these efforts. The twonations are currently assessing numerous energy projects thataffect the interests of both countries. Some of these proj-ects were discussed (1) during the Vice-President's January1978 visit to Canada and (2) by the U.S. President and theCanadian Prime Minister in March 1979. U.S. Department ofEnergy officials informed us in July 1979 that some of theprojects are to be treated in more detail in its upcomingfinal Northern Tier Study report. A brief commentary on themajor oil and gas project follows.

PIPELINE PROPOSALS

Significant oil and natural gas discoveries in the Beau-fort Sea, northern Alaska, and the Canadian Artic coupled withthe increased demand for energy may lead to the constructionof additional transmission systems to the Canadian and U.S.markets. A Trans Alaskan pipeline was constructed to transportNorth Slope crude oil from Prudhoe Bay to Valdez, Alaska.The oil is then transported by tanker to the west coast andother market places in the United States. The west coastmarkets have not, however, been able to fully absorb the NorthSlope oil. Although excess oil is available on the west coast,crude oil shortages exist in other parts of the United States.To alleviate this distribution problem, various pipeline pro-posals--all designed to market North Slope crude--have beenentertained. Department of State officials pointed out inJuly 1979 that under Title V of the Public Utility RegulatoryPolicies Act of 1978 (approved November 9, 1978), the Depart-ment of the Interior has lead responsibilities for the evalua-tions of crude oil transportation systems, including pipelines.Three of the proposals under title V would involve pipelineroutes through Canada. Each of the proposed pipelines has itsproponents and opponents and contains issues and considera-tions which are beyond the scope of this study. (See app.II.)

Kitimat

The Kitimat proposal is a plan to construct a pipelinefrom Kitimat, British Columbia, to Edmonton, Alberta, whereit would tie in with the Canadian pipeline system. Alaskancrude or foreign oil would be delivered to Kitimat via tankers.Estimated to cost $750 million in 1977, the Kitimat pipelinecould transport 750,000 b/d.

25

Kitimat could provide Canada with a west coast oil portif one is needed. Further, Canada would benefit economicallyfrom the construction phase and from the transmission charges.

The United States would receive access to alternativesupplies of crude for Northern Tier refiners as well as alle-viating the surplus of Alaskan crude on the west coast.Also, because Kitimat would connect with Canada's pipelinesystem in Alberta, swaps of Alaskan and foreign crude forAlberta crude could become a possibility.

The outlook for the Kitimat project was not bright priorto May 1979 because of the environmental opposition in BritishColumbia. The U.S. Depattment of Energy pointed out in July1979 in commenting on the draft of this study, however, thatthe May 1979 British Columbia and National elections in Canadahave given new lift to this project. The Department said:

"It is presently to be a 500 thousand barrelsper day (MB/D) pipeline from a port at Kitimatto Edmonton connecting into the existing inter-provincial pipeline for transporting AlaskanNorth Slop (ANS) and foreign crudes. * * *The project may propose construction of a heavyoil refinery at Kitifmat with the plan to usesome of the ANS crude. This might be beneficialin effecting exchanges for sweet crude for useby the Montana and North Dakota refinery centerswhich are presently not configured to processhigh amounts of heavy crudes. Success of theproject may require refineries in the Chicagoarea to modify for greater use of heavy sourcrudes to make this project economical. Pres-ently, the Northern Tier refiners, excludingthose on the west coast of Washington are con-figured to process 250-350 MB/D. This assumesuse of indigenous oil in that region includingrecent finds in North Dakota (20 MB/D)."

Trans Mountain

When Canada decided to cut back oil exports, the TransMountain Pipeline was delivering 270,000 b/d from Edmonton,Alberta, to Cherry Point, Washington. This dropped to approx-imately 14,000 b/d on a swap basis. Trans Mountain is inoperation for only about 10 days a month.

26

In an attempt to more fully use the pipeline and torelieve the Northern Tier problem, a consortium proposed thereversal of the pipeline. This would have allowed oil tobe transported in each direction for part of the month.

The British Columbian refiners and Provincial governmentopposed the proposal because of fear that British Columbianrefiners might eventually be shut off from Albertan crude.When the U.S. Congress passed legislation restricting thevolume of port traffic, the consortium withdrew its applica-tion to the National Energy Board.

The Department of Energy, in commenting on the draftof this study in July 1979, said that currently, this projectproposes a port on the Strait of Juan de Fuce and the construc-tion of a .new line paralleling the existing line to Alberta.The Department also said:

"Design throughput is also 500 MB/D [thousandbarrels per day]. To serve the Montana refin-eries, * * * [a pipeline] into Billings needsto be extended into Edmonton * * *. It isunlikely this will occur unless sweet crude'can be exchanged for ANS [Alaskan North Slope]crude with Canada, or at the Billings refineriesmodified to handle heavy sour crude. However, itcould furnish ANS crude to Chicago through theexisting Interprovincial Line and increaseexchanges with refineries in-Puget Sound."

Alaskan Highway oil

The Alaskan Highway oil pipeline proposal offers fouralternative projects to move surplus Alaskan crude into theU.S. midcontinent and Northern Tier States. Two of theprojects would construct a pipeline leg off the Trans-Alaskapipeline and transport the crude to Alberta.

The other two projects would ship the Alaskan crudefrom Valdez and Kinai Peninsula to Skagway, Alaska, and thenvia a new pipeline to Alberta. The Department of Energy,in commenting on the draft of this study in July 1979, saidthat to be economically viable with the other two Canadianprojects, the line proposed from Skagway, Alaska, wouldhave to terminate at Keg River and not Edmonton. Existingpipelines running from Keg River to Edmonton would have tobe changed from gas to oil, product to crude, and new linesbuilt to accomodate this flow into Edmonton.

27

As the crude would enter Canada's pipeline system in

Alberta, the same benefits would accrue to both nations asoutlined under the Kitimat Pipeline proposal. Because thispipeline would be constructed side-by-side with the AlaskaHighway gas pipeline, the environmental impact would be held

to a minimum. This proposal appears to have less oppositionthan does the Kitimat proposal.

Other proposals (e.g., Northern Tier Pipeline 1/) havebeen offered as alternatives to transport surplus Alaskancrude and foreign crude to refining centers in the U.S.Northern Tier and midcontinent. Because they do not directlyinvolve Canada, the proposals are not discussed here.

OTHER PROJECTS

Alaskan Highway gas

The Alaskan Highway gas pipeline is designed to trans-port natural gas from the North Slope of Alaska to Californiaand the U.S. Midwest via a pipeline through Canada. This proj-ect will provide Canada with an economic stimulus during theconstruction phase plus potential access to its frontierresources. Plans call for building the southern legs of thepipeline before beginning construction of the main line to

enable surplus Albertan natural gas to be exported to theUnited States. However, construction (and perhaps exports)is contingent upon the-entire project proceeding.

When Premier Trudeau and President Carter signed theformal agreement to allow construction of the Alaskan Highwaygas pipeline, the decision to proceed was based in part upona natural gas shortage and the availability of private finan-cing. Department of State officials, in commenting on a draftof this study in July 1979, said that initial delays occurredwhen the United States was unable to promptly settle on a

gas-pricing policy. Although the regulatory pace has quick-ened since the establishment of the wellhead price for Alaskan

gas in late 1978, important factors, such as (1) gas-condi-tioning costs, (2) an incentive rate of return formula, and(3) gas import authorizations need to be resolved. Anotherhurdle to be overcome is attracting the necessary privatefinancing. In the interim, the sponsor stated they have beenspending $500,000 a month to keep their organization intact.

1/As this report went to press, the Secretary of the Interioron October 15, 1979, recommended that President Carterapprove the Northern Tier Pipeline proposal.

28

A consensus exists among industry and financial communityspokesmen that the project will need some sort of Government(United States and/or Canada) guarantee or backstopping. BothGovernments, however, have agreed that they will not partici-pate in the financing.

Department of State officials stated that the UnitedStates has a requirement for the line, but they also saidthat increased U.S. natural gas supplies, increased conven-tional Canadian gas reserves, and prospects for imports ofMexican gas could affect the need for the Alaskan pipeline.

The New Brunswick proposal

The New Brunswick liquefied natural gas proposal calledfor the 20-year purchase of 1 billion cubic feet a day ofAlgerian gas. The liquefied natural gas would have been ship-ped to New Brunswick, regasified, and then transmitted tothe Maine border. From Maine, the gas was to be sent througha 500-mile pipeline to connect with existing distributionsystems.

In December 1977, the National Energy Board conditionallyapproved the application for construction of the regasifica-tion-terminal at Saint John, New Brunswick, and a pipeline tothe Maine border. Import and export licenses were also condi-tionally approved.

The Department of Energy, in commenting on the draft ofthis study in July 1979, said that it rejected the proposalin its Economic Regulatory Administration Order Number 3,dated December 18, 1978.

Strategic Petroleum Reserve storage

The United States has a Strategic Petroleum Reserve pro-gram which, under statutory authority, provides for eventualstorage of up to 1 billion barrels of crude oil and petroleumproducts to counter emergency situations such as anotherembargo. Three Canadian companies have proposed facilitiesto help meet this requirement. A joint study recommended byPremier Trudeau and Vice President Mondale concluded thatadditional technical issues needed to be studied before deter-mining the feasibility of the Canadian sites. The joint studyindicated the proposals would provide the United States withstorage facilities while providing a stimulus to the localCanadian economy. Department of State officials informed usin July 1979 that the United States and Canada are currentlyholding discussions on a potential agreement for the UnitedStates to use Canadian storage.

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APPENLIX I APPENDIX I

Department of EnergyWashington, D.C. 20545

July 9, 1979

Mr. J. Dexter Peach, DirectorEnergy and Minerals DivisionU.S. General Accounting OfficeWashington, D.C. 20548

Dear Mr. Peach:

We appreciate the opportunity to review and comment on the GAO draftreport entitled "Selected Data On The Canadian Energy Situation." Ourviews with respect to the text of the report are discussed below.

The report implies that commercial development of U.S. shale oil dependsonly on the expenditure of $200 million for a demonstration plant.However, the report does not make it clear that the price of shale oilis still higher than the current world price of conventional oil.

Some of the information presented in chapter 6 regarding crude oilpipeline proposals is no longer accurate. While these projects will betreated in more detail in the Department of Energy's (DOE) upcoming finalNorthern Tier Study report, it might still be appropriate to updatethe status of these projects in the report.

Three of the Canadian proposals are under study as a solution to pro-jected Northern Tier petroleum product shortfalls and transportationdeficits owing to curtailment of Canadian imports in that region;namely Kitimat, Trans Mountain and Foothills (Alaska Highway Project);as well as all-American Northern Tier Pipeline Project.

Contrary to the impression given by the report in discussing these pro-jects, all appear to be viable at this time, in particular the Kitimatand Trans Mountain Projects. All three of the Canadian proposals andthe Northern Tier Project have filed applications with the Departmentof Interior (DOI) under Title V of P.L. 95-617, Public UtilitiesRegulatory Policy Act of 1978, Section 508.

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AIPENEIX I APPENDIX I

Mr. J. Dexter Peach, Director 2.Energy and Minerals Division

Preliminary supply/demand and cost analyses based on information fur-nished by the project sponsors are being submitted to DOI for a draftof the DOI Title V report which is to be issued for public comment thissummer. The purpose of the Act and DOE's involvement is to provide thePresident with information upon which he can decide on one or more suchprojects for meeting the Northern Tier needs through 2000, and for expe-diting Federal permits. A Presidential decision is planned in December1979.

Specifics on each of the Canadian proposals which should be updated inthe draft report follows:

Kitimat: - The May 1979 British Columbia (BC) and Nationalelections in Canada have given new lift to this project.It is presently to be a 500 thousand barrels per day (MB/D)pipeline from a port at Kitimat to Edmonton connecting intothe existing Interprovincial pipeline for transportingAlaskan North Slope (ANS) and foreign crudes. KaiserResources is a recent addition to the existing consortiumof sponsors. The project may propose construction of aheavy oil refinery at Kitimat with the plan to use someof the ANS crude. This might be beneficial in effectingexchanges for sweet crude for use by the Montana andNorth Dakota refinery centers which are presently notconfigured to process high amounts of heavy crudes. Suc-cess of the project may require refineries in the Chicagoarea to modify for greater use of heavy sour crudes tomake this project economical. Presently, the NorthernTier refiners, excluding those on the west coast ofWashington are configured to process 250-350 MB/D. Thisassumes use of indigenous oil in that region includingrecent finds in North Dakota (20 MB/D).

Trans Mountain: - This project proposes a port in PugetSound (at Low Point on the Strait of Juan de Fuce) and theconstruction of a new line parallelling the existing lineto Alberta. Design throughput is also 500 MB/D. To servethe Montana refineries, the Conoco line into Billings needsto be extended into Edmonton by others. It is unlikelythis will occur unless sweet crude can be exchanged forANS crude with Canada, or at the Billings refineriesmodified to handle heavy sour crude. However, it couldfurnish ANS crude to Chicago through the existing Inter-provincial Line and increase exchanges with refineries inPuget Sound.

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ArPENIX I APPENDIX I

Mr. J. Dexter Peach, Director 3.Energy and Minerals Division

Foothills: - To be economically viable with the other twoCanadian projects the line proposed from Skagway, Alas.I(500 MB/D design capacity) would have to terminate atKeg River and not Edmonton. Existing pipelines runningfrom Keg River to Edmonton would have to be changed byothers from gas to oil, product to crude, and new linesbuilt to accommodate this flow into Edmonton.

The Department of Energy did not grant conditional approval to the TransAlaska Pipeline Company (TAPCO) project in 1977 as cited on page 39 ofthe report. While the Federal Power Commission (FPC) Administrative LawJudge reached a qualified approval in his initial opinion, the decisionis not binding. Furthermore, DOE rejected the proposal in its EconomicRegulatory Administration (ERA) Order No. 3, dated December 18, 1978.

We appreciate your consideration of these comments in the preparationof the final report and will be pleased to provide any additionalinformation you may desire. Comments of an editorial nature have beenprovided to members of your staff.

Sincerelyr

Donald C. GestiehrDirectorOffice of GAO Liaison

32

APPEMZIX IIAPpEj-4IX 1

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