BACKGROUND

Canada is the United States’ most important trading partner, with an equivalent of over $1 billion a day in goods, services, and investment crossing the borders in each direction in 2001. Canada and the U.S. also enjoy a highly interdependent energy relationship, trading oil, and electricity. An example of this interdependence was an electric power outage on August 14, 2003, which left large portions of the Midwest and Northeast United States and Ontario, Canada without power.

After expanding 3.3% in 2002, Canada’s real gross domestic product (GDP) for 2003 grew 1.7%. A number of factors contributed to the slowdown of Canada’s economy, such as weak U.S. economic growth for most of the year; a strong appreciation of the Canadian dollar; the SARS outbreak in Toronto; and restrictions on exports of softwood lumber and beef (due to mad cow disease). However, the recovery of the U.S. economy, high oil and natural gas prices, and continued spending from the Canadian government are expected to boost Canada’s economy in 2004. The Canadian economy is forecast to grow 3.6% in 2004.

On December 12, 2003, Paul Martin was sworn in as Canada’s 21st prime minister, after the resignation of fellow Liberal party member Jean Chrétien. On taking office, Prime Minister Martin pledged to work on strengthening U.S. – Canada relations and to increase spending on defense, healthcare, and education, as well as to improve federal-provincial relations. Mr. Martin, the leader of the liberal Party, is expected to call national elections for spring 2004.

ENERGY OVERVIEW

Canada was the fifth-largest energy producer in the world in 2001, behind the United States, Russia, China, and Saudi Arabia. Over the past two decades, Canada has become a significant net energy exporter. In 2001, about 31% of Canadian energy production was exported, with the United States its main customer. In the first three quarters of 2003, the United States imported more oil (including crude oil and petroleum products) from Canada than from any other country. During the same time period, the United States also imported about 2.5 trillion cubic feet (Tcf) of Canadian natural gas, representing 87% of total U.S. imports. In 2001, about 39% of Canada’s primary energy production was natural gas, followed by oil (25%), hydropower (20%), coal (11%), and nuclear power (5%). Alberta is Canada’s largest producer of energy. Along with being a major energy-producer, Canada also was a significant energy consumer in 2001, ranking eighth in the world.

OIL

According to Oil Journal, as of January 2004, Canada’s total proven crude oil reserves stood at 178.9 billion barrels. Canada currently trails only Saudi Arabia, which holds the most proven crude oil reserves in the world. Prior to 2002, Canada did not even rank in the top 20 of countries with the most proven crude oil reserves. The massive increase in reserves reflects the Journal’s inclusion of Alberta’s oil sands, which stood at 174.4 billion barrels as of January 2004, according to Alberta Energy and Utilities Board (EUB). In contrast, conventional crude oil and condensate stood at an estimated 4.5 billion barrels, as reported by Canadian Association of Petroleum Producers (CAPP). Some analysts, however, have questioned the new assessment and whether it is accurate and appropriate to include oil sands.

Exploration and Production

Canada’s total oil production (including all liquids, bitumen and synthetic crude) averaged an estimated 3.1 million barrels per day (bbl/d) for 2003, an increase of 7% over 2002. The country’s oil production has been increasing since 1999, as new oil sands projects and production off the coast of Newfoundland have come onstream. Overall, oil sands production is expected to increase significantly and to offset the decline in conventional crude oil production, becoming Canada’s major source of oil supply.