Canada’s minority government rolled out a package of environment proposals April 26, delivering on a promise Prime Minister Stephen Harper made in his crown speech opening the current session of Parliament last October. Conservative minorities had blocked efforts to make Canada’s Kyoto Protocol commitments legally enforceable in the past; now in control, the Torys sketched a framework that deviates from Kyoto in critical respects.

They’ll be back to the drawing board in the fall, though, as there’s little chance pegging emissions reductions to 2006 levels (as opposed to Kyoto’s 1990 standard) and establishing intensity-based targets (versus Kyoto’s quantity measurements) will become law.

Although Member of Parliament Bill Casey of Nova Scotia voted against his own party’s budget after the second of three readings before Parliament, the Bloc Quebecois and the remaining Conservatives banded together to virtually guarantee that legislation’s ultimate passage. Now that he’s won that fight, Harper is likely to prorogue the current parliamentary session rather than watch the Liberal-controlled Canadian Senate pass a House of Commons private member’s bill that would move Canada’s Kyoto Protocol commitments from “best intentions” to “legal obligations.”

(Casey, by the way, got booted from the Conservative caucus.)

Canada’s Liberal Senate majority is threatening to sit through the summer in order to pass the private member’s Kyoto bill in response to Conservative movements indicating a filibuster. Liberal Senate Leader Celine Hervieux-Payette described a sub-amendment to the bill introduced by the Conservatives as an indication the government wants to drag out the debate on the bill until Parliament adjourns as scheduled later in June.

The private member’s bill passed the Commons with support from all opposition parties in February. It would force the government to establish regulations that would follow carbon-dioxide emissions reductions as described in the Kyoto Protocol.

The Conservatives’ Regulatory Framework for Air Emissions—introduced April 26 for public consumption as “Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution”—is touted as the first-ever attempt to “force industry to reduce greenhouse gases and air pollution.”

It contains “mandatory and enforceable reductions in emissions and air pollutants” and a commitment to reduce Canada’s total emissions of greenhouse gases by 20 percent of 2006 levels by 2020.

Regarding greenhouse gases, the government hopes to establish short-term emission reduction targets that will take effect in 2010. For existing facilities, the emission-intensity target for each sector (electricity generation, oil and gas, forestry, smelting and refining, iron and steel, some mining operations, cement, lime and chemical production) is targeted at 6 percent improvement each year from 2007 to 2010. The initial enforceable reduction will be 18 percent from 2006 levels by 2010. After 2010, the government plan will require a 2 percent improvement each year, for a total industry reduction of 26 percent by 2015.

Companies will have several options to meet their required targets. They can: reduce their emissions through abatement; contribute to a technology fund that will invest in new emissions-reduction technology; use emissions trading; or use a one-time recognition of early action for companies that took measurable action between 1992 and 2006.

National caps will also be set for air pollutants of concern: nitrogen oxide (40 percent reduction from 2006 levels); sulphur oxide (55 percent); volatile organic compounds (45 percent); and particulate matter (20 percent). Limits will also be set for other air pollutants such as mercury from electricity generation, and benzene emissions from natural gas, and iron and steel sectors. These targets will be enforceable as of 2012. Companies can also meet their requirements via abatement or trading of nitrogen oxide and sulphur oxide credits.

But it’s not gonna pass. One of the consequences of prorogation is that all legislation pending before the Senate as well as the House of Commons is dead; he’ll spike Bill C-288 in the Senate and his government’s environment plan in the Commons.

Harper will open a new session with the same Parliament membership in October. Prorogation doesn’t dissolve the government and won’t require new elections; it’s basically a do-over for Canada’s self-styled New Government

What will the New, New Government have to say about emissions?

Harper characterizes Canada as a high-growth economy with a rapidly expanding population, similar in many ways to emerging economies—think China—that are angling for special treatment within whatever system the United Nations (or the G-8, or the top 15 polluting nations) eventually implement. “It’s impossible to realistically implement any emission control program unless you take into account of the national economic circumstances of the country,” Harper said.

The focal point of media discussion and political criticism is Alberta’s oil sands. To accommodate the industry’s growth, the Conservatives would use intensity-based targets to govern allowable emissions. Those targets, which mandate cuts on a per-barrel-produced basis rather than fixed goals, will cut emissions by 20 percent per barrel from 2006 levels by 2020 

Harper has said he didn’t consult President Bush before the April 26 rollout of his emissions framework, and he denied consulting with the US leader in advance of the pre-G-8 emissions kerfuffle.

Whether the two North American heads of state talked on the issue is irrelevant. The timing and similarity of the recent pronouncements—the Harper’s legislative package and accompanying PR blitz, Bush’s public acceptance of certain Kyoto elements and commitment to new global negotiations—amply illustrates a meeting of the minds.  

The Alberta oil sands hold the largest pool of oil reserves outside the Middle East; resource extraction–drilling, mining, infrastructure–is a critical part of Canada’s economy. Alberta, a bastion of Canadian conservatism, added nearly 26,000 jobs in resource extraction during 2005-06, driving the province’s unemployment rate down to 3.1 percent, a 30-year low, according to the government. For the first time, every Albertan received a CD400 (USD340) check from the government earlier this year from an unexpected fiscal surplus.

Oil sands projects are large, use considerable amounts of energy, particularly natural gas, and release both gaseous and particulate emissions into the atmosphere. Oil sands processes have become more efficient and have reduced greenhouse gas emissions per unit of production, but an increase in output could lead to an increase in total emissions.

Producing one barrel of oil from oil sands emits three times more greenhouse gases than from conventional light or medium crude oil. The extra emissions are due to the use of natural gas used to separate the bitumen from the sand and to upgrade it to synthetic oil.

Oil sands production is expected to triple to meet growing global demand. The Conservatives’ framework doesn’t set out any overall emissions caps, so companies can continue to increase production–their emissions can also go up as long as they maintain those intensity levels.

New oil sands projects will face a traditional environmental assessment process, and then will have three years before they must begin reducing their emissions. The new plan seeks to balance the environmental goals with the needs of a growing economy.

In the days ahead of the official G-8 meeting in Germany, Harper said that Canada’s short-term targets for cutting greenhouse gas emissions are more ambitious than those imposed by the European Union (EU), widely considered the leader in the developed world at tackling climate change. Harper has been selling Canada’s green plan hard this week, and his diplomatic overtures have so far been politely received in Europe. He told German business leaders that Canada’s plan could be used as a model for other growing or developing countries.

The EU agreed in March to reduce greenhouse gas emissions to 20 percent below 1990 levels by 2020. Canada has also pledged to cut emissions by 20 per cent by 2020, but it uses a base year of 2006, rather than the 1990 baseline set by Kyoto, which Canada and 172 other countries have ratified. Canada’s targets could indeed produce a greater reduction in emissions over the next 13 years than in Europe if you base it on 2006 levels.

Emissions can be limited by an absolute cap on the quantity of emissions or by some maximum allowable intensity relative to some measure of output or input, such as the number of cars or refrigerators purchased by consumers, the amount of energy input required by some production process, or even GDP.

Cap-and-trade systems limit emissions to some pre-specified absolute quantity. Intensity-based limits restrict emissions to some pre-specified rate relative to input or output.

Both quantity or intensity limits may be voluntary in the sense of expressing a sincere aspiration and good-faith intent; and either may be mandatory in the sense that well-defined sanctions will follow non-attainment of the limit.

Intensity versus quantity, 2006 versus 1990: Those debates will frame the next round of negotiations President Bush committed to, and with a little help from Prime Minister Harper, it looks as though “intensity” and “2006” have more traction. 

Speaking Gigs

I’d like to extend an invitation to you and a guest to join me at this year’s San Francisco Money Show, July 26-28, at the San Francisco Marriott, located in the heart of downtown San Francisco. This three-day event features presentations by me and my colleagues Neil George and Elliott Gue, as well as 50 other experts on real estate, metals, exchange traded funds, commodities, stocks and options. The entire event includes 150 free educational workshops, 15 panels and numerous opportunities to answer your questions in person.

To receive complimentary admission, call 800-970-4355 and mention my name, Roger Conrad, and priority code 007394. Alternatively, you can click on the San Francisco Money Show’s home page.

The Roundup

Oil & Gas

Enerplus Resources (ERF.UN, NYSE: ERF) will record a future CD80 million income tax expense for the second quarter because of the Tax Fairness Plan’s implementation as part of the Canadian federal budget. The Tax Fairness Plan includes a tax on income trust distributions beginning in 2011.

It’s is a noncash expense relating to temporary differences between the accounting and tax basis of Enerplus’ assets and liabilities and will have no immediate impact on the fund’s cash flows. Enerplus will also file a material change report on SEDAR and EDGAR to reflect the changes to the estimated after-tax net present value of future revenues from its oil and gas reserves. Enerplus Resources remains a buy up to USD52.

Penn West Energy Trust’s (PWT.UN, NYSE: PWE) Wildboy natural gas facility has resumed production after a May 13 fire brought work to a halt. Wildboy is producing about 28 million cubic feet per day of natural gas, approximately 56 percent of pre-fire capacity.

Penn West expects to be up to full capacity by October 2007, a further delay dictated by the reconstruction of the gas plant tank farm and adjacent equipment that was destroyed in the fire. The company carries both property and business interruption insurance for the Wildboy gas plant that provides a CD200 million limit subject to certain deductibles.

The dollar limit of the policy is expected to be sufficient to cover all claims related to the fire. The deductible portion of the property insurance is CD500,000 and will be borne by Penn West in the reconstruction of the facilities. The deductible portion of its business interruption insurance is a period of 720 hours.

The value of production lost from May 13, 2007, to June 11, 2007, will be borne by Penn West. This portion of the lost production is expected to reduce production and related operating margins to be reported by approximately 2,400 barrels of oil equivalent, or 2 percent, in the second quarter of 2007 and approximately 600 barrels of oil equivalent per day, or 0.5 percent, in the 2007 calendar year.

Subsequent to June 11, 2007, Penn West expects its business interruption insurance will compensate for the dollar value of lost production incurred between the expiration of the deductible period until such time as full production is restored. Penn West Energy Trust is a buy up to USD38.

Electric Power

Primary Energy Recycling Corp (PRI.UN, PYGYF), through Primary Energy Operations LLC, has hammered out an agreement with senior lenders to amend its credit agreement in a way that it anticipates will allow it to continue making its distribution. The amendment modifies the compliance limits for certain coverage ratio covenants for the next four quarterly test periods. The pre-amendment compliance limits will resume in the second quarter of 2008.

Also, Primary Energy’s North Lake Energy facility has returned to service after an April 19 blade failure led to its shutdown. Repairs have now been completed; the unit was returned to service on May 25 and has operated without interruption since. The total outage duration was 36 days.

The financial impact, including lost revenue and repair costs is estimated to be USD1.77 million; after subtracting costs not eligible for insurance recovery and allowing for the insurance deductible, Primary Energy will likely pursue recovery of USD200,000. Sell Primary Energy Recycling Corp.

Gas/Propane

Superior Plus Income Fund (SPF.UN, SPIJF) has reached a three-year deal with Bruce Power LP to sell fixed-price electricity to Ontario consumers through Superior’s existing natural gas retailing channels. Bruce Power operates a nuclear generating complex on Lake Huron and is Ontario’s largest independent electricity supplier.

During the term of the agreement, Superior’s subsidiary Superior Energy Management Electricity will purchase electricity from Bruce Power for customer contract terms of up to five years. The deal should allow Superior to maximize channel sales and increase revenue per customer. Superior Plus Income Fund is a hold.

Business Trusts

Chemtrade Logistics Income Fund (CHE.UN, CGIFF), responding to press speculation about its possible sale, announced that it “continues to evaluate strategic alternatives available to maximize unitholder value,” a process it began with its February strategic review announcement. Citing “investment banking sources,” a Toronto Globe and Mail blog reported that “rival chemical makers are kicking tires at Chemtrade.”

Chemtrade is an unlikely target of private equity because its cyclical, commodity-based business requires significant capital spending. Competitors within the industry could lower costs and boost pricing power.

The Globe and Mail post named US-based PVS Chemical Solutions and Koch Sulphur Products, Norway’s Borregaard, Finland’s Chemtrans, and Germany-based MG Chemiehandel and Nordeutsche Affinerie as potential suitors. Though it’s played down the rumors, Chemtrade Logistics Income Fund is a buy up to USD10 for its takeover potential.

Cinram International Income Fund (CRW.UN, CRWFF) has inked a deal with Motorola to package and deliver phones and accessories to the North American market. Financial terms weren’t disclosed, and Cinram declined to estimate how many phones would be shipped through its operations.

Cinram will test the cell phones and parts, as well as program, assemble, package and ship the final product. The company will also take back old phones and repair and refurbish them.

Cinram is building a facility specifically for the Motorola endeavor, a plant it hopes to open in July. Hold Cinram International Income Fund.

Pipeline Trusts

InterPipeline Fund (IPL.UN) has acquired Corridor Pipeline System, the sole transporter of diluted bitumen produced by the Athabasca Oil Sands Project, from an affiliate of Kinder Morgan for CD760 million. Funding for the acquisition was provided from InterPipeline’s existing bank credit facilities and the assumption of approximately CD460 million of existing debt.

Inter Pipeline also assumed responsibility for the completion of an estimated CD1.8 billion expansion of Corridor, which will increase diluted bitumen capacity on the system from 300,000 barrels per day to approximately 465,000 barrels per day by 2010. Hold InterPipeline Fund.

Real Estate Trusts

Legacy Hotels REIT (LGY.UN, LEGYF) has received a CD12.60 per unit (CD1.46 billion) takeover offer from unidentified investment groups. Legacy rallied to well above CD14 after it put itself up for sale.

The current offer is 12 percent above Legacy’s February 28 close, the last day of trading preceding its “strategic review” announcement, but is obviously well below recent highs. Legacy said it will continue to evaluate options.

The underwhelming offer could be based on the long-term contracts Legacy has with Fairmont Hotels & Resorts to manage Legacy properties. Fairmont spun off Legacy and still owns a big stake in the real estate investment trust.

It isn’t known as a low-cost manager, and renegotiation of its terms was identified as a crucial factor in the bidding process. Legacy Hotels REIT still rates a buy up to USD13.  

Natural Resources Trusts

Noranda Income Fund (NIF.UN, NNDIF) revised its 2007 production and sales forecast to 265,000 tons and 272,000 tons, respectively. Second quarter production is expected to be 63,000.

Production in 2007 has been negatively impacted by process difficulties in the hydrometallurgical section of the plant. Noranda will provide further details in its second quarter earnings report, but the revision isn’t expected to impact monthly distributions. Noranda Income Fund is a hold.