Ten thousand delegates from 190 countries will be in Bali this week to talk about climate change, kicking off negotiations for a new international agreement to follow the Kyoto Accord.

The UN wants an agreement by 2009, leaving enough time for implementation by the time Kyoto expires in 2012. The goals for Bali include picking a deadline and setting an agenda. Basically, the plan for this week is to plan to get back together real soon.

(Ironic aside: Indonesia planted millions of trees to soak up the estimated 50,000 tons of greenhouse gases expected to be created by delegates flying to Bali to attend the conference.)

The US continues to oppose mandatory emissions cuts by wealthy nations and a target to limit the rise in global temperatures. On Monday, Australia ratified Kyoto, leaving the US as the only industrial power not to have signed it.

Canada’s Prime Minister Stephen Harper is trying to bridge a gap between what now amounts to the rest of the industrialized world and the US. But he and his government have basically abandoned Kyoto. The Harper government’s plan would see Canada cut its emissions by 20 percent by 2020, but the Tories use 2006 as a baseline, not Kyoto’s 1990 baseline. Canada wouldn’t reach its Kyoto target of a 6 percent cut below 1990 levels by 2012 until 2020.

Canada was once a big player in UN climate talk. Although our neighbors to the north pitched in on writing the thing and put a signature to it, they never did much to enact and enforce measures implementing Kyoto. A private member’s bill mandating Kyoto-based emissions reduction passed last spring, but the minority Conservative government has refused to enforce it.

In late September, Harper touted a new consensus on “flexible” targets as the best means to address global warming at a meeting called by UN Secretary General Ban Ki-moon to set the table for the current Bali meeting.

Harper has said the global community needs to balance environmental protection with economic growth and sees an “emerging consensus” on the need for a rethink on how to respond.

During a question-and-answer session after a September speech to the Council on Foreign Relation, he said: “If you go for hard caps as the only kinds of target (to limit global emissions), by definition the only countries that will sign on are countries that have no population growth and fairly limited economic growth. That’s what happened with Kyoto.”

Canada’s ability to drive the climate change debate has been compromised, however, by the failures of past Liberal governments, as well as the current Conservative regime, to get any meaningful legislation passed. Harper’s ideas on intensity-based targets may yet gain traction, but the only event of consequence on this issue is the 2008 US presidential election.

The deadline is essentially agreed to–2009–and the arguments shaping the agenda are known. China, India, Brazil and Indonesia–developing countries exempted from Kyoto–must be required to accept hard emissions caps. The exemption was negotiated in 1995; without it, there wouldn’t have been a Kyoto Protocol in 1997. But the present US administration won’t move unless developing nations are held to compulsory limits.

India threatened to walk out of a preliminary conference at Bogor, Indonesia, in October when it was suggested the 1995 exemption be abandoned, so there’s significant ground to be covered before developing and developed countries can reach an agreement. (And that begs the question whether any such agreement will adequately address the problem.) 

Will whoever occupies the White House have the nerve to use US influence to force China, India, Brazil, Indonesia and the rest of the developing world to accept hard-and-fast rules?

What happens between now and when that question is answered is just noise.   

Rate Cuts

The Bank of Canada (BoC) cut its overnight interest rate by 25 basis points to 4.25 percent Tuesday, a pre-emptive strike against global financial market difficulties linked to US subprime woes. Also, recent inflation numbers came in lower than expected because of “increased competitive pressures related to the level of the Canadian dollar.”

The BoC is still officially concerned about upside risks to inflation (given a very low jobless rate), but the credit squeeze and a possible US recession are the dominant concerns now.

The BoC said credit conditions globally and in Canada have tightened further, and it expects the slowing US economy to suppress demand for Canadian exports.

“All these factors considered, the bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009,” said the BoC in a statement.

The BoC’s move could be the first in a series of cuts by central banks; our colleague Elliott Gue, in a post on KCI Investing’s new community blog At These Levels, discussed such a possibility in a broader commentary on the US dollar:

We all know that the US is at the center of the credit market turmoil but that doesn’t mean the nation is the only country affected. For example, Britain is certainly vulnerable as evidenced by the high-profile bail-out of Northern Rock by the Bank of England.

And while economic growth outside the US remains reasonably solid, I find it hard to imagine that it’ll be immune. Note, in particular, the obvious deterioration in Germany’s index of leading economic indicators–the largest economy in the EU is clearly slowing down.

The Federal Reserve has been most aggressive to date in cutting rates. But the European Central Bank (ECB) has intervened in other ways, pumping liquidity into the system aggressively during the heart of the August credit crunch. In fact, the ECB was even more aggressive than the Fed back then in injecting liquidity.

With growth deteriorating in Europe I’d expect to see the ECB start to get more aggressive cutting rates and injecting liquidity in 2008 just like the Fed. In my post a few days ago, I highlighted my reasons for expecting a significant pullback in oil prices in the New Year. That pullback might just filter through in the form of lower inflation expectations, giving global central banks just the cover they need to get more aggressive on rates.

One point to look for is how the dollar reacts to a Fed cut on December 11th. The obvious reaction would be a fall; if the dollar instead rallies, it may be an indication that the currency markets are already pricing in the Fed ease.

You can read Elliott’s entire post here.

The BoC will assess developments and the balance of risks before making its next rate decision on Jan. 22. It still sees the possibility of inflationary pressure from strong domestic demand in Canada and weak productivity growth. Overall, the BoC said, the Canadian economy is operating above production capacity. Canada’s economy grew by a stronger-than-expected 2.9 percent in the third quarter, down from 3.8 percent in the second quarter.

The Roundup

Oil and Gas

Enerplus Resources (ERF.UN, NYSE: ERF) is buying Focus Energy Trust (FET.UN, FETUF) for CAD1.38 billion. The acquisition will boost Enerplus’ expected 2008 production by about 26 percent. Focus unitholders will receive 0.425 units of Enerplus for each of their units, valuing Focus at CAD17.38 per unit, a premium of 7.8 percent over the Nov. 30 closing price.

Enerplus owners will hold about 79 percent of the combined trust, which is expected to produce the equivalent of about 101,000 barrels of oil per day next year. According to Enerplus, combined operating costs will be CAD8.50 per barrel of oil equivalent (boe), 11 percent less than the CAD9.50 forecast for Enerplus alone. Focus’ production is about 90 percent gas.

Enerplus will assume all of Focus’ CAD300 million of debt. Enerplus expects to maintain its monthly payout to unitholders of 42 cents Canadian per unit after the purchase closes in February. Enerplus Resources is a buy up to USD50; hold Focus Energy Trust.

Vault Energy Trust (VNG.UN, VNGFF) has postponed a meeting of unitholders to vote on the proposed agreement whereby Penn West Energy Trust (PWT.UN, NYSE: PWE) would acquire it until it can assess the impact on existing Vault unitholders of Penn West’s acquisition of Canetic Resources Trust (CNE.UN, NYSE: CNE). Vault anticipates completing its review of the Penn West/Canetic information sometime in early December and rescheduling the vote on its acquisition by Penn West for mid-January. Vault Energy Trust is a hold. 

Zargon Energy Trust (ZAR.UN, ZARFF) is buying Rival Energy (TSX-V: RGY) for CAD47 million in cash and stock, including the assumption of CAD14.2 million in debt. Rival produces about 1,000 boe per day, consisting of 650 barrels per day of crude oil and 2.1 million cubic feet per day of natural gas. About 60 percent of Rival’s current production is from the operated Bellshill Lake oil property, within Zargon’s Alberta Plains core area and just south of Jarrow, Zargon’s largest producing property.

Rival shareholders can elect to receive either 0.0562 of a Zargon unit or CAD1.35 cash for each Rival share, subject to a maximum of 690,000 Zargon trust units and a maximum of CAD16.4 million of cash. The offer represents a 16 percent premium over the five-day weighted average trading price of Zargon units and Rival shares.

Based on the expected late-January closing of the acquisition, Zargon has increased its 2008 production guidance from 8,800 boe per day to 9,750 boe per day. Zargon Energy Trust is a buy up to USD28.
 
Electric Power

Primary Energy Recycling Corp (PRI.UN, PYGYF) announced over weekend that it would reinstate distributions, following the waiving of a debt covenant default. Primary completed the limited waiver to its senior debt credit agreement, enabling it to pay distributions.

The change also permanently increases covenant thresholds and modifies other credit agreement terms. The board of directors has reinstated a 80-cent-Canadian-per-unit annualized distribution, and Primary intends to pay 66.7 cents Canadian per unit in December. The units bounced after the announcement, making this a good opportunity to sell Primary Energy Recycling Corp.

Business Trusts

Big Rock Brewery Income Trust (BR.UN, BRBMF) announced that two of its beers, Grasshopper and Jack Rabbit, have been awarded gold medals at this year’s Canadian Brewing Awards. Grasshopper, a wheat ale, was awarded gold in the Wheat Beer North American Style category for its exceptionally refreshing, delicately hopped flavor. Jack Rabbit, Big Rock’s lightest lager, was recognized as top Light (Calorie Reduced) Lager at the competition. Hold Big Rock Brewery Income Trust.

TransForce Income Fund (TIF.UN, TIFUF) has signed an agreement to acquire privately held Thibodeau Group and its 815 employees and 1,530 tractors and trailers. Portneuf, Quebec-based Thibodeau is a less-than-truckload and truckload carrier, operating primarily out of 14 terminals in Quebec, Ontario and the US. It generated CAD80 million in revenue in 2006. TransForce Income Fund is a buy up to USD14.

Tree Island Wire Income Fund (TIL.UN, TWIRF) will consider a request from The Futura Corp, which owns nearly 20 percent of the fund, to hold a special meeting to consider the replacement of several of Tree Island’s trustees. Futura cited mismanagement and the lack of a strategic plan for the company as the basis for its request, which will be taken up Dec. 14.

Futura, an investment company focused on the building materials sector, made its request shortly after Tree Island revealed it was cutting 10 percent of its salaried staff in a cost reduction effort linked to the consolidation of US operations following Tree Island’s USD18.5 million acquisition earlier this year of Baoan International Investment Co, a Chinese-owned wire manufacturer with operations in California. The deal allows Tree Wire to establish operations in China. Hold Tree Island Wire Income Fund.

Pipeline Trusts

Inter Pipeline Fund (IPL.UN, none) is raising CAD150 million in a bought-deal offering to reduce its bank debt. The fund will offer 15.3 million units at CAD9.80 apiece through a syndicate led by CIBC World Markets. The offering is expected to close on Dec. 20. Inter Pipeline Fund is a buy up to USD9.

Natural Resources Trusts

Canfor Pulp Income Fund (CFX.UN) cut its cash distribution for the second straight month, lopping another 14 percent off to 12 cents Canadian per unit, because of the rise of the Canadian dollar. Canfor cut its October distribution from 18 cents Canadian to 14 cents Canadian per unit. The November distribution will be paid on Dec. 14 to unitholders of record on Nov. 30. Canfor Pulp Income Fund remains a buy up to USD13.

SFK Pulp Fund (SFK.UN, SFKUF) chopped its distribution in half , blaming the “highly volatile and strong Canadian dollar.” The fund, which supplies pulp to the paper industry, said a 1-cent-Canadian distribution would be payable in December, down from the previous 2 cents Canadian. Hold SFK Pulp Fund.