July 8 (Bloomberg) -- U.S. Treasury Secretary John Snow's first official visit to Canada begins today in an isolated city amid marshlands and lakes -- and oil reserves big enough to reshape political and economic ties between the two countries.

The destination is Fort McMurray, Alberta, 750 kilometers (466 miles) northeast of Calgary in the heart of Canada's C$39.4 billion ($32 billion) oil industry, which in 2000 passed Saudi Arabia to become the U.S.'s biggest oil supplier. Fort McMurray also represents something else, said former policy makers and diplomats: a chance to revive U.S.-Canada relations strained since 2003 by the Iraq war.

``It's not well known in the U.S. the degree to which the U.S. is dependent on Canada for energy,'' John Manley, a foreign affairs and finance minister under former Canadian Prime Minister Jean Chretien, said in an interview. ``We have very few levers in this relationship'' and energy is the only one where ``we have a true advantage.''

Manley, who quit politics in 2004 after more than a decade in the cabinet, used to say there was no more important relationship for Canada than that with the U.S., which buys more than 80 percent of Canadian exports. Canada, in turn, is the U.S.'s largest trading partner.

Frayed Ties

Ties between the two countries, which have shared a free- trade agreement since 1989, started to unravel at the end of Manley's tenure. The issues ranged from Canada's refusal to join the U.S. and the U.K. in combat for the first time in its history to U.S. tariffs on Canadian lumber and wheat.

``Weeds have indeed grown in the garden and threaten what has traditionally been one of the world's most successful relationships,'' a group of 70 American and Canadian scholars, executives and former government officials said in a statement in February, at a Columbia University meeting on U.S.-Canada relations.

Fifty-four percent of 146 Canadian executives surveyed in March by Compas Inc., a Toronto polling firm, said Canada-U.S. relations were worse than normal and 31 percent said they were the worst ever. ``Things got frosty at the top,'' said James Blanchard, a former Michigan governor and U.S. ambassador to Canada from 1993 to 1996. The relationship is ``in suspension,'' said Gordon Giffin, U.S. ambassador in Ottawa from 1997 to 2001.

We're No. 1

A growing appreciation of Canada's energy reserves in the White House and Congress may clear the way for a strengthening of ties, said Jennifer Welsh, a Canadian-born professor of international relations at Oxford University in Oxford, England. Last year she published a book on what Canada, the world's eighth- largest economy, needs to do to assume a larger role on the world stage.

Canadian Finance Minister Ralph Goodale, who will escort Snow to Fort McMurray, has been trying to get the word out. He focused on energy as he lobbied Snow to visit Canada, and two weeks ago reminded an audience in New York that Canada, ``not Saudi Arabia, not Venezuela'' is the U.S.'s biggest source of oil.

``Within this coming decade those Canadian sources of supply have the potential to alter the world's geopolitics,'' Goodale, 55, said on June 24.

Snow, 65, is traveling to Canada to discuss overall economic ties as well as energy and its role in the relationship, the Treasury Department said in a statement. Snow's trip will be the first to Canada for a Treasury secretary outside an international summit in at least two decades, according to Canada's Finance Department.

`Faraway Places'

Snow last week called energy his ``biggest'' concern, underlining President George W. Bush's pledge to make the U.S. economy less reliant on oil from ``faraway places.'' Bush, in an interview with the Danish Broadcasting Corp. on June 29, said the U.S. is ``hooked on oil from the Middle East, which is a national security problem and an economic security problem.''

Record oil prices are increasing the urgency to break the addiction. Crude oil reached an all-time high of $62.10 a barrel on the New York Mercantile Exchange yesterday and closed at $60.73 a barrel, up 55 percent from a year ago.

Canada's oil exports to the U.S. averaged 2.12 million barrels a day in 2004, or 10.3 percent of daily U.S. consumption, compared with 1.64 million barrels from Mexico and 1.56 million barrels from Saudi Arabia, according to the U.S. Energy Information Administration. Canada's oil exports to the U.S. have jumped 59 percent in the past decade.

Sand Riches

Canada's reserves, mostly trapped in tar sands that cover an area in northern Alberta the size of Florida, are the second- largest in the world after Saudi Arabia, the Canadian Association of Petroleum Producers said, citing the Oil and Gas Journal. The country also is the U.S.'s biggest supplier of natural gas and electricity.

``There has been until recently an underestimation of the potential of Canada to address our oil needs,'' said Spencer Abraham, who retired as U.S. energy secretary in January after four years in the Bush administration. ``It's a better alternative than the instability in other parts of the world,'' said Abraham, now a visiting fellow at Stanford University's Hoover Institution in Stanford, California.

Prime Minister Paul Martin's government should be careful not to overstate the degree to which oil might bolster Canada's political clout, said Gwyn Morgan, chief executive of Calgary- based EnCana Corp., which plans to spend $240 million doubling its output from oil sands to 60,000 barrels of oil a day by 2006.

``I would be tempered in that regard,'' said Morgan, whose company also is Canada's biggest natural gas producer.

Heavy Crude

One obstacle to tapping Canada's reserves is that North American refiners will have to spend billions upgrading their factories to handle the heavier, stickier crude that's left when it's separated from the tar sands, Morgan said.

EnCana and Premcor Inc., a U.S. refiner, probably will spend about $1.5 billion converting Premcor's plant in Lima, Ohio, to handle 140,000 barrels a day of the so-called heavy oil from Alberta, Morgan said. If politicians are counting on the oil sands to help lower oil prices, they should offer tax incentives to encourage more such conversions, he said.

Prices must remain above $25 a barrel to cover the higher production costs of mining and drilling the oil sands, said George Eynon, senior director of research at the Calgary-based Canadian Energy Research Institute, which supplies analysis to governments and producers. That's not an issue with $60 oil.

Former Canadian cabinet member Manley, who has visited the extraction operations around Fort McMurray, said Snow will leave impressed. He said he doubted that would be enough to end U.S. lumber duties, which the U.S. Commerce Department says are a response to Canadian subsidies. Influential U.S. lawmakers from both parties, including Republican Senator Gordon Smith of Oregon and Democratic Senator Max Baucus of Montana, support the duties.

``It's great that Goodale convinced Snow to come,'' Manley said from the Toronto office of his current employer, law firm McCarthy Tetrault LLP. ``I'd also like to see a senior delegation from Congress and a couple of key people from the White House.''

To contact the reporter on this story: Kevin Carmichael in Calgary at kcarmichael@bloomberg.net;

Last Updated: July 8, 2005 00:00 EDT