GLOBAL ENERGY REPORTER
U.S. oil refiners are facing steeply higher costs from new climate change regulations being proposed in Washington - and Canadians oil sands producers may be forced to help pay the tab.
Under bills now before Congress, refiners would have to purchase allowances for every ton of carbon dioxide they emit into the atmosphere.
Because oil sands bitumen requires more energy-intensive, emissions-heavy processing, the cost of producing gasoline and diesel from the Alberta crude will climb more steeply than it would for refining light grades of oil, Peter Whitman, a policy analyst with the U.S. Department of Energy, told an industry conference in Houston yesterday.
At the same time, U.S. refiners would face a price squeeze as they are forced to compete with imports from foreign refiners whose countries have less strict greenhouse gas emission targets.
"The refining emission costs ... could represent a significant portion of [current] refining margins and would disadvantage the domestic refiners versus the importer who does not have to pay for emissions at the refining level," Mr. Whitman said.
Speaking to representatives of major U.S. refiners - including Exxon Mobil Corp., BP PLC, ConocoPhillips Co. and Valero Energy Corp. - Mr. Whitman said the industry can't count on political opposition to derail the climate change legislation, which has passed the House of Representatives and is now before the Senate.
The U.S. Environmental Protection Agency has indicated that it will turn next to large industrial emitters, and will require refiners and other industries to monitor and report their greenhouse gas emissions beginning Jan. 1, 2010.
Several refiners are investing billions to retool their refineries to process the growing volumes of oil sands crude that will flow south as companies boost production in Alberta.
While companies such as Suncor Energy and Syncrude upgrade the sludge-like bitumen into synthetic crude oil in Canada, much of the new production planned for Alberta would be upgraded in the United States.
Both TransCanada Corp. and Enbridge Inc. are in the midst of major expansion plans to their pipeline systems to double capacity above the current 1.4 million barrels a day of exports to the U.S.
Refiners in the U.S. are already facing a squeeze on their profit margins after demand plunged due to the recession and then the price of crude oil rebounded on international markets. Many industry analysts now believe U.S gasoline consumption has peaked.
Richard Green, an industry consultant with the DNV risk management group, said climate change regulations in the U.S. would clearly hurt Canadian oil sands producers because of the relatively high emissions required for processing.
"The bill seems to disadvantage that relationship because right now the level of carbon for extracting and refining oil sands is among the highest" in the world, he said.
Producers would face lower prices for their bitumen if, as expected, climate regulations drive up the price of processing it.
The Canadian exporters face a double whammy, as their U.S. customers not only face higher costs from refining the bitumen, but also could see their customers among American refiners lose market share to lower-cost, offshore competitors.
"People would be very angry if they knew the result of this bill was to give imported oil a break over domestic supply," said Lisa Epifani, a Washington-based lawyer with Van Ness Feldman and former Senate aide for the Republicans.
"The oil and gas industry needs to show that there are a great number of jobs at risk in this sector."
On their own, the proposed rules would create an incentive for companies to upgrade their bitumen in Canada before shipping it to U.S. markets because there would be higher processing costs south of the border. But Ottawa is also expected to impose emissions regulations on Canadian upgraders and refiners with a system that is comparable to whatever emerges in U.S. regulations.
