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Emissions at a Syncrude oil sands facility in Alberta (DAVID BOILY)
Emissions at a Syncrude oil sands facility in Alberta (DAVID BOILY)

U.S. carbon rules pose oil sands hurdles Add to ...

Canada's oil sands producers face the prospect of a patchwork of costly climate regulations in their key U.S. markets as American states step up their efforts to adopt California-style low-carbon fuel standards.

Dozens of states are moving ahead with regulations that would penalize more carbon-intensive fuels like those made from oil sands bitumen, and encourage the use of greener alternatives. The states are proceeding amid growing doubts about President Barack Obama's ability to get cap-and-trade legislation through Congress this year.

Eleven governors of the New England and mid-Atlantic states agreed last week to develop a common low-carbon fuel standard, and to lobby Washington to adopt federal regulations that impose penalties on the use of the most carbon-intensive transportation fuels.

Under proposed regulations, refiners and marketers would either have to reduce their reliance on oil sands and other heavy crudes, or buy credits from low-carbon energy producers. In either case, the value of the Alberta crude to its producers would fall.

California pioneered the low-carbon fuel standard with a plan that was condemned as discriminatory by the Alberta oil industry as well as federal and provincial governments. Now other regions are following California's lead, including 10 Midwestern states that together represent the oil sands' largest export market.

"Generally, a low-carbon fuel standard could significantly disadvantage fuels produced from oil sands," Al Mannata, fuels issue manager for the American Petroleum Institute, the Washington-based industry lobby group, said Wednesday.

"But you've got to see the regulation and how they write the regulation to ultimately determine that," he added.

The northeastern governors, who released the memorandum of understanding last week, said a low-carbon fuel standard can reduce emissions and encourage the production of lower-carbon alternatives such as advanced biofuels and electric vehicles.

They made it clear that they would prefer a national system, rather than a patchwork of state-based regulations, but said they are prepared to proceed if Washington does not.

Mr. Obama has urged the Senate to pass legislation - narrowly approved by the House of Representatives - that would impose national caps on emissions and allow for trading of emissions credits to finance the most efficient reduction efforts. But Democratic leadership in Congress is having trouble winning support from the party's more conservative members, especially senators from states that depend on coal mining or coal-fired electricity.

Failure of the cap-and-trade bill would provide greater incentive for states to adopt their own low-carbon regulations, and ultimately for the Obama administration to use the power of the Environmental Protection Agency's powers to impose emissions regulations such as a low-carbon fuel standard.

In a letter to the northeast states' association - an advisory body to the governors - ConocoPhillips Co. opposed the implementation of state or regional regulations, saying they would be "costly and inefficient." The company warned that standards may not be achievable or could conflict with other federal or state programs. ConocoPhillips has partnered with Calgary-based EnCana Corp. to produce bitumen from the oil sands and process it in the United States, primarily for Midwestern markets.

Under a low-carbon fuel standard, regulators set a benchmark "carbon intensity" level based on fuel made from conventional crude oil, and then require refiners and marketers who import gasoline and diesel to reduce their carbon intensity over a fixed time period. Different fuels are assigned their own carbon intensity.

Oil companies essentially would have to subsidize the development of low-carbon alternatives to compensate for their growing reliance on heavier crude and bitumen.

A report prepared for the northeastern governors last summer singled out the oil sands as a source of carbon-intensive gasoline. The report, by the Northeast States Center for a Clean Air Future, concluded gasoline made from the oil sands produced 12-per-cent more carbon dioxide emissions than conventional gasoline over its "life cycle."

(Extraction and processing of oil sands bitumen is far more emissions-intensive than that for conventional oil, but the total carbon footprint includes tailpipe emissions, which account for 80 per cent of CO{-2} released from the use of petroleum-based fuels.)

The Canadian industry argues the California regulations unfairly singled out oil sands production, and fears other states will follow that lead.

"Obviously, we're concerned about it," said Don Thompson, president of the Oil Sands Developers Group, an industry organization based in Fort McMurray, Alta. Mr. Thompson met in November with a group from the Midwest governors' association, which travelled to Alberta as part of a consultation process as it develops its own low-carbon fuel standard. "The only lens this seems to look through is the environmental lens - it purports to reduce the carbon footprint of fuels - but it doesn't deal with the fundamental question of: If not from Canada, then where [will the U.S. get its oil]"

Mr. Thompson said that, on the basis of total carbon footprint, Canadian oil sands production is reasonably competitive with imports from places such as Mexico, Nigeria, Venezuela and Iran, which are less reliable as suppliers.

He said the world is increasingly reliant on heavier grades of crude oil - which entail production of carbon dioxide - and most oil-producing countries are doing little to reduce their emissions. Canadian producers, on the other hand, have already cut their per-barrel emissions and will continue to do so.

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