California rule could hit oil sands producers

SHAWN MCCARTHY
Globe and Mail
April 25, 2009

OTTAWA -- Canadian oil companies face an effective U.S. tax on their greenhouse gas emissions if climate change regulations adopted by California this week are copied by other American jurisdictions.

On Thursday night, the California Air Resources Board adopted the world's first low-carbon fuel standard, which sets a threshold for total carbon dioxide emitted in the production and consumption of all fuels sold in the state.

Although Canadian oil is not currently exported to California, the industry is worried because some 13 states and the government in Washington have proposed similar regulations.

"The main concern we have is not California, it's the influence they have on others," said Rick Hyndman, vice-president at the Canadian Association of Petroleum Producers in Calgary.

The California standard is the latest U.S. attack on the oil sands' environmental performance. A 2005 federal law prohibited U.S. agencies from using fuel that derives from unconventional sources, though there is debate whether that includes oil sands.

The Obama administration has backed similar low-carbon regulations at a national level, though Canadian officials remain hopeful those rules could be more accommodating to oil sands producers.

Mr. Hyndman and representatives of the Canadian and Alberta governments attended a hearing in Sacramento on Thursday, urging the board to drop provisions that they claim discriminate against Canadian oil sands and other crudes that aren't currently refined or marketed in California.

If other states, or Washington, adopt regulations that penalize oil sands crudes, it will cut into producers' revenues, Mr. Hyndman said. They would be forced to divert Canadian exports to markets that do not have such standards, or to invest in expensive abatement technology, beyond what Canadian federal and provincial rules are demanding.

Simon Mui, a San Francisco-based scientist with the National Resources Defense Council, a U.S. environmental group, said the Canadians are wrong in arguing that the regulations discriminate against the oil sands projects. He said the regulations assess fuel sources by their carbon content, regardless of origin.

"They are lobbying for a solution that would unfairly disadvantage low-carbon intensity alternative and renewable fuels and leave themselves off the hook," Mr. Mui said. "They're effectively looking for an exemption from the rule."

New California fuel rule may violate NAFTA -lawyer

CALGARY, Alberta, April 24 (Reuters) - California's new low-carbon fuel rules may be a violation of NAFTA and World Trade Organization provisions because they would unfairly limit exports of crude from Canada's oil sands to the state, a prominent Canadian trade lawyer said on Friday.

California adopted a first-ever rule on Thursday requiring refineries, producers and importers of motor fuels sold in the state to reduce the "carbon intensity" of their products by 10 percent by 2020, with greater cuts thereafter.

The measures to slash such emissions would force refiners to consider the carbon footprint of the fuels they produce, a potential blow to synthetic crude upgraded from Alberta's oil sands, whose production emits more carbon-dioxide than conventional oil.

However, the state may have no business imposing such rules on oil produced in other countries, a Canadian lawyer said, and the provisions may violate international trade treaties.

"There's definitely a NAFTA case and a WTO case. There's no doubt in my mind about it," said Simon Potter, a partner at the McCarthy Tetrault law firm whose practice includes trade and competition law. "This is California deciding they are going to treat oil differently depending on ... where it comes from. It's an obvious violation of the requirement for national treatment."

NAFTA provisions guarantee that companies and products from Canada, the United States and Mexico are not discriminated against on the basis of nationality or origin.

"Once you get across the border, you have to be treated like everybody else," said Potter, a former president of the Canadian Bar Association. "To the extent that these measures make oil from one part of the world that they consider dirty more expensive than identical oil from another part of the world they consider clean, they've got a discriminatory treatment issue."

Canadian trade officials could not be immediately reached for comment on whether they have concerns about the new rule.

While little or no oil sands crude is currently exported to California, the Alberta government said it considers the provision a threat because the state is a potential market. Also, other U.S. states are considering similar regulations.

"Does it have a possibility of a negative effect on Alberta's bitumen future? I would suggest I'd be very naive if I thought anything other than 'yes' is the proper answer to that," Alberta Energy Minister Mel Knight said on Friday in Houston.

(Additional reporting by Bruce Nichols; editing by Rob Wilson)

See also:

Oil sands brace for American green fuel regulation