Oil sands to take hit from U.S. bill

Shawn McCarthy and Nathan VanderKlippe
Globe and Mail
Tuesday, Jun. 30, 2009

Producers and their U.S. refiners face sharply higher costs

Alberta's oil sands producers and their U.S. refiners face sharply higher costs to reduce greenhouse gas emissions under legislation approved by the U.S. House of Representatives and championed by U.S. President Barack Obama.

The American Clean Energy and Security Act, if passed by the U.S. Senate, could also result in new tariffs on Canadian exporters of energy-intensive goods from cement to chemicals if Washington deems Ottawa's climate-change regulations to be lacking.

Under the cap-and-trade plan, U.S. refiners will have to buy permits for each tonne of carbon dioxide that they send into the air. While utilities will be provided free allocation of those permits to reduce the impact on power users, the oil industry will have to purchase virtually all of its permits.

Such a system would heavily penalize oil companies that ship oil sands bitumen to the United States because refining the raw bitumen into petroleum products such as gasoline and heating oil is more energy-intensive and higher in emissions than is the processing of conventional oil. U.S. refiners processing the heavier oil sands crude will face higher permit costs, cutting into profit margins for producers and refiners.

Both producers and refiners would likely share that cost. A resulting drop in demand would in turn drive down the price of bitumen.

Many U.S. refiners have been moving to retool their refineries in recent years to accommodate the heavy crude from Alberta's oil sands.

But the proposed legislation could put all of that at risk.

“Any climate legislation that we're looking at is going to make refiners think twice about building a dependence on the heavier crudes that are more energy intensive to upgrade and refine,” said Susan Casey-Leftowitz, a lawyer with the Washington-based Natural Resources Defense Council.

The U.S. climate-change policy is clearly aimed at encouraging a shift from oil to electricity in the transportation sector.

“The argument for expanding the tar sands is that there would be expanding demand for that oil in the United States,” Ms. Casey-Leftowitz said. “But this bill signals there is not going to be that expanding demand.”

Critics argue it will be decades before the United States can switch to electric-powered cars and mass transit. In the meantime, the legislation will merely make gasoline more expensive and the United States more dependent on imported petroleum products, said Kyle Isakower, of the American Petroleum Institute.

Still, the oil industry did dodge a major bullet when the House dropped plans to include a low-carbon fuel standard, similar to one adopted in California, that would impose significant costs on oil sands producers. Canada's petroleum industry has carefully monitored the bill's progression and lobbied U.S. legislators in a bid to convince them that a rule that damages Canadian oil production also damages U.S. energy security.

“We're delighted that low-carbon fuel standards are not in the Waxman-Markey bill,” said Tom Huffaker, vice-president of environment and policy at the Canadian Association of Petroleum Producers. “But we're resisting dancing on the table because we know this is a work in progress.”

The banishment of those standards from the Waxman-Markey legislation should lessen the chances that similar legislation will reappear, either in other states or through the U.S. Environmental Protection Agency, Mr. Huffaker said.

Many states, however, have signalled their intention to follows California's lead once it has worked out the complexities of the regulations.

The industry also takes some comfort from Mr. Obama, who warned against border-tariff measures in the bill.

“The last thing we need is anything that could turn into protectionism masking as environmentalism,” Mr. Huffaker said. “We'd be delighted if the President prevails and that language comes entirely out,” when the Senate deals with it.

However, the Waxman-Markey bill became even more protectionist after it was amended to ensure its passage; the amendments make it easier for Washington to impose tariffs.

Canadian concerns “have intensified,” said Elisabeth DeMarco, a Toronto-based lawyer with MacLeod Dixon LLP.

The House bill seeks to prevent “carbon leakage” – meaning the shift of emissions-heavy industries and jobs out of the U.S. to avoid the new regulatory burden.

“The amendments heighten the carbon leakage provisions, which are really trade-protection provisions dressed up as carbon leakage,” Ms. DeMarco said.

Environment Minister Jim Prentice has urged the Americans to ensure that the country's environmental legislation does not represent disguised protectionism, though Ottawa itself has worried about energy-intensive industries moving offshore if countries don't adopt comparable climate change regulations.

The American Petroleum Institute has warned that the equivalent of one in six U.S. refineries could close by 2020 as a result of the new rules.

That could lead to greater imports – a situation that would likely benefit Canadian refiners and upgraders.

But Columba Yeung, the chairman and founder of Calgary-based Value Creation Inc., expects Canada to mirror U.S. policy, ultimately levelling the playing field between the two countries. Value Creation is working to build a facility to upgrade oil sands bitumen into a lighter crude capable of being refined into products like gasoline and jet fuel.

Mr. Yeung is, however, hopeful that stiffer carbon dioxide policy will boost companies like his, which has developed a technology that produces 20 per cent less greenhouse gases than current processes.