Oil sands brace for American green fuel regulation

OTTAWA — Federal and Alberta officials will make a last-ditch effort in California on Thursday to head off a regulation that would target oil sands emission levels and create a new barrier to the export of the unconventional oil.

Despite significant opposition, California's Air Resources Board is expected to approve on Thursday North America's first low-carbon fuel standard, a system that is expected to be a model for the U.S. federal government, 13 American states and several Canadian provinces that have proposed similar regulations.

The California board's regulations would require Canadian oil sands producers to dramatically reduce their emissions before their product could be sold in the state, or to purchase expensive credits from alternative energy producers, like those who make ethanol from non-food feedstocks.

While California does not currently consume oil from the oil sands, the largest state in the union is a potentially lucrative market for American refiners that do handle Alberta-based bitumen and upgraded synthetic crude.

As well, Calgary-based Enbridge Inc. is planning to build a pipeline to deliver oil-sands product to the West Coast, aimed at markets in Asia and California.

Under the low-carbon fuel standard, refiners and petroleum marketers will be required to track their supplies back to the wellhead.

This means marketers will have to provide an assessment of the carbon intensity of the fuel, based on guidelines being produced by staff at the Air Resources Board.

In a letter to California Governor Arnold Schwarzenegger that was filed with the board, federal Natural Resources Minister Lisa Raitt complained that the proposed rules appear to single out oil sands producers for punitive treatment.

“We are concerned that crude oil derived from Canada's oil sands may be discriminated against as a high [carbon-intensity] crude oil, while other crude oils with similar upstream emissions are not singled out,” Ms. Raitt wrote in a letter sent Tuesday.

“This could be perceived as creating an unfair trade barrier between our two countries.”

As part of the state's overall climate change plan, Mr. Schwarzenegger signed an executive order requiring the board to establish a low-carbon fuel standard in order to reduce emissions from the state's motor vehicle fleet by 10 per cent by 2020.

The California regulations would also be a setback for the corn-based ethanol industry, as the board's staff has concluded many sources of conventional ethanol is little better than gasoline when it comes to emissions. Ethanol producers are fighting back, claiming the regulator's methodology is flawed when it comes to determining the emissions that result from land-use practices.

Canadian oil industry officials are furious that the regulators have establish two standards: one for crudes that are already used in the California market and are included in a state-wide carbon intensity average, and another for crude types that are not now sold in the state and will have to fall below that average or face penalties.

The Alberta Energy Department, which has sent an official to intervene in today's hearing, wants to ensure the regulations aren't designed in a way that favours imported oil from Mexico and Venezuela, which can cause as much greenhouse gas emissions as Alberta crude. “We want to make sure that all sources are assessed on a full-life-cycle basis, from well to wheels,” Alberta Energy spokesman Jason Chance said Wednesday.

Several studies have concluded that the oil sands crude result in 20 per cent to 30 per cent higher emissions than fuel derived from conventional light oil, but the industry and Canadian governments argue the oil sands should be compared with other heavy oil sources, which make up an increasing share of the North American consumption.

Ms. Raitt argued California should take into account Canada and Alberta's efforts to reduce greenhouse gas emissions, including from oil sands facilities.

Simon Miu, a San Francisco-based scientist with the Natural Resources Defense Council, said it is critical the regulations penalize fuels that have a heavy carbon content as a way of encouraging low-carbon alternatives.

Mr. Miu recently concluded a study of oil sands emissions that concluded there is a wide disparity among oil sands projects. He said Canadian Natural Resources' Primrose in-site project produced 161 kilograms of carbon dioxide per barrel, while Petro-Canada's McKay River project emits only 34 kilograms per barrel.

Shawn McCarthy is The Globe's Global Energy Reporter