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The U.S. Targets Canada’s Oil Sands

The U.S. Targets Canada’s Oil Sands: Washington Should Tread Lightly with its Environmental Legislation, so that Carbon Cuts will not Come at the Expense of Canada’s Energy Sovereignty or U.S. Energy Security

by COHA Research Associate Shantel Beach

Even though climate change legislation has stalled within the United States, President Obama’s willingness to bypass Congress using the authority of the federal Environmental Protection Agency (EPA) signals that he is seriously prepared to cut U.S. carbon emissions. The way in which Obama forges ahead in this battle to fight climate change will shape not only his country’s future, but also the future relationship the U.S. shares with its largest trading partner, Canada.

Immediately after Obama announced that he would be attending the Copenhagen Climate Change Summit, Canada’s Prime Minister Stephen Harper mimicked the move, and with good reason. If the climate change measures currently under discussion in Congress prove to be a good indicator of what’s to come, then Prime Minister Harper is on solid ground to gear-up for a political skirmish with the U.S. that will wholly transform energy relations between the two countries. If Obama enacts environmental legislation targeting Alberta’s carbon-intensive oil sands, he should be prepared to lose the many corresponding political and economic benefits his country has long enjoyed as a result of historic energy trade with Canada.

All too soon, Washington may find that if it pushes too hard or too fast with carbon cutting legislation targeting the oil sands, its friendly neighbor might finally grow tired of being taken for granted when it comes to oil. Canada can, and likely will push back, especially because China is more than happy to step-in and purchase oil north of the 49th parallel if the U.S. chooses not to.

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Why Canada Matters

Canada, not Saudi Arabia, Mexico or Venezuela, is the single largest foreign supplier of oil to the United States. A sizeable 17 % of total U.S. oil imports come from Canada, and according to the most recently disclosed official statistics from the U.S. Energy Information Administration (EIA), imports of Canadian crude oil totaled a formidable 1.9 million barrels per day (bbl/d) in September of this year alone. This figure was nearly double the imports from the next largest supplier, Mexico. In fact, Alberta, Canada’s oil-producing province, currently exports more oil to the U.S. than any other country in the world. Reflecting general yearly trends, in the month of September, Canada provided more petroleum to the U.S. than Saudi Arabia, Iraq, Kuwait, and Russia combined. With its proven oil reserves totaling 174.2 billion barrels, Alberta boasts the second largest reserves in the world, next only to Saudi Arabia. Last year, Alberta’s crude oil exports to the U.S. totaled an average of 1.5 million bbl/d and despite a temporary slowdown in international demand for oil in months prior, in September 2.4 million barrels of petroleum products per day continued to enter the US from Canada, doubling the level of imports from Saudi Arabia.

Gas Guzzling in the United States

Contrary to the notion that the thirst for non-renewable energy is decreasing in the United States, oil consumption is actually on the rise. Reliance upon Canadian petroleum products remains a daily reality. According to recent data, the U.S. produces a meager 10% of the world’s petroleum, but consumes a sizeable 24%. As long as demand is greater than domestic supply, oil imports will remain critical to the survival of the U.S. economy, and the maintenance of its energy security. According to the EIA, September gasoline consumption in the US climbed by 4.7 % (400 thousand bbl/d), compared to last year, a number which reflects rising overall consumption. This was the fourth month in a row that gasoline demand increased from the previous year, a trend that will likely reappear in the upcoming months.

“Oil Sands” Shouldn’t Be a Dirty Word

While much of Canada’s aforementioned oil reserves come from conventional wells, the oil sands make up a significant percentage of the cache. Like Venezuela, the oil sands have contributed greatly to Canada’s known reserves, and have played a large part in ranking it above other countries as an energy supplier. Most of the public is at least familiar the term “oil sands” (also called tar sands). In recent months many environmentalist groups like Green Peace have done everything in their power to reduce the popularity of this namesake to an all-time low. By executing brash public smear-campaigns, the anti-oil sands movement in the U.S. reached its peak this September when Prime Minister Harper came to Washington to speak with President Obama. Harper was met by angry activists and lobbyists alike, who had one message: “stop the tar sands.” Despite their robust allegations that the oil sands contribute greatly to global warming, it is commonly acknowledged that the oil sands make up a meager 5 % of Canada’s overall carbon emissions, and on a global scale, they account for less than one-tenth of one percent of all greenhouse gas emissions. To put this number into perspective, oil sands emissions only equal about ½ of what New York City emits each year.

Oil from the oil sands cannot be extracted using traditional drilling techniques, and instead much of it requires in-situ (or in-place) extraction, which occurs underground. While it is true that currently it takes more energy to extract a unit of oil from the oil sands than it does from other conventional deposits, as extraction technology improves, this will not always be the case. Generally speaking, per barrel of oil, carbon dioxide emissions have been reduced by 45 % since 1990, and progress continues today. If investment in the oil sands continues to rise, so too will the efficiency of the associated technology. With time and without restriction, the oil sands will likely become less carbon intensive by their very nature. Enhanced oil recovery technology (EOR) unlocks oil from the oil sands, and has made tremendous progress and has had astonishing results since its inception. According to Leonardo Maugeri of the Wall Street Journal, “when new exploration technologies do take root, the results are remarkable.” Given that to date legislation to cut emissions has not made EOR technology uneconomical, Maugeri emphasizes that, “In the past few years, the industry has succeeded in striking oil at depths below 10,000 feet of water and 20,000 feet below the seabed—as in the Gulf of Mexico and the Brazilian offshore[...]Fifteen years ago, all this was simply unthinkable.” If the oil sands are allowed to grow naturally, then extraction technology will continue to advance, ultimately reducing the carbon-intensive nature of the industry.

While popular media typically prefers to avoid reporting on international success stories, it becomes especially important to note that in 2007, Alberta became the first place in North America to legislate mandatory greenhouse gas reductions for large industrial facilities. Alberta’s carbon capture and storage program hopes to reduce greenhouse gas emissions by 50 % from expected 2050 levels, and will lower emissions to an equivalent of 14 % below 2005 levels. Carbon capture and storage is an initiative supported by the United Nations Intergovernmental Panel on Climate Change, the International Energy Agency, and has even been endorsed by Nobel Peace Prize Winner, Al Gore. In July of 2008, the Alberta government committed CND $2 billion (USD $1.9 billion) to kick-start its carbon capture and storage projects, and by 2015 it is expected that the initiative will store up to 5 million tons of carbon dioxide emissions per year. What Alberta has done on its own to reduce carbon emissions in its oil and gas sector is unprecedented in North America, and one could even say the Western hemisphere.

Because the extraction of bitumen from the oil sands does involve processes which are technology, water, and carbon intensive, Alberta has chosen to develop strong legislation to protect water supply and air quality. As a matter of fact, in comparison to other provinces, Alberta has some of the highest environmental standards in Canada. Currently, in the oil sands region of Alberta, there are over 100 water quality stations in place, and the Alberta government works in partnership with industry, First Nations (Native Americans), and community members to monitor local air quality. Furthermore, it has enforced provincial legislation aggressively in order to mitigate the industry’s environmental damage. Fines and environmental protection orders are routinely given by regulators if oil sands sites are not meeting standards, and funds are then reallocated to environmental reclamation projects. Before any pundit chooses to judge Alberta’s management of the oil sands over critically, it is necessary Alberta in the context of other oil producers. While it is obvious that Alberta must continue to strengthen its legislation, comparatively speaking, it has done a better job at enacting and enforcing environmental protection than other countries boasting comparable oil sands reserves. Countries like Venezuela and Saudi Arabia have far less accountable legislative and judicial branches of government, and thus do not hold their oil sands industries nearly as culpable for environmental degradation.

Because the province of Alberta has shown that it is willing to develop the oil sands in a responsible way, its opinion and input should be welcomed as part of the dialogue being pursued in the U.S. to cut carbon emissions. As a major consumer of Alberta’s oil sands, the U.S. must respect Canada’s needs when considering its environmental legislation. Alberta’s government has consistently voiced that it will gladly continue reducing its own carbon footprint, but insists that a U.S. framework affecting its oil sands must be framed by the North American Free Trade Agreement (NAFTA.) Given that many lobbyists on Capitol Hill have demanded an unconditional “halt to oil sands development,” it would be a welcome gesture if U.S. public figures emphasized that responsible growth of Canada’s oil sands is both valuable and acceptable to the United States.

What’s Happening in the House?

Despite the many benefits derived from Canada/U.S. oil trade, Washington has chosen not to highlight the importance of its historically unique relationship with Ottawa. Instead of working closely with its neighbor, key U.S. legislators have framed the energy discussion in unfriendly terms that hint at reducing U.S. emissions at Canada’s expense. Since the emergence of the American Clean Energy and Security Act, otherwise known as the Waxman-Markey bill, the wheels have been set in motion for mandatory green house gas (GHG) controls. Fathered by both the Chairman of the House Committee on Energy and Commerce, and the Chairman of the Subcommittee on Energy and Environment, the bill seeks to reduce US emissions by 17% below 2005 levels, by the year 2020. According to The Economist magazine, the bill’s reduction targets are low compared to those of other rich countries; however, they mark a sharp departure from the status quo in the U.S.

What’s Happening in the Senate?

Meanwhile in the U.S. Senate, a similar bill has emerged. The Kerry-Boxer bill promises to put the United States “back in control of [its] energy future.” Titled the Clean Energy Jobs and American Power Act, the title alone foreshadows sizeable increases in U.S. governmental control over the energy industry, which would obviously carry international implications for oil trade, especially for Canada. In many ways, the wording of both bills seeks to breeze over their potential to violate international free-trade agreements, including NAFTA and World Trade Organization (WTO) provisions.

Introducing a National “Low-Carbon Fuel Standard”

Most agree that a final climate bill would likely employ a national low-carbon fuel standard (LCFS). So far, California and eleven Northeastern states have already signed agreements to implement LCFS, and many more are considering it. In sum, a LCFS aims to reduce emissions by requiring that transportation fuels sold to cars or trucks be composed of only a limited amount of carbon-intensive fuels. Basically, a LCFS seeks to reduce gasoline usage in favor of bio-fuel usage. Bio-fuels are considered “non-carbon intensive,” and include a range of fuels from vegetable oil to ethanol. Currently the production of bio-fuel in the U.S. is mainly made up of maize (corn) production, and has lately come under severe scrutiny by economists and policymakers alike. Even though the industry has absorbed millions in U.S. government subsidies, the production of bio-fuels in the U.S. has been far less efficient than in other countries like Brazil, which uses sugarcane to make its unique brand of bio-fuel.

According to some analyses, oil derived from the oil sands would need to be blended with low-carbon bio-fuel on a one-to-one ratio, in order to attain a life-cycle carbon count acceptable under LCFS rules. If this analysis is accurate, it would theoretically cut demand for the oil sands in half. Basically, a life-cycle carbon count measures the amount of energy needed to extract one unit of output. For instance, extracting one unit of output from the oil sands requires several more units of natural gas than are needed to extract oil from conventional reserves, thus giving the oil sands a higher carbon life-cycle. If enacted, a national LCFS would disproportionately target Canada’s oil sands sector.
While at first glance it may seem like a good idea to enact legislation incentivizing the consumption of low life-cycle carbon fuels, these policies carry with them negative consequences for U.S. energy security. Under a national LCFS program, all vehicles would be required to fill-up with a blended fuel. As the production of bio-fuel in the U.S. is not currently enough to satisfy a one-to-one ratio blend with gas coming from the oil sands, in the short-term the blend will likely favor conventionally extracted oil, at Canada’s expense. Due to Canada having less conventional oil reserves than oil sands reserves, a shift in U.S. demand toward conventional oil would redirect trade away from Canada. If the U.S. comes to depend less on Canada’s oil sands, it will surely come to depend more on conventional oil reserves from less dependable countries overseas.

Kerry, Boxer, Waxman & Markey: The New Bullies on the Block?

Ottawa has apprehensively watched over U.S. environmental legislation, holding its breath in the hopes that Congress might spare its oil sands industry. According to the Premier of Alberta, Ed Stelmach, “Canada depends on Alberta’s oil-rich economy to fuel prosperity,” while, “any shut down in the province’s oil industry would be felt across the country.” His comments have been consistently reinforced by Prime Minister Harper, and Canada’s Federal Minister of the Environment, Jim Prentice, who both emphasize the importance of Alberta’s oil sands to the country’s overall economic well-being.
If upon its ratification, U.S. environmental legislation is not flexible enough to allow for Canada’s oil sands industry to stay afloat, the effect on the Canadian economy overall will be devastating. Any U.S. legislation that either directly or indirectly restricts the free trade of Canadian oil would be a low blow, and should be swapped in favor of bilateral agreements, negotiated with an equal investiture of oversight by both parties. So far, the Canadian government has remained amenable to enacting a framework of carbon cuts in conjunction with the U.S., but only at a reasonable cost to their industry. Minister of the Environment Jim Prentice recently stated that, “ultimately, the only effective environmental policy is one that takes into account the competitiveness of the Canadian economy – and the preservation of Canadian jobs– now and in the future.”

Relying on Canada’s Oil, Not Bad Given the Alternatives

By now, it should be clear that it is in the best interests of the United States to work very closely with Canada in developing a North American energy strategy that gracefully balances the need to continue developing the oil sands with the need for comprehensive carbon cuts. Given its profound socioeconomic stability and thriving liberal democracy, Canada remains the perfect trading partner for the U.S. It plays by the rules, and its only request is that its partners do the same. Canada is, as Stephen Harper reminds us, a “stable, reliable producer in a volatile, unpredictable world.” Furthermore, Canada’s oil is cheap, and requires the least amount of political capital and international maneuvering to secure. As aptly put by Alberta’s Envoy to Washington Gary Mar in an exclusive interview with the Council on Hemispheric Affairs, “Oil from Alberta flows into the United States through a secure pipeline, and there is no need for American soldiers to be put in harm’s way protecting it.”

Canada Has Options

Because of the long-lasting friendship it has developed with its easygoing Northern neighbor, the United States will likely expect Canada to continue quenching its perpetual thirst for oil, without taking into account the harm their legislation could do to overall relations with the country. It remains to be seen if Canada will be willing to swallow the bitter cost of heavy U.S. regulations which disproportionally harm the oil sands. Historically, it has been both easy and reasonable for Canada to do business with the U.S; however, who is to say that under less amenable terms of trade, Canada won’t turn to someplace else? Given that in today’s world “black gold” holds its value better than most currencies, it would be foolish to forget that Canada has options in choosing its trading partners. This month, Stephen Harper embarked on a landmark trip to China (the first in years), and his message could not have been clearer. Advertising Canada as one of the most “welcoming environments for foreign investment in the world,” Harper emphatically insisted that his country boasts “the resources to meet China’s ever-growing needs.” Harper’s underlying sentiment has been echoed by Alberta’s Gary Mar, who warns that “in the event that America is not interested in Alberta’s energy supplies, then we will work on markets elsewhere in the world.”

There’s More Yen to Come

Quickly and aggressively, Chinese sovereign wealth funds and state-run companies are becoming large-scale investors in Canada’s natural resources. In 2005, long before Harper’s visit to Beijing, China’s Sinopec purchased a 40 percent stake in the Northern Lights Oil Sands Project through its Canadian subsidiary. Earlier this year, it purchased an additional 10 % share, upping its ownership to 50%. The project is located northeast of Fort McMurray, Alberta, and has a production capacity of 5 million tons of synthetic crude oil annually. In August of this year, state-owned Petro-China claimed an even larger stake in Alberta’s oil sands, purchasing a 60% share of the Athabasca Oil Sands Corporation’s Mackay and Dover projects, for a staggering CND $1.9 billion (approx USD $1.8 billion). The land covered under the Mackay and Dover projects alone has been independently assessed to contain approximately five billion barrels of oil, which is considerable taking into account other reserves in the area. Looking beyond the billions of barrels known to constitute the deposit, the most meaningful part of the Petro-China purchase is that it signaled China’s largest ever stake in Canadian oil. Given that the U.S. has enjoyed virtually unchallenged trade hegemony with Canada up until this point, large Chinese investments mark a sharp departure from business as usual.

A New Pipeline in the Works

In addition to these investments, plans are currently underway to construct a pipeline that would ship oil from Alberta (a land-locked province) to the Pacific Coast. Presently the only existing pipeline infrastructure goes North-South, and if the new pipeline moves ahead, it will eliminate the monopoly the U.S. has on access to Canadian oil. Not only will the pipeline ease Chinese access to the Canadian oil market, but would also open up Canada’s energy sector to a variety of other Asian markets, most of which are desperately seeking oil of any kind to meet their expanding population’s thirst for energy. According to Gary Mar, the new pipeline would allow oil to be exported “to India, China, or even Japan.”

Looking Ahead
All things considered, it is clearly in Washington’s best interests to carefully reconsider any environmental legislation that targets Canada’s oil sands. Due to the profitability of the oil sands and their contribution to the overall strength of Canada’s economy, it would be foolish to underestimate the lengths that Canada will go to in defense of their industry. While currently the U.S. enjoys unchallenged and unrestricted access to Canada’s oil, this might not be the case in the future. With China knocking at Ottawa’s door, Prime Minister Harper need only open it a crack before floods of Yen replace lost U.S. dollars. If Obama’s environmental legislation goes too far, Canada will be forced to develop the western-bound pipeline, and by then it will be too late for the U.S. to regain its lost energy security. Fortunately, there is still time for the U.S. to once again demonstrate its respect for Canada by reforming legislation to accommodate the modest need to keep the oil sands alive.

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This analysis was prepared by COHA Research Associate Shantel Beach
Posted 15 Dec 2009
Word Count: 3400


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