Wednesday, April 27, 2011

The Legislative Ax

By Peter McKenzie-Brown

About 25 years ago I had a brief meeting with Daniel Yergin, the founder of Cambridge Energy Research Associates, who impressed me greatly with his global knowledge of the petroleum industry. When he told me he was writing a petroleum history, I gave him a copy of a brief history of the Canadian oil industry I had just finished – a history that waxed eloquent on the potential of Canada’s oilsands. He promised to read it on the plane going home to Cambridge, Massachusetts.

A few years later he published his magisterial volume The Prize, which received the Pulitzer Prize for general non-fiction but relegated Canadian oil industry history to a single brief footnote about the 1947 Leduc discovery. My only consolation was that his information had almost certainly come from my document. I report this episode because now, 20 years later, his firm has clearly rethought Alberta. Among American think-tanks, CERA is one of the oilsands’ most optimistic cheerleaders.

Getting the Numbers Right
Now the leading subsidiary of an NYSE-listed company, CERA has recently been preparing and releasing a series of thoughtful, detailed analyses of the oilsands under the general title “Oilsands Dialogue.” Available online, the growing package of reports is “must” reading for those concerned with oilsands markets and policy, which are increasingly being influenced by stateside legislation.

A recent offering is an analysis of the gathering phenomenon known as the low-carbon fuel standard, which has the potential to put some of Canada’s most important bitumen markets at risk. Lifecycle analysis of carbon emissions is one measure of the efficiency of fuels used for road transportation. Generally referred to as “well-to-wheel,” this analysis is frequently broken down into stages such as “well-to-pump” and “pump-to-wheel.” The pump referred to is the one you use at the service station to fill your tank.

The tightly-argued CERA report is full of surprises. On the one hand, the researchers found that if you produce only transportation fuel from oilsands production, your average well-to-wheels life-cycle greenhouse gas emissions will be 5% to 15% higher than for the average crude produced in the United States. On the other, they found that average bitumen imported into the United States has well-to-wheels life-cycle greenhouse gas emissions only 6% higher than average. These two sets of statistics appear contradictory, yet the explanation is simple. To achieve maximum refining efficiency, refiners use blends of crude oil. This anomaly illustrates the complexities involved in trying to calculate the well-to-wheels lifecycle for greenhouse gas emissions.

In addition to complexity, there is a certain element of futility. Alberta’s Washington representative, Gary Mar, gives a folksy but adamant commentary on the subject. “Saudi crude is light in terms of GHGs” he acknowledges, and “oilsands oil is not as light as Saudi Arabian oil. However, we are less GHG-intensive than, for example California heavy. We are not quite as good as Nigerian oil but we are close.” Then he zeroes in on his target: “Most of the GHGs, about 80%, are produced during the combustion phase of transportation. The overwhelming majority of GHGs are released into the atmosphere when you’re driving your car or truck” – that is, in the pump-to-wheel stage.

Legislative Options
Given the difficulties in quantifying well-to-pump emissions and the relatively small share of total emissions they represent, the well-to-wheels calculation may make even less sense than America’s Bush-era federal renewable fuel standard – a standard requiring that specified volumes of biofuels, which are energy-intensive to produce, be blended into transportation fuels. Yet “lifecycle analysis of emissions is becoming a new basis for policy in the transportation sector,” the Cambridge study observes. With considerable understatement the authors add that “life-cycle analysis is an evolving discipline that must deal with a number of uncertainties, making it a challenging basis for policy.”

In that context, it’s worth remembering that legislation is more of an ax than a tool for subtle refinement. Even so, low-carbon fuel standard legislation marches on. It took effect this year in California, where legislators hypocritically grandfathered the state’s own heavy oil, which is far more GHG-intensive than any other oil used in the United States. British Columbia’s version will take effect in two years. And according to CERA, 13 other jurisdictions in North America (including Ontario) have expressed interest in this kind of legislation. Such legislation could have a huge impact on bitumen markets. Combined, those jurisdictions represent a third of the US gasoline market and half of Canada’s.

Within the United States, debate on the issue has already led to litigation. For example, a court action launched by groups representing refiners and the petrochemical sector, trucking, a consumers’ alliance, a producers’ is lobby and a clutch of agricultural groups claim that only the US federal government (not the state) has the authority to regulate carbon emissions. Although the case continues to crawl through the legal system, last year a district court in California ruled that low-carbon fuel standards conflict with federal law, including the Energy Independence and Security Act of 2007 and the decades-old Clean Air Act. The ruling described the latter as “comprehensive federal legislation that covers air pollution prevention and control, emissions standards, acid rain reduction, permits, and stratospheric ozone protection.”

Rather than focusing on fuel properties, legislators from oil-importing jurisdictions could probably develop more effective policy by focusing on fuel economy and total demand for transport. Fuel economy standards focus on ways to enable individual vehicles to get greater mileage from a given volume of fuel. Policies that reduce transport demand include fuel taxes, better urban planning and encouraging mass transit, carpooling and, for example, telecommuting.

As North America’s major bitumen producer, Alberta is in a unique position to pass effective legislation, according to Gary Mar; as the owner, regulator and single biggest beneficiary of the oilsands, it is in the province’s interest to do so. Two years ago, the province became the only jurisdiction in North America to place a price on carbon emissions. It did so as part of a larger initiative to get large emitters to reduce their GHG emissions by 12%. “You satisfy the requirement to reduce your GHG emissions in one of three ways,” he says. “You can physically reduce emissions; you can purchase an accredited Alberta offset, or you can pay a $15 per tonne levy into a technology fund that supports development and application of transformative technologies.”

He adds, “It’s not just Alberta companies that can apply for access to money from that fund. Anyone can do it as long as that technology is applied within the province of Alberta.” The funds from this tax go to the newly-created Climate Change and Emissions Management Corporation, a not-for-profit organization whose job it is to reduce greenhouse gas emissions and assist in adapting to climate change.

Last year the agency put out calls for proposals related to renewable energy, energy sufficiency and clean technology, receiving ideas totalling $161 million from 30 organizations, and winnowed them down to 16 “ground-breaking” projects, according to the corporation’s chairman, Eric Newell. He adds that these projects “hold enormous promise, not just for Alberta, but for how the world will tackle the climate change agenda.”

Nancy Pelosi’s Dilemmas
Last September, then-speaker of the US House of Representatives Nancy Pelosi made a much-vaunted visit to Ottawa to confer with Canadian political leaders on energy matters, especially the oilsands. Whether accurately not, she was reported as saying she was “not keen on fossil fuels.” In that context, it is interesting to note that about “two-thirds of Canada’s crude oil equivalent goes to the United States,” according to Gary Mar. In fact, “Alberta alone provides 17% of total US oil imports, while Canada as a whole contributes 23%.”

Bob Taylor points out that from an energy systems perspective, Ms. Pelosi’s comment suggests two dilemmas. Taylor was Alberta’s Assistant Deputy Minister for Oil and now leads a consulting group known as the Energy Futures Network. “Like other citizens of advanced economies,” he says, “she faces the dilemma of cold showers and cold coffee and staying home versus willingly using fossil fuels day-in and day-out.” As a high-profile Congresswoman she carries a particularly big hydrocarbon burden: the kerosene used to fuel the jet that brought her up from Washington, for example, the gasoline that fuelled her limos to and from the airport, and so on.

The second dilemma, says Taylor, is that “her preferred state of ‘not fossil fuels’ belies the current US reality. Eighty-three percent of US energy supply originates from fossil fuels, with petroleum accounting for 37% of those needs. Her constituents will be reliant on a range of fossil fuels, including oil imports, for many years into the future.” To move toward a future which is less reliant on hydrocarbons, he says, involves solving four exceedingly difficult problems.

The first is to reduce or limit energy growth while contending with a growing population in the US and growing gross domestic product per capita.

The second is to reduce the amount of energy wasted in the United States. Taylor points to a Lawrence Livermore National Laboratory study, which found that 61% of the energy used in the United States is “rejected” (wasted). “Smaller motor vehicles, smaller and better insulated homes, a shift towards urban densification would be good places to start.”

The third is to “shift from fossil fuels and non-renewables towards renewables and non-carbon-emitting technologies while maintaining the reliability and affordability that are taken as ‘givens’ by American citizens (and voters).”

The last is to lower GHG emissions from well-to-pump even though the energy input cost of oil production has been rising for decades. This is partly because of the increasing need to use harder-to-produce oils like bitumen as light oil reservoirs have depleted. Also, deeper drilling depths (more energy used to run the rigs, more energy needed for steel) plus more energy for waterflood injection and for pumping oil from greater depths or with a higher water content. The result? According to one study, in 1930 the industry needed to consume the energy equivalent of one barrel of oil to produce 100 barrels. Today expending one barrel of energy produces only ten barrels of crude from American fields. Yet the notion of continuing to use less GHG-intensive crude in refineries is one of the key concepts in low-carbon fuel standards legislation. “It may be a bit like pushing on a string,” says Taylor.

Global Markets
It may also be breaking the law. Low-carbon fuel standards could actually abrogate the North American Free Trade Agreement or World Trade Organization rules. According to an opinion presented in the Globe & Mail newspaper, the courts may interpret the low-carbon standard as being discriminatory against Canadian crude. While NAFTA has some room for manoeuvre based on environment-related issues, to win that battle Americans may have to prove climate change in a court of law. And as we have seen, much of the litigation already on the table is based on US constitutional challenges.

According to Don Murray, president of Calgary-based Advantage Insight Group, other measures may influence the free flow of oilsands blends across the US border. Traditionally, crude oil that originates in North America can move from Canada to the US without duty. However, US importers have to identify the country of origin of their blend components – in the case of bitumen, any overseas diluents combined into the product. “As diluent imports into Canada have increased,” he notes, “the NAFTA status of Canadian heavy blends has been questioned.” He stresses, though, that this argument is still primarily theoretical.

Are Canada’s US markets likely to dry up because of concerns about lifecycle carbon emissions? Probably not. “We are a global player in the energy industry,” according to Gary Mar, “and there is an important relationship between Alberta’s oilsands and United States energy needs. We are committed to being a responsible energy supplier, and we’re poised to become an even more important part of North America’s energy needs.”

According to Andrew Constantinidis, an industry consultant, the industry should be more vocal in telling its American markets that Canadian oil supplies have a special quality about them apart from the fact that they mostly come from the oilsands. Of America’s seven major sources of foreign oil, Canada and Mexico are the only conflict- and repression-free petroleum suppliers. The humanity of that message, he thinks, will trump concerns about greenhouse gases.
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