PetroDollars: The EU and Canada Making Peace over Oil Sands

Amid a regulatory and political tangle in the U.S. over the Keystone XL pipeline and heated opposition in Canada to the Northern Gateway pipeline—both crucial to industry hopes of opening new markets for oil sands crude—Canada proclaimed victory in Europe.

But it's one that should probably be viewed as small, symbolic and short-lived.

For the past two years, the Canadian and Alberta governments have been engaged in a costly lobbying effort to preserve emerging global markets for oil sands producers and prevent the European Union from taking the first step toward forcing refiners worldwide to pay financial penalties for using the carbon-intensive Alberta crude.

An EU directive, spearheaded by Commissioner for Climate Action Connie Hedegaard, proposed a Fuel Quality Directive (FQD) requiring transport fuel suppliers to cut the life cycle greenhouse gas emissions of their product by 6% per unit of energy by 2020 from a 2010 baseline, assigning a greenhouse value of 107 to the oil sands compared with 87.5 for average crude.

If passed, such a directive could have set a precedent for other international fuel rules that would challenge oil sands products, a prospect that has alarmed Canada's political and corporate leadership at a time when exports to Asia are beckoning.

Placed in a come-from-behind position, the governments and industry embarked on a mission to protect the oil sands business, threatening a trade war against "flawed" and "discriminatory" actions, and were joined by European-based oil companies with oil sands operations—Shell, Total, Statoil and BP. The Canadian Association of Petroleum Producers also noted that more than 55 companies from across the EU were involved in the oil sands' service and supply chain and could be harmed by a negative FQD ruling.

When a committee of experts from the EU's 27 member states failed to agree Feb. 23 on the FQD, the UK, France and the Netherlands were among seven states that abstained, while eight were opposed and 12 voted in favor—amounting to a stalemate.

Canada's Natural Resources Minister Joe Oliver said the vote was "positive, although we don't take anything for granted. It's a pretty convoluted process, so we have to keep sending our message out." Alberta Premier Alison Redford promised to continue a campaign to persuade a global audience that her government does not oppose an EU fuel-quality directive so long as it treats Alberta crude fairly.

The issue now moves to a special executive council of EU environment ministers for an expected vote in June, when some observers are forecasting a tight result, forcing CAPP to increase awareness of what Vice President Greg Stringham said are reductions in par-barrel GHGs, land disturbance, water use, industry cooperation to advance environmental research and tighter government regulations.

Given that the EU does not currently import oil sands bitumen in any raw or processed form and there are no publicly announced plans to build pipeline and tanker links from Canada, the issue might seem overblown. Not so.

Regardless of what happens to pipeline links to the Texas Gulf Coast and Asia, oil sands producers are taking a serious look at eastern Canada and the U.S. and are not ruling out Europe.

Suncor Energy is leading the way by completing a complicated test run from Alberta to tankers in Vancouver and from there to Montreal via the Panama Canal, supporting Canadian political and business leaders who are eyeing the use of refineries in Ontario, Quebec, New Brunswick and Newfoundland to process Western Canada crude.

Enbridge already has applied to the National Energy Board to partially reverse its 240,000 b/d Line 9 from Montreal to Sarnia, Ontario, allowing Suncor's Montreal refinery to initially process 137,000 b/d.

John Quinn, Suncor general manager of refining and marketing, told a Canadian parliamentary committee that reversing Line 9 would "help secure the Montreal refinery's long-term flexibility, its performance and its viability." That would reduce current imports of more than 500,000 bbl/day of foreign crude to Eastern Canada refineries that can process 1.2 million bbl/day, giving an added prod to talk of extending pipelines from Alberta to Atlantic Canada.

Enbridge officials have indicated that if shippers accept pipeline tolls of CA$–7/bbl from Alberta to Montreal, the company will consider a full reversal of Line 9, opening the way to extending their pipeline to Canada's Atlantic coast, which would bring Europe within economic reach.

The Canadian and Alberta governments have hinted an EU standard could be made fairer by setting emissions standards for a broader slate of crude sources.

That sets the stage for a resolution with the EU at a time when oil sands producers and some environmental groups are leaning toward carbon pricing to ensure costs are applied evenly across the economy and avoiding the costs and complexities of cap-and-trade systems or regulatory approaches.

Gary Park in Vancouver
Platts