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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
axe 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.
Peter McKenzie-Brown
Language Instinct
Although the writer is a director and officer of Stratabound, the thoughts and views herein are mine only and
not those of Stratabound. I am not registered in
any jurisdiction as a broker or investment adviser, so nothing herein should
be construed as advice on whether to buy, sell or hold shares of Stratabound or any other company mentioned herein.
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