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U.S. law puts chill on Canadian oil sands
Toronto Globe and Mail


July 02, 2008

WASHINGTON -- It's just one sentence buried in an 800-page U.S. energy bill that passed into law last December.

Yet it has morphed into a potential threat to Canada's oil sands boom, a contentious political football in Washington, and an early warning sign of an epic environmental battle over bitumen.

Stripped to its bare essentials, Section 526 of the U.S. Energy Independence and Security Act of 2007 bans federal agencies from buying alternative fuels that produce more greenhouse gases than conventional oil. This would include purchases by the military and the postal service -- far and away the two biggest consumers of fuel in the United States.

Producers are concerned that Section 526 could represent just the tip of the iceberg, heralding even tougher environmental demands from U.S. lawmakers that will push the issue beyond just government supply contracts and jeopardize the oil sands industry's massive growth plans into the U.S. market.

But support is growing in Washington to change the language of the section so that it doesn't exclude oil sands crude. Key lawmakers, including Senate Energy and Natural Resources Committee chairman Jeff Bingaman, D-N.M., are backing compromise wording for Section 526 that would stipulate it does not apply to "generally available" petroleum products that are "predominantly" made from conventional sources.

"With the additional clarification, I do not believe that Section 526 would be a barrier to oil imports from Canada," Bingaman told a recent conference on the oil sands organized by the Canadian-American Business Council.

But that language would still leave too much open to interpretation, some say.

Canadian and industry experts warn of a hornet's nest of trade disputes, legal challenges and a darkening cloud over oil sands investment unless the section is repealed in its entirety.

"All it would take is legal action by the (Natural Resources Defense Council) or some other group," warned Gary Mar, the former Alberta cabinet minister who is now the province's representative in Washington.

"What Mr. Bingaman says won't be relevant."

There's a lot at stake: Just in the next few years, industry experts see about $80 billion of investment in the oil sands. South of the border, companies are rolling out plans to spend $53 billion to expand or modify refineries to handle the unusual brand of heavy oil that comes out of the oil sands.

Another $16 billion (Canadian) of pipelines are proposed to ship the oil directly from Alberta to the multitude of heavy-oil-friendly refineries along the U.S. Gulf Coast, which are banking on Canadian oil as the long-term replacement for dwindling and/or unreliable supplies from Venezuela and Mexico.

"We're moving forward, because these are long-term projects. But we are keeping an eye on it," said Bill Day, spokesman for Houston-based refining giant Valero Energy Corp., which has already committed $3.8 billion to expand its bitumen-upgrading capacity and is mulling participation in an oil sands pipeline project.

"It's very confusing, and unworkable."

If Section 526 is not altered, "it could bring development to a screeching halt," said Matt Fox, senior vice-president of oil sands at ConocoPhillips Co., which last year formed an $11-billion partnership with Calgary's EnCana Corp. to use EnCana's oil sands supplies to feed Conoco's U.S. upgraders and refineries.

"You'd have to think twice about oil sands development if your intention was to deliver oil to the Lower 48," Fox said.

Congress insists its primary intent was to keep U.S. taxpayers from subsidizing the environmentally dubious business of turning coal into diesel fuel. The author of the section, Rep. Henry Waxman, D-Calif., has said it was meant to block government agencies from forming contracts "specifically to promote or expand the use of fuel from tar sands," but not to block purchases of "generally available fuels" that might contain "incidental amounts" of oil sands product.

Despite quiet lobbying from the oil industry, Ottawa and the Alberta government, the measure is proving tough to kill.

"There have been almost weekly attempts to repeal it, and they've all failed," said Susan Casey-Lefkowitz, director of the Canada Project at the Washington-based Natural Resources Defense Council, an environmental action group with more than 1.2 million members.

At the heart of the issue are concerns in the U.S. environmental community that the U.S. government, by touting the oil sands as a key cog in the country's long-term energy security, is betting the country's future on a dirty energy source. Alberta's heavy oil requires large amounts of natural gas to extract and refine, giving it a significantly larger footprint of greenhouse gas emissions than conventional oil.

Environmentalists have estimated that the overall carbon footprint for fuels from oil sands is triple that of conventional petroleum sources, though recent independent research puts the oil sands emissions at more like 25 percent higher than conventionally sourced fuels. They say the law would put tough restrictions on several Midwest refineries now undergoing upgrades to accommodate Alberta's heavy oil.

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Scripps Howard News Service,

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