Canada raises fears over oil sands

Canada raises fears over oil sands

By Sheila McNulty in Houston

Published: April 22 2008 03:00 | Last updated: April 22 2008 03:00

Big oil companies are to press on with the development of Canada’s oil sands, regardless of legislation passed by the US government that could bar procurement of its carbon-intensive fuel.

Jeroen van der Veer, Royal Dutch Shell’s chief executive, told the Financial Times last week that oil groups were convinced there would be people prepared to take the fuel if oil sands were developed. Jim Mulva, chief executive of ConocoPhillips, said in a separate interview: “The US needs this energy source.”

The Energy Independence and Security Act, signed into law in December, restricts US government procurement of alternative fuels to those whose lifecycle greenhouse gas emissions are equal to or less than those from conventional petroleum sources.

Canada’s oil sands – the biggest proven oil reserve outside Saudi Arabia – are considered unconventional fuels, and producing them emits more greenhouse gas than conventional production.

This has led Canada to warn Washington that narrow interpretation of the legislation would have “unintended consequences”.

US rejection of fuel from oil sands could establish an international precedent, jeopardising the billions of dollars the oil majors have invested.

Nonetheless, Henry Waxman, the chairman of the powerful House oversight committee, is pressing the US government to comply with the legislation. In January he wrote to Robert Gates, US defence secretary, whose department is the US government’s biggest single oil consumer, requesting that he identify all defence department projects that might be affected by the law.

He also asked Mr Gates to state what steps he would take to comply with the law.

“The bigger picture here is that fuels from tar sands have significantly higher greenhouse gas emissions over their lifecycle than conventional fuels,” Mr Waxman told the Financial Times.

“As countries move to cut their greenhouse gas emissions, entities producing and using fuels from tar sands are going to have to deal with these higher emissions.”

Jeff Rubin, chief economist and chief strategist at CIBC World Markets, said carbon legislation was being introduced around the world and companies had to be prepared. He believed that, instead of giving up the oil sands, companies would find ways to reduce the carbon footprint.

“If emissions are $30-$40 a tonne, or $3-$4 a barrel, that is going to induce technological change.”

Yet that will take time, and the three presidential candidates vying to replace President George W. Bush in November have pledged policies to cut greenhouse gas emissions. That could be why Canada wants the law interpreted now.

The Bush administration has encouraged development of the oil sands as part of its strategy to reduce US reliance on Middle East imports.

Against this backdrop, oil majors such as Shell and Conoco have invested heavily in Canada. Their chances of exploiting new resources in other countries are increasingly blocked by national oil companies that now control more than 80 per cent of the world's oil reserves.

Neither company said they would pull back from their oil sands developments while they awaited Washington's interpretation of the legislation.

Mr Mulva said if the US decided against importing fuel from Canada's oil sands, other markets would be sought.