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Patch test

The oilpatch reacts to Obama’s low-carbon fuel standard.

“Most people in this country are having a hard time making it. Barack Obama wants to tackle that challenge.” That’s what Carolyn Fuller believes. It’s a beautiful August evening in Boston, and Fuller has just left Obama’s 47th birthday party at 60 State St., close to Faneuil Hall. “Obama is what this country needs,” she said, firmly. “He’s the change we’re looking for.”

Perhaps.

Earlier that day, Obama outlined his energy policy and reiterated his commitment to a low-carbon fuel standard for the U.S. market. Under that standard, explained Obama’s adviser Jason Grumet on a conference call, it’s an “open question” whether high-carbon-content fuels, such as those from the Alberta oilsands, would qualify. (Obama’s opponent, Senator John McCain, does not support a low-carbon fuel standard.)

Talk of green policies on the campaign trail is nothing new. Both presumptive candidates for U.S. president have policies designed to tackle climate change. What’s new is the anti-oilsands tone the debate has taken. And it’s showing up in policies, position statements — and legislation.

On June 23 of this year, a group of U.S. mayors passed a resolution encouraging all mayors to ban high-carbon synthetic fuels in their municipal fleets. It specifically named Canadian “tarsands oil” as high-carbon. In December 2007, the U.S. government passed the Energy Independence and Security Act. It banned the use of high-carbon-content synthetic crude for U.S. federal fleets. And in late 2007, the California Energy Commission agreed to adopt Governor Arnold Schwarzenegger’s low-carbon fuel standard. It bans fuels whose carbon content is higher than that of conventional crude.

The Canadian oilpatch’s reaction is, thus far, mixed. “This thing has taken on a life of its own,” says Marcel Coutu, chairman of Fort McMurray, Alta.–based Syncrude Canada Ltd., one of the oilsands’ biggest producers. (Coutu is also president and CEO of Canadian Oil Sands Trust, which owns a 36.4% stake in Syncrude.) Though “caught by surprise,” Coutu claims he isn’t worried by the U.S.’s greenward drift. Yet judging by the Alberta government’s announcement July 8 that it is committing $4 billion toward emissions-reduction policies — a move lauded by major oilpatch players — the oilpatch is clearly paying attention.

There’s no question that oilsands crude emits more carbon than the conventional variety. Producing one barrel of synthetic crude generates up to three times as much CO2 as its conventional counterpart, according to the Pembina Institute. Spokespeople from Shell Canada and Syncrude confirm that figure.

From the perspective of reducing emissions, anti-oilsands policies make sense. But policies that cut off market access to oilsands syncrude — without a viable and cost-effective alternative in place — could also create serious economic chaos.

According to Alberta government figures, the province supplies 13% of the U.S. market for crude oil. The oilsands produce 1.2 million barrels of crude a day — and the proportion of U.S. supply that will be sourced from the oilsands is likely to grow. Cutting that off would likely hurt the U.S. economy, but it would especially hurt those on low and fixed incomes — such as the 8.7 million American households who subsist on less than US$10,000 a year. Yet, on an Obama campaign conference call, representative Sean Smith couldn’t say what the impact of these anti-oilsands policies on fuel prices for those on low incomes might be. Neither could Obama-supporter Fuller.

So how is the Canadian oilpatch reacting to all these changes and policy proposals? Syncrude chairman Coutu estimates his company exports approximately three-quarters of its synthetic crude to the U.S., but he doesn’t think anti-oilsands policies stateside will affect those exports any time soon. Why? “It is very difficult to segregate or track the source of crude oil once it gets into the pipeline system and makes its way toward the market.”

What’s more, global supply is extremely tight. “Frankly, every barrel is going to get utilized. Boycotting a particular sector is not going to keep those barrels out of the market.” Coutu says.

For his part, the vice-president of the Canadian Association of Petroleum Producers, Greg Stringham, says he’s “taking these policies very seriously.” And he’s been on several missions to Washington to clarify to U.S. policy-makers what Canadians are doing to bring down emissions.

“Washington wasn’t aware, for example, that last July [2007] the Albertan government required large emitters to cap their emissions,” Stringham explains. Alberta’s climate-change legislation required polluters to reduce their carbon dioxide intensity by 12% by March 31, 2008. If emitters couldn’t do that, they had to start paying a $15 a tonne levy into a fund for energy-efficient technologies or purchase carbon credits from Alberta-based projects.

The proposed federal standards, argues Stringham, would be more stringent yet. “They would call for an 18% reduction in emissions immediately. And then there’s plans for cap and trade, which Washington is also considering. The policies are starting to look more and more the same.”

Maybe. Our federal government has committed to halve emissions by 2050, as did the rest of the G8 countries, at this year’s summit in early July. Yet an Obama administration, if campaign policy statements are to be believed, would commit to bring emissions down a whopping 80% below 1990 levels by 2050.

Taking the longer view, every oilpatch player contacted for this article pointed to carbon capture and storage (CCS) as a solution to the carbon conundrum. This is the process by which carbon is captured at the point it is emitted and then pumped deep underground, supposedly for permanent storage.

Of course, carbon capture is expensive — and untested at the required scale. Each CCS plant will likely cost $1 billion or more, says Coutu, and take years to install. So, on July 8, the Alberta government committed $2 billion toward developing the process. That’s on top of an almost-$1-billion investment in CCS the federal and Saskatchewan governments committed to in March. And in May, British Columbia kicked in $3.4 million for a pilot CCS project at Fort Nelson.

This public involvement raises another question. As the price of oil remains above US$115 a barrel, oilsands players have made massive profits on their investments. In July, Canadian Oil Sands Trust reported net income for the second quarter of $497 million. Is it fair to expect the Canadian taxpayer to contribute toward a technology designed to clean up the oilsands’ carbon problem?

Marcel Coutu pauses. “That’s a good question,” he says. “I’d have to argue that CO2 is not just an industry problem, it’s an energy consumption problem by all of us, including the end user.” He points out that industry is already paying into the Alberta technology fund, moneys from which will likely go toward financing carbon capture projects.

George Gosbee is the president of Calgary-based Tristone Capital Inc. One of the oilpatch’s top investment bankers, Gosbee is also vice-chair of AIMCo, the government of Alberta asset management fund. (It officially became a Crown corporation in January of this year.) Gosbee applauds the government of Alberta for its “leadership” on carbon capture, and says industry is likely to shoulder the brunt of the cost of developing carbon capture. But he’s blunt about what he thinks of the United States’s green policy direction. “The general consensus in the oilpatch is, what’s the alternative?” says Gosbee.

He has a point. According to the U.S. Energy Information Administration, that country remains 96% reliant on petroleum for its transportation needs. Yet if you ask supporters crowded to catch a glimpse of Obama back in Boston, continued reliance on fossil fuels is no longer tenable, given the finite nature of the resource. “I like what [oil billionaire] T. Boone Pickens is doing, betting on alternative energies,” said one Obama supporter, recently retired consultant Earl Powell. “I’m for whatever policies will break our dependence on oil.”

Of course, it’s early days in the election cycle. Though the Senator from Illinois continues to lead in the polls, Senator John McCain has been gaining. And with Obama flip-flopping in August on everything from drilling for oil offshore to releasing fuel from the strategic reserve to reduce fuel prices, it remains to be seen how strong his commitment to the low-carbon fuel standard might be.

Details in Obama’s energy policy released Aug. 4 provide clues. Beneath the commitment to a low-carbon standard is another pledge to develop more domestic fuel sources. This includes the Bakken Formation, a deposit of sweet crude trapped within two gigantic layers of rock in North Dakota, Montana and southeastern Saskatchewan.

A U.S. geological survey published in April estimated the Bakken holds up to 3.65 billion recoverable barrels. However, drilling through rock requires considerable inputs of energy, and will likely generate large amounts of CO2 emissions. Would fuel sourced from the Bakken pass the low-carbon fuel standard test? That’s an open question.