February 2014

Crude debate

Canadian government pushes back against European greenhouse gas legislation

By Graham Lanktree

Canada’s oil sands industry is cautiously optimistic that Prime Minister Stephen Harper will prompt a revision of new EU legislation to curb greenhouse gas emissions.

At the 2013 Canada Europe Energy Summit in London last November, Minister of Natural Resources Joe Oliver said Harper is petitioning European Commission president José Manuel Barroso personally on the issue.

Oliver’s address was part of a four-day tour of Europe intended to convince his counterparts in Italy, the United Kingdom, and France that the European Union Parliament’s proposed Fuel Quality Directive (FQD) is “unscientific, discriminatory, opaque, will discourage disclosure and harm the European refinery industry.”

As drafted, the legislation will see all EU oil suppliers reduce life cycle greenhouse gas emissions (GHG) from well to wheels by six per cent (based on 2010 emissions data) by December 31, 2020, following a timeline of two per cent by 2014, and four per cent by 2017. By the deadline, oil suppliers will be reviewed by the EU on whether they are reducing GHGs by a non-binding two per cent through carbon capture and storage and two per cent in credits purchased through the Clean Development Mechanism of the Kyoto Protocol. The directive itself would not tax Canadian exports but would do so indirectly, penalizing refineries in Europe for using oil sands crude feedstock which the EU FQD rules has a higher life cycle carbon dioxide (CO2) footprint. The Renewable Energy Directive sets binding emissions reduction targets on EU countries and taxation of the crude will be levied by each individually to meet their targets.

Oliver criticized the science behind the plan. Just days before, environmental consulting firm ICF International – which also consults for the EU – concluded in a Canadian government-funded study that “the science underpinning the measures is flawed,” marred by methodological and data errors.

The EU legislation weighs the intensity of production, transport and consumption emissions from oil sands as 22 per cent greater than average conventional crude. This weighing of natural bitumen feedstock stems from a peer-reviewed Stanford University study for the European Commission.

Yet the IFC report and Oliver maintain “even light crudes from some countries exporting to the EU have similar or even higher GHG intensities due to flaring and venting emissions,” said Oliver, which are not taken into account. “This is basic energy science, but the FQD doesn’t reflect it. Worse, by giving a pass to countries with poor data, it provides no incentive to be more forthcoming,” he added, calling for redrafting of the legislation.

Bob Dudley, CEO for BP, which has a stake in three Alberta oil sands properties, said the FQD methodology is far from perfect. “At this stage BP and, I assure you, the wider industry believe the most feasible approach is to take an average carbon value of crude oils used each year by European refineries,” he said at the event. “The amount of debate on this subject shows that the methodology to measure it is not even close to being precise enough to measure and monitor carbon life cycles.”

Despite government overtures and industry optimism that the legislation will be revised, Isaac Valero-Ladron, EU spokesman for climate action commissioner Connie Hedegaard, said his organization is “planning to present the proposal in the coming months, and before the May European Parliament elections.” He dispelled rumours that Barroso is moving to delay the vote until after the 2014 European Parliamentary elections, adding, “the Commission is taking its time to deliver a sound proposal.”

Valero-Ladron said he stood by the FQD’s science: “The [ICF report] assessment is inadequate, because it unjustifiably assumes that such average values are not quantifiable as there are limited acceptable data outside Canada and the United States” when it comes to emissions from conventional crude.

Science aside, any new legislation will impact Canada’s oil sands industry, according to Ungad Chadda, senior vice-president of the Toronto Stock Exchange. “If you’re taking your customer base and reducing it with foreign regulations, I think that would impact the outlook some investors might have on our market,” he said.

In 2012, EU imports of Canadian petroleum products rose 17 per cent to more than C$2.6 billion. According to the Canadian government, the EU is the world’s largest common market, foreign investor and trader, with a population of more than 500 million and GDP of $17.4 trillion.

But in an interview with CIM Magazine, Enbridge president and CEO Al Monaco suggested industry put its energies elsewhere. “This is strictly for crude oil exports into Europe,” he said of the directive. “So we don’t see that as affecting Chinese demand. We need to get to Chinese demand. It’s the ideal market,” he added, emphasizing the recent National Energy Board approval of the Northern Gateway pipeline.

Over the next two years, the Canadian government will put $22 million into an international public relations campaign aimed at business leaders, media and politicians in the United States, Europe, and Asia.

“I’m absolutely confident over time that that the logic of the market will prevail and we will see new infrastructure emerge to provide Canadian oil and gas with reliable routes to the market,” said BP’s Dudley. “Let’s just hope that we get some sensible reform into that legislation.”

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