What should Canada’s position be on the EU and oilsands?

The upcoming vote in the EU on implementing the Fuel Quality Directive, expected next month, has generated a great deal of press in Canada because the directive targets Canada’s oilsands by assigning a default value of emissions which is higher than that applied to conventional fuels.

The EU’s policy is aimed in the right direction – Article 7a of the EU’s Fuel Quality Directive (FQD) obliges suppliers of transportation fuel to reduce the lifecycle greenhouse gas emissions intensity of their fuel by 6% by 2020, relative to 2010 levels.  Despite good intentions, some of Canada’s criticisms of the FQD make sense. Most importantly, the FQD eliminates incentives for both improvement in emissions intensity and data disclosure from many sources of fuel, both conventional and unconventional.  The FQD also has the potential to mute incentives to innovate for some oilsands firms.

The FQD has potential costs to Canadian firms -the issue is not whether oilsands crude will be exported to the EU, but whether  oilsands-based refined products will be.  There is the potential that they will be exported from the US given the US is long refining capacity and is expecting increasing oilsands share in their crude basket. If the FQD leads to a de-valuing of oilsands crudes in the US market, that hurts producers.

Let’s start with what the FQD implementation directive does.  Lifecycle emissions benchmarks are speculative, since actual emissions will depend on how a specific barrel was produced, refined, stored, and combusted, what fuel sources were used to provide additional energy at each step of the process, and how by-products are used.  The FQD attempts to lower the regulatory burden on refiners by providing default factors for feedstocks used – if you are supplying gasoline derived entirely from conventional oil (you can look here to see where EU oil comes from) then your fuel is treated as having 87.5gCO2e/MJ, or 2.81kg/l. If you use oilsands crude as your refinery feedstock, then your default value is higher – 107 gCO2e/MJ or 3.44 kgCO2e/l.  If you are trying to reduce your kgCO2e/l, you can see where the incentives will lead you – toward fuels labeled conventional and away from fuels labeled oilsands. (You can look here for a math lesson on life cycle analysis.)

My first reaction to this policy was that bundling all oilsands together was the wrong approach because there are significant differences in emissions per barrel across reservoirs, production technologies, and upgrading/refining sequences.  Further, if you give all oilsands a standard value, where’s the incentive to improve performance for an individual producer?  It turns out the the EU FQD has a provision for individual producers to certify their own fuel quality. So, if you’re a top-performing oilsands producer on a GHG/bbl basis, your fuel would be counted at a lower figure, making some oilsands-crude-based products less unattractive to EU suppliers. (thanks to Pembina’s Dan Woynillowicz for this info) So, only those oilsands operations with emissions well above the benchmark, and limited potential to improve performance, will see no incentive to improve.

So, is the FQD an oilsands ban? No. Suppliers are free to use any fuels they want to use, but they must meet their overall emissions reductions benchmarks. Depending on the 2010 benchmark, a firm may be able to accommodate a significant proportion of oilsands sourced fuel, as long as that fuel is offset with other, lower emissions sources. Despite this, oilsands are at a disadvantage under the FQD relative to other sources of oil, and it’s worth thinking about whether that makes sense.

Importantly, the incentives created under the FQD are not for suppliers to source lower carbon fuels, but to source fuels labeled as lower carbon by the FQD – there’s a difference. The EU FQD definition of oilsands (or natural bitumen) includes all crude sourced from natural bitumen deposits with an API gravity of less than 10. The problem with that is that there is not a 1:1 relationship between API gravity and/or geology and GHG emissions, so by applying a benchmark to oilsands, the EU is ignoring other unconventional oil production. For example, a recent IHS-CERA report found that California thermal heavy oil production had significantly higher life-cycle emissions than the average barrel of oilsands imported to the US. Under the EU FQD, refined products produced from California Heavy would likely be treated as having an impact of 87.5g CO2/MJ while lower emissions oilsands-sourced products would be labeled at 107g/l by default.  So, a supplier could actually increase GHG content significantly and still meet the FQD, as long as they use the right high emissions fuels.

So, what should Canada be asking? Canada should be asking for a revision to the directive in which the benchmarks are set at the high end of the range for each fuel type (including oilsands), and should make sure that the option remains to certify lower emissions fuels with the lowest possible regulatory burden.  This would drive two things.  First, it would put the incentives in the right place, by giving an advantage to fuels actually lower in emissions as opposed to those which fit into a classification with lower average emissions.  Second, and most importantly, it would force emissions reporting and disclosure from oil production in areas not doing so to the same degree as Canada does due to our regulatory structures. In other words, Minister Oliver is right when he says that, “the proposed implementing measure discourages less forthcoming sources of crude oil from providing better data or becoming more transparent,” and he should keep pushing for this. These two changes would allow oilsands to compete on a level playing field with other fuels with the same GHG footprints, and would help advance transparency in energy markets in general.

Oilsands are among the highest emissions fuels currently in use, but the highest emissions fuels used today are by no means exclusively oilsands.  The FQD makes that clear, setting out a standard for oil shales (131.3 g/MJ) and coal-to-liquids (172g/MJ) which are both significantly higher than oilsands’ 107g/MJ. Canada will benefit when all global sources of transportation fuels, including Nigerian, Russian, and Californian crudes, are forced to disclose GHG information to sell into global markets. That should be mission #1 for our lobbying efforts in the EU.

Getting the EU to abandon benchmarks for oilsands is unlikely, but if Canada were to push the EU to extend benchmarks to more sources and base them on actual emissions, they would be helping Canadian producers and resource owners AND pushing GHG policy in the right direction, for a change.