An economist pretending to be a geologist

Last night, I wrote a long post on the EU Fuel Quality Directive, on which a vote is expected next week. The Fuel Quality Directive has attracted a great deal of attention here in Canada because it would assign a higher emissions rating to Alberta oilsands than to other sources of crude oil, and I have argued that it will do so despite the fact that some of these other crudes may or may not actually have higher emissions per barrel than oilsands.

The response to the blog post was quick.  Naturally, both Government and industry representatives were supportive as it reinforced their positions, while environmental groups were less enthusiastic since it called into question their contention that the FQD would apply to oil other than oilsands, including that produced from Venezuela. Thanks in particular are due to Hannah McKinnon of the Climate Action Network who was most helpful in providing context for her comments which I referenced in my blog.

I’ve spent a lot of time today sorting through reports to either refute or validate my own conclusions about this policy, but I haven’t been able to do either conclusively. At least I have learned a lot about the resource bases in both Canada and Venezuela as a result of this search.  Here’s a little of what I’ve discovered.

The first update to my blog post came from a further reading of the EU definition, which references 2007 piece from the USGS  that contains a different analysis of Venezuelan Orinoco oil.  In this analysis, the USGS finds that the Eastern Venezuelan Orinoco Oil Belt contains 2.1 trillion barrels of natural bitumen, almost as much as the 2.3 trillion barrels of natural bitumen in the western Canadian sedimentary basin. According to the definition used in this report, there are over 5 trillion barrels of natural bitumen in place globally, with 40% of that in each of Canadian and Venezuelan deposits. More importantly, they find that the average viscosity among resource pools including the Orinoco is 31,789 cP, which would indicate that on average these resources would end up classified as natural bitumen by the EU. By comparison, the average viscosity of reservoirs of similar type to the Canadian oilsands is over 185,000 cP.

So, what does this tell us? Not much, actually.  Since viscosity is highly non-linear (see the log scale on the figure below), the average can be skewed upwards by a small amount of highly viscous oil. For example, if only 7.5% of the resource in the Orinoco had a typical oilsands viscosity of 185,000 cP, most of the other 92.5% could be well under the EU cutoff.  So, what does the distribution look like?  Well, I don’t have precise data on this yet (I’d welcome it), the IEA’s 2010 World Energy Outlook provides some sense of the distribution.

Based on my reading of the definition in the EU Fuel Quality Directive, crude oil feedstocks outside of the box in the top left corner would not be considered natural bitumen and so would not be assigned the rating of 107gCO₂eq/MJ, implying 22% higher carbon emissions than conventional crude.

Related to this is the question of what proportion of production from the Orinoco will be from reserves which meet the EU natural bitumen standard.  Venezuela has over 3 million barrels per day of production capacity from the Orinoco either producing or proposed for construction between now and 2020, so their production expectations are in the same ballpark as those from the Canadian oilsands, but the IEA expects that production to come from a mix of primary production (cold flow) and steam stimulation technologies.  The cold-flow production would almost certainly be of sufficiently low viscosity to not qualify for the EU FQD designation of natural bitumen, but beyond that it is not clear.  Looking at the percentage of the resources effected, when we’re talking about 1.3 trillion barrels of original oil in place and production rates of only 3 million barrels per day can skew the results.

The third question which has arisen for me, with respect to the EU FQD, is whether heavy and extra-heavy oil not classified as natural bitumen would automatically be classified as conventional crude. In the FQD Implementation Directive, it states that conventional crude is defined as, “any refinery feedstock source exhibiting an API gravity that is higher than 10 degrees,”  or for which, “it can be demonstrated that the conventional crude oil was not subjected to thermal or mining processes,” for extraction from the subsurface.  So, by that standard, that which is not natural bitumen is not necessarily conventional oil.

Of particular interest given the definition above is Venezuelan, California, and Middle Eastern thermally-produced heavy oil as well as cold-flow production from those regions.  According to IHS-CERA, the GHG per barrel of these oil sources, despite some having API gravity greater than 10, is generally within the range of oilsands GHG per barrel, and certainly not lower by 22%.

So, we’re back to  what I wrote here – why will the EU not make a simple amendment to their policy which certifies all heavy oil as high GHG, and then allow those who can produce with lower emissions to report verifiable data and certify down? I was struck, in this regard, by a sentence in the IEA’s 2010 World Energy Outlook which states that, “there is very little information available on current performance and future plans for reducing the environmental impact (of oil production in Venezuela’s Orinoco Belt).”  An earlier sentence paints the issue in sharper relief since it says that, “the Orinoco could compensate for slower growth in Canadian oil-sands production, if Canadian projects were delayed by environmental concerns.”

Here’s an opportunity to both improve the level of information and to make sure that we are not encouraging higher GHG oil supply by drawing an arbitrary line in the sand which purports to differentiate high vs. low GHG oil supplies. I hope the EU will take it, and I hope our Canadian producers will demonstrate that they can compete when full information about their GHG footprints and that of their competitors is measured on a level playing field. Over to you, EU.