Despite the depressed economic environment, the U.S. federal administration is embracing several clean and renewable energy initiatives.

For Canadian oil producers with a view to the American market, the adoption of the Energy Independence and Security Act of 2007 (“EISA”) and the introduction of the American Clean Energy and Security Act of 2009 (“ACESA”) are of particular concern. Taken together, these laws will prohibit U.S. federal agencies from purchasing energy with lifecycle greenhouse gas (“GHG”) emissions greater than those of conventional oil, while setting demanding emission allowances for other U.S. importers and refineries. As the emission intensity of crude bitumen, the fuel derived from the Canadian oil sands, can be up to one-third higher than that of conventional oil, it may soon become almost impossible for Canadian producers to access the U.S. market.

Impact on Canada’s International Trade

Canada is currently the largest exporter of crude bitumen to the United States, with almost 100% of Canadian output shipped to the U.S. market. On average, net oil exports represent about 30% of Canada’s total net exports. Although the full impact of EISA and ACESA remains to be seen, the magnitude of oil exports means that even a small decrease could result in substantial ramifications for Canada’s trade balance. While alternatives to the U.S. market exist, a majority of the infrastructure expansions currently under development in the oil sands have been designed and priced on the assumption of accessible U.S. markets.

Energy Independence and Security Act of 2007

EISA was signed into law in December of 2007 with the stated purpose of moving the U.S. towards greater energy independence through promoting clean renewable fuels and by improving the energy efficiency of federal agencies. Although the Act targets U.S. domestic policies, it may impact the Canadian energy sector.

Of particular concern is Section 526, which prohibits U.S. federal agencies from purchasing “alternative fuels” with lifecycle greenhouse gas emissions greater than those of conventional oil. Drafted with the specific intention of preventing the U.S. Air Force from procuring high-pollutant coal-to-liquid fuels, the scope of Section 526 may have unintentionally ballooned to include the Canadian oil sands. If, as environmental groups have argued, fuel derived from the oil sands constitutes an “alternative fuel,” the Act would effectively eliminate large-scale consumers such as the U.S. Army and the Postal Service from the industry’s customer base.

There is debate in Canada and the U.S. as to whether the availability of a proximate supply of fuel from a stable political jurisdiction outweighs the associated environmental degradation. It should be noted that while opponents may take some comfort in the reality that the application of the EISA does not reach beyond the federal government to the broader community of importers, the demonstrated recognition and widespread acceptance of the underlying policy concerns appears to be influencing legislation aimed at all consumers.

American Clean Energy and Security Act of 2009

ACESA is a federal bill that mandates emissions trading with a number of provisions relevant to Canada’s energy sector. It is also known as the Waxman-Markey Bill. The bill’s principal target areas include clean energy, energy efficiency, reducing global warming, pollution and transitioning to a clean energy economy. The Bill was passed by the House of Representatives in the Spring of 2009. A separate bill, the Clean Energy Jobs and American Power Act, 2009 (the Kerry-Boxer Bill) was introduced in the Senate in September, 2009 with the objective of achieving Senate approval of the measures contained in ACESA. However, the Senate bill has some key differences with ACESA, including a more aggressive greenhouse gas reduction target.

Modeled upon California’s recently adopted Low Carbon Fuel Standard, ACESA’s clean energy provisions require retail electricity suppliers to meet an increasing percentage of their demand through the supply of renewable energy. In its original form, the Bill also contained a requirement for energy producers, refineries and other importers to reduce the lifecycle emission intensity of their fuels to 2005 levels by 2022 and progressively more thereafter (the low carbon fuel requirement). However, in the form passed by the House, this requirement was dropped from the Bill and is not found in the current form of the Senate bill. While therefore not part of the proposed legislation before Congress, it is widely expected that the low carbon fuel criterion will find its way into the clean energy program eventually adopted by the U.S. Clearly, if these measures do become law, there will be further pressure on industry to reduce the use of high emission fuel such as that derived from the Canadian oil sands.

Some Concluding Remarks

Efforts to shape U.S. clean energy legislation in a manner more favourable to Canadian producers have focused on excluding fuel derived from the oil sands. In addition, it has been argued that the clean energy initiatives may be a violation of foreign trade obligations. This trade threat is founded on NAFTA, which prohibits member states from discriminating among other member states and ensures equality of opportunity to import from, or to export to, all. Canada may argue that the U.S. clean energy legislation unfairly discriminates against Canadian oil producers, if it can establish that crude bitumen is sufficiently similar to conventional oil. However, the geological composition of crude bitumen, coupled with the pronounced differences in its production process relative to conventional oil, may present difficulties. Moreover, even if such an argument can be developed, NAFTA provides member states with an exception related to environmental concerns.

Recent pronouncements by U.S. officials in Canada, including the new ambassador to Ottawa, have highlighted the need to balance the U.S. desire to ensure energy security, which the oil sands provide, with environmental issues.

In summary, EISA and ACESA present significant obstacles to the export of Canadian oil to the U.S. market. The significantly elevated lifecycle greenhouse gas emissions of crude bitumen relative to that of conventional oil may render fuel derived from the Canadian oil sands almost impossible to market south of the border. Whether these laws will give rise to successful challenges under existing free trade arrangements such as NAFTA remains to be seen.