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Face off: Canada versus the EU over fuel-quality directive

Europe doesn’t import any oil from Alberta, but the proposed fuel quality directive has ignited a row between Brussels and Edmonton

In the next few weeks the European Commission (EC) will decide whether to approve changes to the fuel-quality directive (FQD), which stipulates the kind of oil the EU imports. The decision will have major implications for Canada’s oil sands and Europe’s relationship with North America.

The EU’s FQD sets quotas for the amount of greenhouse gas (GHG) that can be emitted during the production, transportation and combustion of given fuels. A revision in 2009 required fuel suppliers to reduce their GHG intensity for road transport fuels by 6% by 2020, against a baseline from 2010.

To measure emissions reductions, the EU decided to assign carbon values to oil that reflect pollution caused during production, including those fuels derived from the oil sands.

The EU doesn’t import any crude oil of fuels derived from Alberta’s oil sands. But environmental groups have been heavily lobbying the Commission to take a hard stance against oil-sands developments. Oil-sands lobbyists, meanwhile, have been trying to persuade the EU not to adopt the regulations, fearing that they could be used as a precedent for legislation elsewhere in the world.

In 2011 the EC proposed to treat oil sands differently from conventional crude oil, ascribing a greenhouse gas value of 107 grams of CO2 equivalent per megajoule (co2/mj) to fuel derived from oil sands, compared with an average of 87.5 grams of co2/mj for fuel derived from conventional crude oil.

This decision was based on a report published by the EC in 2011 which claimed oil-sands production emits 23% more CO2 than conventional oil. Another study, released in 2010 by consultancy IHS Cera, claimed that the oil sands were just 6-15% more polluting than conventional crude production.

Indeed, some studies suggest bitumen output from Canada is less polluting on a well-to-wheels basis – which takes account of emissions from the point of extraction all the way to the vehicle’s tailpipe – than crudes from Nigeria and Iraq, two big suppliers to Europe.

Mindful of the impact on oil trade from the FQD as it stands, Canada, the US and some countries in EU have called for another assessment. This has been underway since June 2012.

Canada strongly disputes the 23% emissions figure and says the report was based on incomplete data. It makes the FQD unscientific and discriminatory; and would harm the country’s global trade, it said.

Both Canada and European opponents of the amendments to the FQD say the problem is not the regulation itself but the implementing measures and how they are calculated. “We are supportive of an FQD-like carbon reduction policy. We have one of those in Canada already,” says Greg Stringham, the Canadian Association of Petroleum Producers’ (CAPP) vice president of oil Sands. “It is the way (the European FQD) is being implemented that is the concern we have as an industry.”

While Canada is being unfairly targeted by the EU, says Stringham, other oil exporters to Europe, such as Russia and Nigeria, don’t even report their GHG emissions numbers. “Our concern is that the default values which have been assigned to crudes don’t accurately reflect the life-cycle emissions,” says Jeff Sundquist, managing director of Alberta’s representation in Canada’s High Commission, in London. “Only 40% of the crudes coming into Europe actually report emissions data whereas we have 100% compliance,” Sundquist told Petroleum Economist.

Setting a precedent

Sundquist points out that that gas flaring, also a significant contributor to GHG emissions, is not reported to the EC, either. “Russia alone contributes almost a third of the world’s gas flaring and they’re treated as average.”

Canada’s touchiness about the FQD is baffling to some: the country’s oil doesn’t compete for European market share with supplies like Russia and Nigeria, because almost all of the oil sands’ bitumen is sold to the US. None reaches the EU.

But the FQD could have an impact far beyond Europe – and that is a worry, especially if emerging markets, such as China, take note.“Once a policy gets established in Europe it’s seen worldwide as a model for other countries to use it in their policies as well,” says Stringham.

Canada is desperate to find new markets for its oil beyond North America, especially in light of soaring US production. Former Suncor Energy chief executive Rick George said last year that over-reliance on the US as an outlet for Canada’s oil sands threatened the country’s economic security.

The FQD debate has permeated into even more strategic trade negotiations between Europe and Canada.

The two sides have been negotiating a Comprehensive Economic and Trade Agreement (Ceta) since 2009. An agreement would open up a raft of cross-border trading opportunities, including in agriculture. The final round of talks is expected to finish soon.

Canada is the junior partner in the negotiations. While the EU is Canada’s second-largest trading partner, after the US, accounting for about 10% of its exports, exports in the other direction are much smaller. Canada is only the EU’s 11th-largest trading partner, accounting for less than 2% of its total external trade.

None of that has stopped Canada from taking a bullish stance. Joe Oliver, the country’s natural resources minister, said recently that Canada could take a complaint to the World trade Organisation if the FQD limited its access to new markets for oil-sands crude.

That is something the EU would want to avoid. But some senior figures in Brussels say the stakes are high for the bloc, too. A break-down in the Ceta talks, runs one line of thinking, could antagonise the US, with which the EU is about to begin negotiations over another free-trade agreement. Those talks were due to begin in June.

European trade negotiations with Canada are also seen by some in the EU as a litmus test for whether it can strike deals with other partners on an equal footing, such as Vietnam, Thailand and Singapore.

Europe divided

There are, however, deep divisions even within Europe itself about the proposed FQD.

The EC’s Directorate-General for Climate Action (DG Clima) is considering six options for implementing Article 7a of the FQD. The measures, which would include reporting all the different crudes entering Europe and their GHG emissions values, could place a huge administrative and financial burden on Europe’s already-flagging refining industry.

At a time of economic fragility in Europe the EC will not want to jeopardise a struggling refining industry, which provides the continent with around 120,000 jobs.

At the end of last year, three members of Europe’s parliament, Silvana Koch-Mehrin, Peter Stastny and Daniel Caspary, co-signed a letter sent to European Commissioner Connie Hedegaard, the EC’s Climate Action Commissioner. It argued that article 7a would jeopardise energy security, economic recovery and the EU’s credibility as a trade partner.

To pass the suggested amendments DG Clima needs approval from the EU’s 27 member states through a qualified majority vote. Any member states with active refinery industries seem unlikely to vote in favour.

Once a policy is established in Europe it's seen worldwide as a model for other contries to use it in their policies as well

One European Parliamentary source told Petroleum Economist that other EC Directorate-General committees, such as that for trade and energy, had also been lobbying against DG Clima on the issue.

Leaked government documents show the UK is worried that the FQD would lead to higher fuel prices for consumers and emissions reductions would be limited.

The document, leaked by Greenpeace, claims to outline the UK’s stance on article 7a of the FQD, including the impact on refineries and inaccurate measurement of the EU crude mix. It urges other EC member states to conduct independent analysis before the EC’s impact assessment is published.

The document also claims the UK government is concerned refineries will not be able to adapt to processing lower carbon crudes. This could hurt their profitability, leading to their closure. It would also further undermine Europe’s energy security.

A UK Department of Transport (DoT) spokesperson declined to confirm to Petroleum Economist whether the documents were legitimate.

In a statement UK transport minister Norman Baker said: “We continue to encourage the Commission to consider and assess options which account for the carbon intensity of all crude oils, including Canadian oil sands.”

DG Clima is now looking over the impact assessment and it is expected to release details soon. A vote on whether to pass the amendment is expected this month. 

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