U.S. Could Exempt Oil Sands From Law On Alternate Fuels

The U.S. is considering classifying Alberta's oil sands as a conventional fuel source in response to fears that new U.S. policy could dramatically impact development in the region, the National Post reported Tuesday.

Canadian officials have spoken out against the U.S. Energy Independence and Security Act, which became law in December, with a foreign affairs spokeswoman saying it would "unnecessarily complicate the integrated Canada-U.S. energy relationship."

Section 526 of the law prohibits the U.S. government from procuring fuels that generate more greenhouse gases than conventional oil. This would rule out Alberta's oil sands, which are second in size only to Saudi Arabia's reserves but classified as an unconventional source that some environmentalists estimate produce up to five times more greenhouse gas emissions than conventional production.

Canada is the biggest crude oil supplier to the U.S., and oil sands-derived crude forms an increasing proportion of its exports.

A U.S. interdepartmental working group including representatives from several U.S. agencies is looking into how to categorize Alberta's oil sands under the new rules, the National Post reported, citing an unnamed person close to the situation. The person suggested the move was taken because "D.C. does not want to hammer" the region, the report said.

The thinking behind classifying oil sands as a conventional source is that the deposits are well established, with current production of more than one million barrels a day and forecast to triple in 2015. As such, they are no longer "a science experiment," the report quoted another unnamed person as saying.

A decision is expected this spring, the report added.

The Bush administration has encouraged oil sands development to lessen U.S. dependence on Middle East oil imports, and U.S. companies such as ConocoPhillips (COP) and ExxonMobil Corp. (XOM) are some of the biggest investors in the region. Currently, developers have proposed more than C$100 billion in projects, lured by rocketing oil prices, which have jumped more than $20 in the past month to nearly $108 a barrel.

Last month, Canada's U.S. ambassador Michael Wilson wrote a letter to several senior members of the U.S. administration, including Secretary of State Condoleezza Rice, warning of "unintended consequences" for both countries if the new law compromised the oil sands.

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