ANALYSIS-Obama's Keystone stand deepens impasse with Canada

WASHINGTON Fri Aug 9, 2013 5:36pm BST

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WASHINGTON Aug 9 (Reuters) - With his blunt assertion that Canada could do more to cut emissions, President Barack Obama raised doubts about whether the United States will approve the Keystone XL pipeline. The question is: What exactly does Canada need to do?

As Obama seeks to revitalize his climate agenda, he has said he will evaluate TransCanada Corp's oil pipeline project on whether it will significantly raise greenhouse gas emissions.

Backers of the $5.3 billion project, which would link Alberta's oil sands to refineries on the U.S. Gulf Coast for at least 50 years, argue it would spur job growth and help the U.S. economy. It is opposed by environmentalists, including many Democrats, because the sticky oil sands must be heated with steam in order to flow, resulting in more emissions than average crude oils refined in the United States.

There is "no doubt" that Canada, as the source of the oil sands, could potentially be doing more to fight carbon emissions, Obama said in a New York Times interview late last month.

Programs to cut emissions could take a variety of paths, including investments in clean energy projects that would offset the impact of the oil sands production, or regulations that seek to make oil and gas production more efficient.

Obama's comments appeared to send the ball flying back into Canada's court, where the federal government has not tackled emissions from the oil and gas sector despite plans to do so since 2008.

But as more time passes it becomes clear that the remarks have led to an impasse between the neighbors and trading partners that could further delay a decision on the pipeline, which has already been pending for nearly five years.

"There isn't a lot of clarity from the White House or the administration on exactly what all the determinants will be for this pipeline," said Trisha Curtis, a research analyst at the Washington-based Energy Policy Research Foundation, Inc.

"It gets to the root of this problem, which is, how exactly is Canada supposed to respond" to Obama's comments, said Curtis.

Canada has long argued that the oil sands would simply replace other heavy crude oil imported by the United States from Venezuela and Mexico.

Canada's Natural Resources Minister Joe Oliver said in an email to Reuters that Canada is leading the way on efforts to reduce emissions, maintaining Ottawa's stance that it has already worked hard to combat climate change.

If Ottawa comes to an agreement with Washington on climate policy, it could ensure more sales of the oil sands and help Canada fix its tepid economy. But while Canada has taken tentative steps toward issuing new rules, there are few signs the Conservative government is going to follow through on them anytime soon.

Like the United States, Canada has moved to reduce emissions from vehicles and power plants. But while Obama has directed regulators to tackle pollution from the largest U.S. source, the power sector, Canada has yet to attack its largest growing source, the oil industry.

U.S. Secretary of State John Kerry, whose department is reviewing the 800,000 barrels per day Keystone pipeline because it crosses the national border, had been expected to advise Obama on the project late this year or early in 2014. Unless resolved, the standoff could spell further delays.

U.S. officials have not given a hard deadline for a decision on Keystone. "The State Department is committed to reviewing the Presidential Permit application for the proposed Keystone XL pipeline in an objective, transparent, and efficient manner," a department spokeswoman said.

The spokeswoman did not answer questions about what Canada needs to do or how long a decision might take.

PRESSURE ON THE PROVINCES

Even if Canada decided to move on emissions, several factors could slow the process down.

Leona Aglukkaq became Canada's new Environment Minister less than a month ago in a cabinet reshuffle and it may take time for the former health minister to settle into the job.

Still, one analyst said Canada, which faces pressure to cut emissions not only from the United States but also from Europe, could act on emissions as soon as this year. The European Commission has proposed labeling the oil sands as "highly polluting" and deterring member countries from importing it.

Robert Johnston, the director of global energy at the Eurasia Group consultancy, said a new agreement could take the shape of a 25/25 target, meaning a 25-percent emissions cut per unit of oil production combined with a C$25 per tonne levy on any industrial emissions above a certain level. He said in a note to clients that Ottawa could act this year with the intent of shaping the Keystone process in Washington.

No response from Ottawa was immediately available on any 25/25 plan.

A spokesman for Aglukkaq said talks in the federal government on oil and gas rules were ongoing, but he would not go into details. Ottawa missed a self imposed deadline on issuing new oil and gas rules this year.

Some Keystone watchers expect provinces such as Alberta to take steps on energy policy before the federal government.

"The only thing I think might be possible is for provincial governments to write tighter regulations over the extraction process itself," to cut carbon emissions from the oil sands operations, said Peter Wilcoxen, an economics professor at Syracuse University.

Earlier this year, Alberta floated a proposal to set a 40-percent cut in emissions per unit of oil produced paired with a C$40 fee on emissions above the target.

That would be tougher than its current program requiring operations that produce over 100,000 tonnes of emissions to cut their intensity by 12 percent or pay C$15 per tonne into a clean energy technology fund, or make other investment to cut carbon.

The 40/40 idea was never an official proposal from Premier Alison Redford, though, and Alberta is in the process of reviewing its options, a spokesperson said on Thursday.

Whether a move by a province alone would be enough to placate Obama and get the Keystone project rolling is uncertain.

"The environmental issues are market access issues now. The main question is whether there's enough time to respond to that," said David McLaughlin, who was chief of staff to former Canadian Prime Minister Brian Mulroney and current finance minister Jim Flaherty. (Additional reporting by Randall Palmer, David Ljunggren and Louise Egan in Ottawa and Nia Williams in Calgary; Editing by Ros Krasny and Claudia Parsons)

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