NAFTA bumps into Albertas upgrader plans; Trade deal would prohibit the province from reducing the flow of bitumen to the United States once it starts

EDMONTON - Eighteen months ago, Premier Ed Stelmach -- the man who said shipping oilsands bitumen south was like selling off the topsoil -- asked his energy minister to develop a strategy to encourage more upgrading in Alberta.

Otherwise, the value-added jobs from this oil boom will go to the United States, said the new premier.

But with two large pipelines underway, which combined could carry all the existing oilsands production, and with billions being invested in converting U.S. refineries to upgrade oilsands bitumen, questions are being raised about Alberta's upgrader prospects.

Gil McGowan, president of the Alberta Federation of Labour, says the premier needs to get the long-promised upgrader strategy in place soon or the opportunity may well be lost.

That's because under NAFTA, the province can't reduce the flow of bitumen once it has started, says McGowan.

"I'm not sure most Albertans -- or the Stelmach government -- realize what could be lost if those exports go ahead.

"I'm not sure all the upgrading here will actually be done here once the super pipelines are built," he said.

"The government wants a target of 70 per cent upgrading here, but it's meaningless unless the government steps into guarantee it."

Energy department spokesman Jason Chance said it's "too speculative" to comment on whether fast-rising bitumen exports under NAFTA will impede Alberta's promised value-added strategy.

The government has no intention of interfering in the free markets protected by NAFTA.

"There is no intent on slowing down exports that create thousands of job," Chance said.

University of Calgary economist Bob Mansell says NAFTA isn't the main issue in developing upgrading in this province.

"There's nothing stopping us from putting on a rule to say it must all be upgraded here," he said. That could be done on future oilsands plants, for instance.

"But Alberta hasn't made that choice."

Alberta oilsands production is currently about 1.32 million barrels a day. Bitumen, the tar-like oil-and-sand mixture dug out of open-pit mines, must be separated and diluted (called upgrading) to make "synthetic crude" which is then sent to a refinery to be made into gasoline, jet fuel and other products.

Currently, about two-thirds of bitumen is upgraded in the province at sites like Suncor and Syncrude in Fort McMurray; about one-third goes south to U.S. facilities.

"So the question is -- what's the right percentage? That's the policy issue from an Alberta point of view," said Mansell. "My position is: let's do as much upgrading as is practically possible."

But upgrading and refining capacity in Canada is limited because no new facilities were built for years on this side of the border, he added.

According to a U.S. report released last week, U.S. refiners are investing $56 billion to convert old facilities to process an additional 1.6 million barrels a day and two-thirds of that is aimed at handling Alberta oilsands product -- more than one million barrels.

Under NAFTA's proportionality clause, Canada is prohibited from reducing oil, gas and bitumen exports to the U.S. unless there is similar reduction to Canadian consumers. Also, Canada cannot change the mix of exports products to substitute, say, gasoline for bitumen.

The new Keystone pipeline, which starts construction this spring, will be able to carry 600,000 barrels of bitumen a day from Hardisty to the U.S midwest. The Alberta Clipper will carry 800,000. There are reports TransCanada has plans for a second pipeline for 800,000 barrels a day to Gulf Coast refineries and two-thirds of that is aimed at handling Alberta oilsands product.

"If you add all that capacity to new pipelines, it could take all the bitumen and leave none for Alberta," said McGowan.

"The government wants a target of 70-per-cent upgrading here, but it's meaningless unless the government steps in to guarantee it. The market is already moving in the direction of more exports. American refiners got out of the gate first."

But Mansell says the urgency is overstated. Oilsands production has only just started -- 90 per cent is still ahead. So there is still plenty of opportunity for upgrading in future.

Currently, Canada exports 60 per cent of its oil to the U.S. and more than half its natural gas, while eastern Canada imports its oil from the Middle East. In the event of a shortage, Canada must maintain exports at the same percentage of overall production as the three previous years under NAFTA.

In a recent report, the Edmonton-based Parkland Institute says the proportionality clause makes it impossible for Canada to supply its own needs if there is an energy crisis. It could not divert U.S. exports to eastern Canada.

Also, Canada's ability on the environment is restricted, the report argues. If Canada wanted to reduce oil production by, say, 10 per cent, in order to cut back on polluting emissions, it would have to cut domestic production by eight million barrels (four days' consumption) in order to reduce exports by the same amount to meet proportionality requirements, says the report Over a Barrel by Gordon Laxer, political economist at the University of Alberta, and Sarnia-based researcher John Dillion.

The debate over proportionality surfaced recently in Quebec, which gets all its natural gas from Alberta. The province is looking at building liquefied natural gas terminals to bring Russian natural gas in for local consumption and into the United States. If that goes ahead, more Alberta gas will be freed up for export to the United States -- increasing NAFTA obligations, argues the Parkland report.

The Canadian Association of Petroleum Producers says a free market protected by NAFTA provides the most efficient distribution of supply.

If it were efficient to send oil to eastern Canada, that would happen, but who wants to pay more for it, asked CAPP vice-president Nick Schultz.

Also, NAFTA is based on the principles of "neighbourliness" -- that you don't do things to a neighbour that you don't want done to yourself."

Mansell also defended the NAFTA's proportionality clause as necessary to create long-term stable conditions necessary to attract investment in oil and gas production.

If the supplier reserves the right to withdraw supply at any time, the U.S. buyer has no certainty and therefore no incentive to invest in a long-term agreement, he said.

"We are to an extent giving up some sovereignty, but most trade agreements do that," said Mansell. "But we're not like Russia, we don't just cut the flow."

If people are really concerned about national security issues, they should worry about electricity supply. "You can get a substitute for transportation, but not for" turning the lights on, he added.

Mansell also downplayed the concern raised by the Parkland report that the country's ability to make environmental policy is restricted by NAFTA.

"As for climate change, we'll have to continue to reduce emissions. But is it likely that one side of the border will reduce and the other won't? Realistically, no."

Recently, the more worrisome problem for the Stelmach government is the growing environmental movement against oilsands products because of the high level of greenhouse gases and pollution released in production.

The Parkland report also argues the provincial government is violating its own 1949 Gas Resources Preservation Act that requires a 15-year established supply of gas on hand before exports are approved.

Natural gas production peaked in 2002. Currently there is only about an eight-year supply of natural gas to serve all customers, says the report.

Alberta Energy's Chance says Parkland is misinterpreting the act. The legislation does not protect all users, only residential and small commercial users who cannot go out and find their own contracts -- and there is 15-year supply for those "core users."

Edmonton Journal, Page A19, Sat Jun 7 2008
Byline: Sheila Pratt

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