Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Energy–Oil & Gas: March 2008
In the bustle of activity leading up to the winter recess, the U.S. Congress passed the Energy Independence and Security Act (Act) on December 13, 2007. The bill was signed into law by President Bush on December 19, 2007. The House had previously passed two versions of the bill that the Senate would not pass due to certain controversial provisions, including a provision which sought to fund renewable energy production tax credits by repealing credits currently granted to domestic oil and natural gas production.
The Act has been hailed as one of the largest single steps toward energy conservation that the United States has taken since the Arab oil embargoes of the 1970s. The law includes the following key provisions:
National Fuel Economy Standards – The Act sets Corporate Average Fuel Economy (CAFE) standards at 35 miles per gallon by 2020. This represents a 40% increase in fuel economy standards and is expected to save billions of gallons of fuel.
Renewable Fuel Standard – The Act sets a mandatory Renewable Fuel Standard (RFS) requiring fuel producers to use at least 36 billion gallons of biofuel in 2022. Of this, 21 billion gallons must be advanced biofuels, such as cellulosic ethanol. In order to bring about this five-fold increase, the Act also increases funding for bioenergy research and technology.
Carbon Storage – The Department of Energy is directed to support several large volume tests of carbon storage in a variety of geological formations in order to examine the feasibility of geological storage from industrial sources and coal-fired electricity plants.
While the Act arguably does not affect Canadian producers, section 526 of the Act is sufficiently unclear in this regard to have drawn the attention of the Canadian government. Section 526 of the Act provides that U.S. federal agencies may not enter into any contract for the procurement of an alternative or synthetic fuel unless the contract specifies that the lifecycle greenhouse gas (GHG) emissions associated with the production and combustion of the fuel supplied under the contract are less than or equal to such emissions from the equivalent conventional fuel produced from conventional petroleum sources. It is unclear at this time if fuel produced from the oil sands would fall into the definition of "alternative fuel".
It is the position of the Canadian government that such an interpretation of this provision of the Act would be inconsistent with section 369 of the 2005 Energy Policy Act (the Energy Policy Act) which aimed at the development of sources of U.S.-origin alternative fuels for strategic reasons. While the Energy Policy Act does define fuel produced from the oil sands as an "unconventional fuel", the Energy Policy Act also sets out a directive to strategically develop such resources in order to "reduce the growing dependence of the United States on politically and economically unstable sources of foreign oil imports." It is also the position of the Canadian government that oil extracted from oil sands is not an alternative fuel, as oil produced from oil sands is commercial, and such production is processed in conventional facilities.
While it remains to be seen how the U.S. government and its federal agencies will interpret section 526 of the Act, it does seem unlikely that oil produced from oil sands will be interpreted as "alternative fuel". Not only would such an interpretation be inconsistent with prior legislation, but oil extracted from the oil sands can be contrasted with other "alternative" fuel sources such as biofuel, which is primarily corn-based and differs significantly in chemical composition from the oil that it is displacing. Further, there is little fuel on the U.S. market that is 100% petroleum extracted only by conventional methodology, and oil-sands-derived petroleum, which makes up 5% of the U.S. supply, is not segregated from other petroleum within the supply, which would make compliance with such an interpretation difficult.
One of the concerns of the United States in passing the Act is to ensure a secure supply of energy resources for the United States going forward. Currently, roughly half of the crude oil supplied to the United States by Canada is derived from the oil sands, and Canada is the United States' largest supplier of crude oil. Eliminating such a secure and proximate supply of fuel for federal agencies, including the U.S. military, would not seem to be in keeping with the U.S. government's efforts to ensure secure and accessible fuel supplies for the United States.
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