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Harper Defers Emissions Rules in Obama Keystone Standoff

Jan. 31 (Bloomberg) -- Canadian Prime Minister Stephen Harper, locked in a standoff with President Barack Obama over the Keystone XL pipeline, is refraining from releasing new regulations designed to cut greenhouse-gas emissions in the energy industry until the U.S. makes similar moves.

Harper’s government has an advanced draft of regulations that would require oil and gas companies in Canada to reduce emissions of greenhouse gases per unit of production, according to a person familiar with the rules who asked not to be identified because the process is confidential. Canada hasn’t yet released the rules, saying that it’s important to maintain the competitiveness of its energy industry.

It’s a “standoff right now on Keystone,” said Ron Liepert, former energy minister for Alberta, home of the oil sands. “I don’t think you’ll see much in the way of action at the federal level in the United States until they can point to some action that they see being taken at the federal level in Canada,” Liepert said in a telephone interview earlier this month.

The $5.4 billion pipeline proposed by Calgary-based TransCanada Corp. cleared a crucial hurdle today with the release of the State Department’s environmental assessment of the project. The report concluded Keystone “is unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States.”

Harper said in an interview earlier this month he would prefer the two countries move together on rules to cut emissions by oil and gas producers.

Joint Action

“The energy sector in particular is one where we need to see continental action, particularly given that the Americans are now a growing supplier of energy resources and in competition with us,” Harper said. “We need both to be, and I would suggest ideally jointly, committed to a program of action.”

Harper has been reluctant to move ahead with the new regulations even though they could give Obama some political cover to approve the pipeline.

“We continue to work with the provinces on reducing emissions from the oil and gas sector while ensuring Canadian companies remain competitive,” Jennifer Kennedy, a spokeswoman for Canadian Environment Minister Leona Aglukkaq, said in an e-mail. “It is premature to comment further.”

‘More Confident’

Natural Resources Minister Joe Oliver told reporters he’s “more confident” that the project will be approved with today’s report. “The fact that it’s consistent with previous reports is what I expected.”

In an e-mail today to potential supporters of the governing Conservative Party, Oliver said “some American billionaires are using their wealth to attack our oil industry,” adding that they “ignore the fact that U.S companies are major players in the Canadian oil sands, and the fact that Keystone XL will create tens of thousands of well-paying jobs for Canadians and Americans,” Oliver said.

The e-mail links to a video on the Conservative party website that urges the U.S. to “approve Keystone XL now.” On the same web page, supporters are invited to donate to the party.

Obama’s Choice

Now that the State Department report is out, Obama may need to choose between satisfying environmentalists, a key constituency, or his nation’s biggest trading partner.

White House press secretary Jay Carney refused to discuss any possible talks with Canada about Keystone or whether the topic may come up when Obama meets with Harper next month at a summit of North American leaders in Mexico.

“I’m certainly not going to negotiate economic matters with other countries from here,” Carney said at a White House briefing today.

He said the decision-making process was still under way at the State Department and said Obama’s position was set out in a speech last year in Washington, in which he said the pipeline will only serve the U.S. national interest if it doesn’t “significantly exacerbate” carbon emissions.

The report’s release kicks off a separate review in which Obama must determine whether building the pipeline is in the U.S. national interest. That determination will weigh factors other than environmental risks, including its importance to the U.S.-Canada relationship, the economic benefits it offers to local communities and how it would improve U.S. energy security. Eight federal agencies have 90 days to give their views to the State Department.

Draft Regulations

Canada’s draft emissions regulations would expand on a system already in place in Alberta that requires crude producers to cut emissions per barrel by 12 percent or pay a penalty of C$15 ($13) per ton. The national regulations would at least double both the percentage cut required and the financial penalty per ton, perhaps taking both figures into the mid-30s, according to a person briefed on the matter who asked not to be identified because the talks aren’t public.

Harper sent a letter to Obama in August offering to participate in joint efforts with the U.S. to cut greenhouse-gas emissions in an effort to mollify Obama’s concerns about the pipeline, a person familiar with the matter said in September.

Environmental Objections

New Canadian targets may help Obama address objections from environmentalists, who say the pipeline would contribute to global warming by aiding the development of the oil sands. Obama said in June that he wouldn’t approve Keystone if it significantly worsened carbon pollution.

TransCanada first applied to build Keystone XL in September 2008 to connect rising volumes of oil-sands crude with U.S. Gulf Coast refineries. Producers are counting on the project to help ease a transportation bottleneck and raise the price of Canada’s heavy crude, which averaged $24.50 a barrel lower than the main U.S. benchmark last year.

Harper’s challenge will be to determine if Obama is willing to negotiate on steps that Canada could take to help win approval, said Michal Moore, professor in energy and environmental policy at the University of Calgary. “You’re not playing with a full portfolio of information,” Moore said in a phone interview yesterday.

Canada has introduced rules to cut emissions by coal-fired power plants, and has harmonized greenhouse-gas regulations with the U.S. on automobiles. The Canadian government has said it will introduce rules on a sector-by-sector basis that will eventually include oil and gas producers.

No Trade-Offs

Gary Doer, Canada’s ambassador in Washington, cautions that the U.S. process for approving the pipeline doesn’t allow for trade-offs.

“You can’t have a quid pro quo,” Doer said in an interview. “The president is making a decision for the national interest determination not the international interest determination.”

The Keystone impasse is causing tension between the two countries, which share the world’s largest trading relationship. A U.S. rejection of Keystone may result in “the first attempt to cut that American umbilical cord,” Fen Hampson, an international affairs professor at Carleton University in Ottawa, said today.

It could also have a “knock-on effect” on other aspects of relations between the two countries, such as making Canada less willing to assist the U.S. in areas such as military operations, he said.

Harper and cabinet members including Foreign Minister John Baird have not hidden their pessimism in recent weeks about winning approval for the project so long as Obama remains in the White House. In the Bloomberg interview, Harper said the U.S. move to seek more public comment on the pipeline suggests Obama’s government may postpone a final decision further.

“How much consultation do you need to do?” Harper said in an interview in his Ottawa office. “It’s clearly another punt.”

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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