The Dirty Dilemma of Canadian Crude

Tar sands oil comes at an environmental cost. But blocking it from the U.S. may make matters worse

It's a noxious process, squeezing petroleum from the heavy, oil-caked tar sands beneath Canada's northern forests. Digging the mines to get at the sticky crude, called bitumen, has chewed up thousands of acres of forests. It has also polluted waterways and released vast volumes of carbon dioxide, environmentalists complain. Yet with oil trading at around $100 a barrel, critics haven't been able to slow the rush on Canada's lush deposits. Since 2000 oil output from the region has more than doubled, hitting 1.1 million barrels a day last year.

Now opponents are taking a new and controversial tack, seeking to limit the growth of specialized refineries in the U. S. Midwest that convert Canada's dirty crude into gasoline and diesel. Working with national and local green groups, the Natural Resources Defense Council (NRDC) has challenged permits required to expand refineries and pipelines on both sides of the Canadian border. Last summer, the groups scored a win. After they complained that BP's (BP) plan for a 15% capacity hike at its Whiting (Ind.) refinery could pollute nearby Lake Michigan, BP shelved the idea. There was "an unacceptable level of business risk," says BP America Chairman Robert A. Malone. Next on the greens' hit list are upgrades to small refineries owned by BP, Conoco-Phillips (COP), Husky (HSE), Hyperion, Marathon (MRO), Murphy (MUR), and Robinson.

LESSER EVILS

From a broader standpoint, the activists' Midwest strategy may be flawed. Almost all of Canada's oil exports currently flow south across the border. In the future, every drop that gets diverted from Midwest refineries could find its way to markets in China, India, and other parts of Asia, where less stringent refining and environmental standards will lead to more pollution being released.

Virtually all green advocates say the best solution is to find substitutes for oil, whether it's biofuels or car engines that run on electricity. "We cannot dig or drill our way to energy security," says Henry Henderson, NRDC's Midwest program director. But it will be many years before most drivers in the U.S. can fill their tanks with renewable fuels.

Turning oil sands into fuel requires Herculean efforts. First, pristine boreal forests are felled so that supersized tractors have room to scoop up the gunky sands. Then comes the heat: Miners must "cook" two tons of oil sands for every barrel of crude produced, consuming the energy equivalent of about one-third of a barrel of oil and up to five barrels of fresh water. The used water ends up in so-called tailing ponds—open-air repositories of toxic chemicals, water, and clay—that are large enough to be seen from space.

It's easy to understand why environmentalists are up in arms. But their tactics could stall U.S. refinery upgrades at a time when they're sorely needed, says Cindy Schild, refining issues manager at the American Petroleum Institute, an oil industry trade group. The effect, says Christopher Ross, a vice-president at consultants CRA International, would be slower growth of oil imports from a stable, friendly neighbor that currently supplies 17% of total U.S. demand—more than any other foreign country. And environmentalists' assaults on refinery expansions will increase U.S. dependence on less secure sources around the globe, he says.

Canadian oil producers can sidestep the protests in the Midwest. They could send the crude to refineries in Northeastern or Southern states that have excess capacity. Or, says Greg Stringham, vice-president of the Canadian Association of Petroleum Producers, they could keep the problems close to home, setting up facilities near the mines and shipping finished gas and diesel. "There are lots of possibilities," he says.

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