(May 26*) Regulatory fight in a Canadian oil-sands box

By Bill Mann, MarketWatch

May 26, 2011, 12:01 a.m. EDT

PORT TOWNSEND, Wash. (MarketWatch) — A big battle is shaping up over environmental regulation of Canada’s oil sands, the second-largest oil deposits in the world. And, surprisingly, it’s Conservatives against Conservatives.

In this corner, it’s Prime Minister Stephen Harper’s federal Conservatives, who just gained a majority government. In that corner, it’s Alberta’s conservative provincial government, led by hard-nosed, oil-industry friendly premier Ed Stelmach.

A diplomatic cable recently released by Wikileaks highlights the problems: It revealed an exchange between then-Canadian Environment Minister Jim Prentice and U.S. Ambassador to Canada David Jacobsen, in which the American said he believed Ottawa was being “too slow” about regulating the expansive oil sands.

The U.S. wants a big part of that “non-terrorist” Alberta oil but it doesn’t want its chief supplier to look environmentally dirty, for obvious political reasons. Canada is now the U.S.’ largest oil supplier.

Canada, being a helpful vendor, apparently agrees, so last week, new Canadian Environment Minister Peter Kent announced that Ottawa will introduce environmental regulations later this year for the oil-sands sector designed to reduce greenhouse gases spewed from one of the country’s most polluting industries.

The water quality at the oil sands — or, as environmentalists call the bitumen mines, the tar sands — is also very much an issue. A leak that fouled the water and killed hundreds of waterfowl in the far-north oil fields two years ago may have spurred the U.S. ambassador’s plea for Ottawa to toughen up environmental controls.

Part of this new Ottawa vow to assume environmental control over what the Alberta government insists is a provincially-owned resource may well be tied in to Harper’s visit this week to the G8 summit in France. There’s a good chance environmental groups will show up with pictures — or billboards — of oil-soaked Alberta waterfowl. Harper doesn’t want Canada to be known on the world stage as the world’s “dirty-oil” producer. (Although extracting crude from bitumen is indeed, at best, a dirty, water-and-energy consuming business).

A group of U.S. Senators visited the oil sands last December and said, not surprisingly, they were satisfied with the environmental protections in place in Alberta. Ottawa apparently isn’t, despite Alberta’s belated environmental-protection moves.

Alberta will fight back

Alberta isn’t going to give up in this battle with fellow Conservatives without a fight.

Provincial finance minister Lloyd Snelgrove criticized Ottawa for regulating a provincial resource, which would add “multiple layers of government trying to the same thing, [where] nobody wins.”

Snelgrove told the Calgary Herald that Stelmach’s Alberta government has been worried for some time Ottawa would step in and regulate the provincial resource, adding unnecessary duplication and costs to the multibillion-dollar sector.

“The federal government has sat on the sidelines for years and years and years. Now they see their little golden goose is under attack and they want to be the voice for Canada on the world stage and we respect that,” Snelgrove told the Calgary Herald.

The Wikileaks cable, little-reported in U.S. media, which is a bit surprising, considering its importance to the U.S. energy future, also revealed that the Obama administration inquired about a possible moratorium on new oil sands development as global criticism mounted over the second-largest proven oil reserves in the world.

A San Francisco-based environmental group has run anti-oil sands billboards and newspaper ads in Canada, the U.S. and in Europe, urging tourists not to come to Alberta. Stelmach, who recently announced he’ll be leaving office soon, replied angrily, buying billboards and print ads of his own saying Alberta is addressing environmental concerns.

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* color and emphasis added by the blogger