UPDATE 1-Alberta mulls tougher carbon rules on oil -report

Thu Apr 4, 2013 2:22pm EDT

* Report says levy could rise to C$40/tonne from C$15

* Minister looking a range of options to meet targets

* Analyst calls amount "not inconsequential"

By Jeffrey Jones

CALGARY, Alberta, April 4 (Reuters) - Alberta is considering a major increase in the carbon levy it charges oil producers as it seeks to show Washington that it is serious about meeting emission-reduction goals, while promoting the contentious Keystone XL pipeline to Texas refineries.

Alberta Environment Minister Diana McQueen offered the levy proposal at a meeting in Calgary last week with oil executives and federal Environment Minister Peter Kent, the Globe and Mail newspaper said on Thursday.

Such a move would be in line with comments that the Canadian province's envoy to Washington made in a February interview with Reuters. David Manning said Alberta may adopt more stringent environmental policies to help producers in the oil sands increase access to lucrative markets such as the U.S. Gulf Coast.

In the subsequent weeks, the government brushed aside media queries about what new moves were under consideration.

Wayne Wood, McQueen's spokesman, did not dispute that the minister had floated the idea of a higher carbon levy, but would not comment on the details and said no decision had been made.

"The minister is looking at any number of options, and it's really premature to speculate on any kind of option that might be settled on," Wood said.

The Globe and Mail said McQueen proposed an increase in that levy to C$40 a tonne, as well as a requirement to cut per-barrel emissions by 40 percent over time.

Alberta currently charges C$15 per tonne for carbon emissions above limits and puts the money into a technology fund. The program has generated C$312 million, though environmental groups have said the levy is far too small.

ALBERTA WANTS PIPELINE

Speculation on new moves by Alberta to improve its record on meeting emission reduction targets has increased since U.S. President Barack Obama named John Kerry, seen as a supporter of tougher climate policy, as secretary of state.

His department is responsible for ruling on TransCanada Corp's 830,000 barrel-a-day Keystone XL pipeline from the oil sands to the Gulf Coast, which has been under regulatory review for more than four years.

Keystone XL has met with staunch opposition from U.S. environmentalists, who say it will encourage more carbon-intensive production in Alberta's vast oil sands, the world's third largest crude deposit, at a time when Americans should be making a wholesale shift to green energy.

The government of Alberta has faced big problems in recent months as a shortage of spare export pipeline capacity has pressured prices for the bitumen produced from its oil sands, lowering the revenue take, and as the Obama administration has pushed back a decision on whether to approve the $5.3 billion pipeline. It is now expected to rule during the summer.

Alberta Premier Alison Redford is set to visit Washington next week for the fourth time in 18 months to press U.S. lawmakers to support Keystone XL. Last month, a State Department environmental assessment concluded that the project in itself would not drive a major increase in greenhouse gas emissions.

HIGHER LEVY "NOT INCONSEQUENTIAL"

In a note to clients, TD Securities analyst Menno Hulshof estimated that such new regulations would add less than $2 per barrel to the cost of producing a barrel of oil sands-derived crude, an amount he called "not inconsequential".

The Canadian Association of Petroleum Producers, the industry's main lobby group, declined to comment.

Cenovus Energy Inc, one of the largest oil sands producers, said a hike would not be surprising, given that the initial program was seen as a first step. Executives have run the numbers on its business model assuming both a C$15 and a C$65 per tonne payment, Cenovus spokesman Brett Harris said.

"Every company is different, but for our business we think we're pretty well positioned to compete at either of those levels," Harris said.

Kent is also expected to announce long-anticipated new federal emission rules for oil and gas at some point. His spokesman declined to comment on McQueen's remarks.

Wood said Alberta is looking at a range of options to meet carbon reduction targets as part of a review that began earlier this year. He had no timing for the results of the review.

Keystone XL opponent Danielle Droitsch, a director at the Natural Resources Defense Council in Washington, said Alberta's proposal was lacking, as C$100 to C$150 a tonne would be needed to make a serious dent in emissions.