Oil's green costs set to rise as Canada vote nears

CALGARY, Alberta (Reuters) - Already struggling with the soaring costs of developing the Alberta oil sands, Canada's energy industry now also faces the prospect of tighter environmental controls regardless of which party wins the country's upcoming general election.

Environmental groups have pushed the harmful effects of oil sands development into the public consciousness in Canada and the United States, leaving political parties no choice but to respond in their campaigns for the October 14 vote.

"Everything points in that direction," UBS Securities analyst Andrew Potter said. "You've already seen CO2 legislation, both at the (Alberta) provincial level and -- very vague rules still -- at the federal level."

As the capital costs of new projects hit new highs, details of how much more stringent and pricey environmental regulations might be are still sketchy.

Last week, Prime Minister Stephen Harper's Conservatives, who are leading in the polls, said they would ban exports of tar-like bitumen from the oil sands to countries with looser emission standards than Canada's.

The oil sands represent the largest oil deposits after Saudi Arabia's conventional reserves, but they are far more complicated, carbon-intensive and expensive to extract.

Harper's proposal left more questions than answers for oil executives, environmentalists and the Alberta provincial government, which has its own carbon reduction policy of imposing fines for over-emitting, which are paid into a technology fund.

The Conservatives, which have had a minority government for more than two years, quickly said the United States, Canada's biggest market, would likely avoid any ban because it appears to be moving toward similar greenhouse gas reductions.

Asian countries are now the only other potential customers, but sales are several years off.

Joseph Doucet, a professor of energy policy at the University of Alberta, said the plan came as a surprise, as shown by the negative reaction from Alberta, which claims jurisdiction over the development of its resources.

Doucet said such a policy runs the risk of reducing the oil's value by limiting the number of buyers bidding on it.

"We might essentially be shooting ourselves in the foot," he said.

In addition, the environmental benefit is impossible to tally without such details as whether a country has to have met commitments to cut emissions or just set policies, said Marlo Raynolds, executive director of the Pembina Institute, an environmental think tank.

The institute views Canada's own emission standards as insufficient, and it says plans to nearly triple oil sands production would mean a significant increase in Canada's overall carbon emissions.

"It really does nothing to drive or improve Canada's policy on dealing with greenhouse gas emissions," Raynolds said.

CARBON COSTS

Stephane Dion, leader of the second-place Liberal Party, has tried to persuade Canadians his Green Shift plan, whose key feature is a carbon tax, is reason enough to vote for the party. Personal tax cuts would offset the higher energy costs.

The left-of-center New Democrats, led by Jack Layton, have called for halting new developments in the oil sands until carbon emissions are capped. The NDP would also discourage bulk exports of unprocessed crude to the United States and China.

Elizabeth May's Green Party espouses a carbon tax on fossil fuels and mandated amounts of carbon capture and storage.

That technology is also being pushed by the Conservatives as a way to limit the direct costs on industrial emitters.

Meanwhile, the industry has been buffeted by surging costs due to a stretched labor supply and inflation in prices of materials.

Last month, Petro-Canada said the cost estimate for its proposed Fort Hills oil sands project has surged by 50 percent to more than C$21 billion ($20 billion), leading some analysts to question the viability of new mining projects.

"This industry has suffered death by a thousand paper cuts, and unfortunately, someone brought a knife to the fight -- the knife being capital costs," FirstEnergy Capital Corp analyst William Lacey said.

"When someone takes a big slash at you, all the rest of it adds to the bleeding. So there's only so much environment costs can push before the oil sands are out of the market."

($1=$1.06 Canadian)

(Editing by Peter Galloway)