OUTSIDE FORT McMURRAY, Alberta -- Hold a vial of pumped and processed oil to the light here, just before it enters the pipeline that one executive jokingly calls "the cash register," and you can see a layer of watery sediment settled at the bottom.

The vial contains diluted bitumen. What happens to it inside pipelines, 0.5 percent sediment content and all, is powering a controversy that spans the continent.

Environmental and safety groups warn that diluted bitumen poses a greater risk of pipeline corrosion and spills than conventional fuel or the synthetic crude also produced from the Canadian oil sands. The oil and gas industry, bolstered by Canadian regulators and policymakers, blasts this claim as hyperbolic fearmongering.

"The challenge we have is combating emotion with facts," Alberta Energy Minister Ron Liepert said during an interview this month when asked about the safety charges leveled by critics of oil sands development, particularly the $7 billion Keystone XL pipeline.

Liepert readily acknowledged, however, that few if any targeted studies of diluted bitumen's corrosion risks are available to help him make the case for more oil sands development.

"I guess we could" gather specific facts to help beat back conservationist attacks, he added. "It wouldn't seem to me like a difficult thing to do."

Yet at the Calgary headquarters of the Energy Resources Conservation Board (ERCB), the independent regulator of Alberta's vast and lucrative oil sands resources, the very notion of studying how diluted bitumen affects pipeline safety struck senior officials as unnecessary.

"Frankly, we don't see it as being a significant issue," ERCB Chairman Dan McFadyen said in an interview. "There is no evidence from our tracking ... that the type of product being carried in the pipeline results in anything different with respect to failure."

Between the confidence of McFadyen and industry officials, led by Keystone XL sponsor TransCanada Corp., and the alarm of environmentalists is a chasm that could shape the future of the oil sands. The United States is Canada's leading crude customer, and the specter of two high-profile U.S. pipeline ruptures in the past year -- both on lines used to carry oil sands fuel -- is giving new momentum to the safety argument against diluted bitumen.

That case begins at sites such as ConocoPhillips Co.'s Surmont, where up to 27,000 barrels of oil are steamed from the ground and diluted with about 30 percent natural gas condensate before pipelines send them off for refining. The small percentage of sediment permitted to remain in that fuel is one of many characteristics unique to diluted bitumen, or dilbit, that worry environmentalists.

"One of the big problems is that there is very little information focused on dilbit," Natural Resources Defense Council (NRDC) attorney Anthony Swift said in an interview.

Dilbit comes in many forms, but all have yet to undergo the emissions-intensive upgrading that yields synthetic Canadian oil sands crude and most are blended with hydrocarbon diluents such as naphtha to decrease their viscosity. These variegated forms of dilbit can pose unforeseen chemical challenges, such as the potential to sink in water if spilled, according to greens, safety advocates and others wary of their effects on U.S. pipelines.

Because regulators at the ERCB, Canada's National Energy Board (NEB) and the U.S. Pipeline and Hazardous Materials Safety Administration do not specifically examine the effects of dilbit relative to synthetic or conventional crude, greens have had to compile whatever data is available from industry and governmental sources, Swift added.

Their conclusion was that on dilbit pipelines, "corrosion abnormalities are occurring faster than [companies] are able to correct them," he said, citing PHMSA warnings of 250 abnormalities and an inability to manage corrosion along an oil sands line that last year spilled an estimated 800,000 gallons of crude in Marshall, Mich.

What's more, remaining silicates within the regulatory limit of 0.5 percent mean that dilbit can put more stress on pipelines and increase internal corrosion prospects, said Nathan Lemphers, a senior oil sands analyst at the Canada-based conservationist group Pembina Institute.

Oil companies and ERCB caution that the lack of specific dilbit monitoring is a product of mechanical reality. Fuel is transported through pipelines in "batches" of different varieties, meaning that few if any pipelines are ensured of carrying only dilbit or syncrude, its upgraded and chemically disparate Canadian oil-sands cousin.

But opponents of Keystone XL counter that dilbit is expected to make up the bulk of fuel flowing through the proposed pipeline, which is at the center of a weeks-long White House protest and a months-long lobbying battle on the Hill.

And the dilbit accusations leveled by those foes in a report earlier this year that urged stronger safety standards for oil sands pipelines continue to draw scorn from industry as well as charges of excessive "emotion" from Liepert, the Albertan energy minister (Greenwire, Feb. 16).

NRDC and ERCB have opened a dialogue since that low point, McFadyen said, but the conservationists' attempt to brand dilbit as an acidic, sulfurous, sticky mess to transport still stings supporters of Canadian oil.

Boardroom frustration

Chief among the frustrated industry interests is TransCanada, where CEO Russ Girling can recite from memory the series of cases environmentalists have made against his company's pipeline: that oil sands emit more greenhouse gases than conventional fuel, that Keystone XL could raise prices at the pump in the Midwest and that the energy conglomerate Koch Industries could reap outsized benefits from its approval (E&E Daily, May 23).

The safety of shipping dilbit is simply "the latest issue that's been raised by opponents to create doubt and uncertainty with no factual basis for it," Girling said during an interview this month in his Calgary office. Any corrosion risks already are managed effectively, he added, and they come "not from inside the pipe, but from the outside."

ERCB's McFadyen agreed. "If you look at systemic issues the pipeline industry has faced over the last several years, internal corrosion is not a factor," he said.

Veteran pipeline engineer Richard Kuprewicz, a member of PHMSA's safety advisory panel who has worked for both TransCanada and NRDC, offered a different take.

"Both external and internal corrosion are a factor" in pipeline failures, said Kuprewicz, president of the consulting firm AccuFacts, and the state of current regulations governing the latter is "a little weak."

"Responsible pipeline operators, if they have internal corrosion risk, know what to do to manage that so it doesn't get out of control," Kuprewicz said.

TransCanada often cites 57 safety conditions it has agreed to for the XL link, including measures to verify the integrity of steel used in the 36-inch pipeline and underground burial of the pipeline at least a foot below federal standards. Those vows were touted this month by Secretary of State Hillary Rodham Clinton, whose department plans to make a final decision on the pipeline by year's end but derided as "smoke and mirrors" by Swift of NRDC.

Kuprewicz said that some, but not all, of the 57 would meet his benchmark for above-and-beyond risk management.

Regulators: America vs. Alberta

While ERCB manages only pipelines inside Alberta, the province's recent boom in oil sands production makes its regulator an influential voice on safety issues. In addition to ERCB's communications with NRDC, the agency is part of a dialogue among Canada's federal NEB, PHMSA and Mexican pipeline overseers aimed at sharing best practices on safety.

Several instructive differences stand out between pipeline regulators on both sides of the border.

Pipeline bills now advancing in Congress aim to give PHMSA greater power over noncompliant operators by increasing its maximum allowable civil fine. But ERCB opts against using its legislative power to levy financial penalties, which McFadyen said his agency does not consider "a particularly effective tool."

Instead, ERCB chooses to put pipeline companies' applications through a more rigorous review process as a deterrent, shutting down facilities or seizing assets in the most extreme cases.

Those U.S. pipeline safety reform plans also ask PHMSA to study specific concerns raised by dilbit transportation, the type of review not being considered by NEB and ERCB in Canada. American environmentalists want to see any approval of Keystone XL put off until that study is complete.

"We believe that there isn't an immediate need for this pipeline and there's no rush to build another tar sands line before our regulatory structure can ensure its safety," Swift of NRDC said, using greens' preferred synonym for oil sands.

TransCanada chief Girling told Greenwire that he would not oppose a PHMSA review of risks from oil sands crude even as he dismissed the need for it. "The whole thing is a nonissue," he said, decrying "this witch hunt [for risk] when the witch didn't exist to begin with."

Kuprewicz, the consultant with experience working for both industry and environmentalists, recommended that the oil sands industry face its skeptics head-on, "rather than just [saying] 'we don't have that problem'" with dilbit.

"This denial, it's not going over very well -- because I think some of these questions are fair questions," he said.

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