Let me ask you something: What do you consider to be non-conventional oil?

Do you see a trillion barrels of oil shales? Or perhaps massive shovels dumping tons of oil sands into huge trucks at the surface mines in the Athabasca basin?

If I asked this forty years ago, most people would have pictured offshore drilling rigs pumping crude up from underwater oil deposits.

Today, however, offshore production is not only a conventional source for crude oil, but also one of the few areas where U.S. oil production is growing (the Bakken plays in North Dakota and Montana are another source that comes to mind).

But why should we be concerned about what is considered conventional oil or not?

I'll give you one reason: Section 526. More on that below.

Canada's Oil Sands: The Next Form of Conventional Oil?

To say the U.S. government is sending mixed signals to our Canadian neighbors would be an understatement. In 2006, the U.S. was practically begging Canada to ramp up its oil sands production.

Okay, perhaps "begging" may be too strong of a word, but how else can you describe it? Just two years ago (when oil was less than half of today's price of $108 per barrel), U.S. officials were asking the Canadian government to increase their oil sands production by fivefold.

That comes out to about five million barrels per day.

If anyone has a better way of phrasing the U.S.'s desire for Canadian heavy oil, I'm all ears. It's clear we were looking to switch our Middle East oil addiction with Canadian oil sands.

Now here's the $64,000 question: Why would news that is over two years old be of any consequence?

The fact is that production from oil sands has been increasing. Although it's not even close to the desired five million barrels per day, production from the Alberta oil sands is projected to be just under three million barrels per day by 2015. We can debate whether production will reach that target another time.

The U.S. Energy Independence and Security Act, signed last December, could be a roadblock for the oil sands. Section 526 of the legislation prohibits the U.S. government from obtaining transportation fuels with higher life cycle greenhouse emissions than conventional petroleum.

In other words, fuel from unconventional oil is unacceptable.

And that, dear reader, is the problem. That means no more oil sands. So does this legislation mean we should abandon all hope for the second largest oil reserve in the world?

Hardly.

Unlike conventional oil which is pumped out of the ground, there are two methods to extract oil sands. Either the oil sands are mined and the bitumen is separated, or the bitumen is heated up underground through in-situ methods and pumped out of the ground.

I don't think the U.S. is about to abandon oil sands. There's simply too much oil and interest invested to give up. This could mean the U.S. might reclassify the heavy oil as a conventional source of oil.

If you can't beat 'em, join 'em.

Meanwhile, Canada has been trying to persuade U.S. officials to see it from their perspective:

• The oil sands deposits are recognized by the U.S. Energy Department as having the second largest oil reserves in the world (second only to Saudi Arabia, assuming the Saudis are being truthful about reserves).

• Canada's oil is processed using the same facilities as conventional oil.

• This would undermine previous goals and investments stated by the U.S. government.

There are several ways the government can deal with Section 526, but I honestly can't see the U.S. backing away from Canadian oil sands. The honey pot is too big. Rather, I think new technology will become mainstream that make extraction methods cleaner and more efficient.

Don't believe me?

Well, I can understand if people are skeptical. Fortunately, there's another way you can reinforce your oil sands investments.

Securing Your Canadian Oil Plays

Many Alberta oil companies focusing on oil sands productions are expanding their operations to another emerging oil play. While developing the heavy oil in Alberta, your oil investments are also moving into the light oil plays of the Bakken Formation in Saskatchewan.

Right now, I would be looking for those companies with operations in both provinces. It's a win-win situation. If you're interested in finding some companies out, I'd suggest checking out the $20 Trillion Report.

As for the U.S. cutting off one of its only chances to relieve its dependence on Middle Eastern oil, I wouldn't count out the oil sands just yet.

Until next time,

Keith Kohl

www.energyandcapital.com

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

Follow the money trail. Sign up for Energy and Capital now.

Enter Your E-mail Address Below:

By signing up, you'll also get our latest report, The Truth About Oil.

Rule 526 appears like a government procurement rule that favours 'clean' fuels over dirty ones. Such a position won't stop Tar sands being produced but will result in a price differential favouring cleaner CO2 fuels.

Logistically it is difficult to see how the fuels will go any place other than the US (though possibly Europe) which simply reinforces the price discount. At over $100 per barrel this isn't going to matter.

Like the other comment, no worries for Canada, China will take it. The other factor is if the Dem's win the presidency and open up the free trade agreement...this will be bad news for US interests in the energy area. China will dictate what a new agreement will be.

I see no problem for Canada here - only for us. I'm sure China and/or India will be happy to take any oil that we refuse to buy. I agree with your view, however, we can't walk away from this much oil so close to us.