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(Adds dropped word "imports" in 12th paragraph.)
* Canada lobbied against previous labelling proposal
* Policy includes method for distinguishing various fuels
* Member states to debate the proposal
By Barbara Lewis and Scott Haggett
BRUSSELS/CALGARY, Oct 7 (Reuters) - A European Union plan tolabel Canadian tar sands oil as highly polluting as part of itsfight against climate change has been abandoned after years ofopposition from Canada, clearing the way for exports of tarsands crude to the European market.
A proposal published by the European Commission on Tuesdayremoves what could have been an EU obstacle to shipments of thecrude and comes at a time when tensions between the EU and itstop oil supplier, Russia, are running high.
EU sources, speaking on condition of anonymity, said thatgiven the situation with Moscow, the desire for a trade dealwith Canada had been a factor in the commission's move to removethe "dirty oil" tag.
Canada and the EU have been working on a trade deal forseveral years. EU officials have said a final pact is expectedto be signed next year and become effective in 2016.
The commission also had been lobbied heavily by Canada andCanadian allies such as the United Kingdom. Canada sees Europeas a potential market for rising production from the tar sandsof northern Alberta, the world's third-largest crude reserve.
"It is no secret that our initial proposal could not gothrough due to resistance faced in some member states," EUClimate Commissioner Connie Hedegaard said in a statement
Instead of singling out Canadian oil sands crude as highlypolluting, the commission's new proposed fuel quality directive(FQD) requires refiners to report an average emissions value ofthe feedstock used in the products they produce. The proposalconfirms a draft seen by Reuters in June.
"We support the FQD's intent to reduce transportationemissions, but believe it should be based on science and thefacts," Canadian Natural Resources Minister Greg Rickford saidin a statement on Tuesday.
Extracting tar-like bitumen from the oil sands requiresdigging in open-pit mines or blasting with steam and pumping itto the surface, meaning it uses more water and energy and emitsmore carbon dioxide than conventional crude production.
Canada currently exports minimal amounts of tar sands crudeto Europe. TransCanada Corp, however, is proposing aC$12 billion ($10.7 billion) Energy East pipeline that by 2018would take 1.1 million barrels per day of Western Canadian crudeto Atlantic ports, from which it could be shipped to Europeanrefineries.
Canadian oil companies have already taken tentative stepstoward accessing the European market. Last month, Suncor EnergyInc, Canada's largest tar sands producer, shipped itsfirst ever tanker of Western Canadian crude to Europe from thecountry's east coast.
The European market for heavy crudes from the oil sandswould not be large, analysts say, representing just 485,000barrels per day in a refining market that processes imports of about 10 million barrels daily. The heavy crude market iscurrently supplied by Mexico and Venezuela.
"It's not a very big part of the market," said JackieForrest, vice-president at ARC Financial Corp. "But there is amarket there that can accept heavy crudes and, when you thinkabout transportation distances ... it's pretty economic to shipcrude there compared with the Venezuelans and Mexicans."
The European Commission's revised plan still proposes amethod to assess the pollution levels of various fuel types overtheir life cycles and the commission said it would proposeaction if these were incompatible with climate goals.
"The commission is today giving this another push, to tryand ensure that in the future, there will be a methodology andthus an incentive to choose less-polluting fuels over morepolluting ones like, for example, oil sands," Hedegaard said.
Environmental campaigners and green politicians criticisedwhat they saw as a step backwards. Greenpeace accused theEuropean Commission under outgoing President Jose Manuel Barrosoof putting trade deals ahead of the environment.
"This should be a lesson to (Commission President-electJean-Claude) Juncker and his team. Public opposition will onlyintensify if he allows trade deals to be used to undermine theEU's environmental legislation," said Greenpeace EU energy andtransport policy director Franziska Achterberg.
Oil sands crude is produced by oil majors such as BP,Royal Dutch Shell and ExxonMobil and productionfrom the region is expected to rise by nearly 70 percent to 3.2million barrels per day by 2020, according to industryforecasts.
In the context of the Ukraine crisis and concerns aboutEurope's energy security, Canada had argued that Europe shouldembrace it as a secure source of oil.
European refining lobby group FuelsEurope welcomed the newproposal as "a simple and effective methodology" that would helpsafeguard the sector's competitiveness.
EU member states will now debate the proposal under afast-track procedure meant to take less than two months. It willalso require a sign-off from the European Parliament.
($1=$1.12 Canadian) (Additional reporting by Scott Haggett in Calgary; Editing byJason Neely, Jeffrey Hodgson and Peter Galloway)
