CALGARY -- In response to concerns that new U.S. environmental legislation will drastically impact development of Canada's oilsands, Washington is considering classifying oil produced from the region as "conventional" fuel rather than subject it to the stringent standards expected of "alternative" fuels.

The U.S. government passed a law that prohibits federal procurement of alternative fuels that generate more greenhouse gases than "conventional sources," which spurred a warning last month from Canada's ambassador to the United States, Michael Wilson. Mr. Wilson said a narrow interpretation of the legislation would include the vast deposits of the oilsands -- where U.S. firms are major investors and the U.S. government is a major customer.

An interdepartmental working group with representation from several U.S. agencies is looking into how to classify the Alberta deposits under the new rules, said a source who suggested the step was taken because "D.C. does not want to hammer" the region.

Mr. Wilson's letter to several senior members of the U.S. administration -- including Robert Gates, the Secretary of Defence, and Condoleezza Rice, the Secretary of State -- outlined concerns with the Energy Independence and Security Act 2007, passed in December.

"The U.S. government would be seen as preferring offshore crude from other countries over fuel made in part from U.S. and Canadian sources," Mr. Wilson argued. "Further, the U.S. government would be contradicting other stated goals to encourage greater biofuels use and Canadian oilsands production."

The letter also warned of unintended consequences for both countries if it compromised the oilsands, which are a key supplier to U.S. military and postal fleets.

The rationale for classifying the oilsands as conventional oil is that, unlike alternative fuel sources, the deposits are well established, yielding more than one million barrels a day and likely to produce more than three million barrels a day by the middle of the next decade. As such, they are no longer "a science experiment," as one source put it.

A decision is expected this spring.

The administration of George W. Bush has encouraged oilsands development from its early days to help reduce U.S. dependence on Middle East imports. U.S.-based companies such as ConocoPhillips, Chevron Corp., Exxon Mobil Corp. and Devon Energy Corp. are among the deposits' biggest investors.

The legislation and new low-carbon fuel standards adopted in California are seen as major setbacks for the oilsands industry because they restrict the market for its oil, all of which is exported to the United States. A major worry is that such rules could have a domino effect and be adopted in other jurisdictions.

In his Feb. 22 letter, Mr. Wilson argued that Canada does not consider oil extracted from the oilsands as alternative fuel. "Oil produced from the oilsands, like oil from other sources, is processed in conventional facilities," Mr. Wilson wrote, noting that it would be difficult to identify fuel on the U.S. market that was 100% extracted by conventional means.

Mr. Wilson also notes that the U.S. administration recognized the oilsands as part of the mainstream when 174 billion barrels of oilsands reserves were included by the U.S. Department of Energy in its annual tally of proved world oil reserves.