Market News

 January 29, 2014
Keystone: Why the wait?

 The Obama administration is nearing a crucial milestone in its review of the proposed Keystone XL oil pipeline, but one vexing question remains: What took so long?

It's been more than five years since pipeline developer TransCanada first asked for a permit for the Alberta-to-Texas pipeline, and 10 months since a State Department draft study said the project would have a negligible effect on the environment. And still Keystone remains in limbo, complicating any message President Barack Obama may want to send about climate change or energy independence in Tuesday's State of the Union address.

Green activists want Obama to reject the pipeline as a threat to the Earth's climate. Republicans, pro-oil Democrats and some labor groups want him to embrace it as a tool for energy independence and jobs. But a host of factors have stood in the way of an up-or-down decision --- including an unprecedented level of gamesmanship among both political parties, environmental groups, the oil industry and the Canadian government, as well as the huge scale of the project and rapid changes in North America's oil markets.

Politically, the pipeline has become a seemingly intractable dilemma, pitting important parts of Obama's base against each other.

Some pieces of the mystery may clear up in the next few weeks, when the State Department is expected to issue a final environmental analysis of the project. But after that, it could still take months for the administration to reject or greenlight the pipeline.

Grumbling among many Keystone supporters has increased in recent weeks, while others are just puzzled.

"I have always felt that Keystone is ultimately going to be approved," said former Sen. Byron Dorgan, a Democrat from North Dakota, one of the states the pipeline would run through. "But I'm surprised that it's taken this long."

People who have met privately with State Department officials about Keystone say the agency has told them little about how the environmental analysis is progressing.

The department has declined to offer details about what's holding up the review, other than to say it's still going over the 1.2 million public comments it received last spring. Secretary of State John Kerry said this month that the environmental report should be issued "before long," though he offered no specifics.

But several sources indicated the environmental report is coming soon. Industry and Canadian officials say they expect the report to be released shortly after the State of the Union. The American Petroleum Institute said it could come as soon as later this week.

TransCanada CEO Russ Girling said on Monday that he also believes the report will be issued "relatively soon."

"Our understanding is that the State Department has pretty much finished their environmental review process. They have reviewed all the comments," he said, adding that the number of questions the department is asking his company about the pipeline has slowed to a trickle in recent weeks.

After issuing the environmental report, the State Department moves to the final stage of its review, including determining whether the project meets the broader national interest. There is no statutory deadline for making a final decision.

But not everybody thinks the department needs to hurry. Many environmental groups reject the notion that the pipeline review has dragged on.

"This is a pipeline that bisects America," said Kate Colarulli, associate campaign director at the Sierra Club's Beyond Oil campaign. "It pretty much bisects North America. The carbon consequences, the size and the scope, the thousands of Americans who would potentially be impacted, no one in their right mind would want this to be a snap decision."

Here are some factors that have helped make Keystone such a long-running affair.

1) It's complicated

One reason State is taking so long: The environmental analysis will have to withstand scrutiny from greens and the oil industry alike.

The department won't say what it's been doing behind closed doors for months. But Girling said many of the department's questions to TransCanada have focused on two issues: pipeline safety, and whether Canada would develop its oil sands even without Keystone.

The second issue is a crucial one for the pipeline's opponents, who have warned that approving Keystone would result in a massive expansion of production in western Canada's oil sands, unleashing disastrous amounts of greenhouse gases.

But in a much-debated section of its 2,000-page March environmental draft, the State Department said the Keystone verdict would have little effect on Canada's decision to ramp up oil production. That will happen "with or without the proposed project," the department said in a passage that Keystone supporters say sucked the wind out of greens' argument that the pipeline would worsen climate change.

Oil industry officials long argued that if TransCanada can't build a pipeline south, the Canadian oil will simply enter the U.S. by rail. The department's draft analysis largely echoed that sentiment. And in the past year, rail transport of crude oil has indeed soared.

But fiery derailments involving trains carrying crude oil from North Dakota's Bakken region, including one in North Dakota in December and a deadly explosion in Quebec last summer, have raised questions about the viability of rail as an alternative. For some Keystone supporters, the crashes offer a reason to build pipelines --- a safer option. For some environmentalists, though, they undercut the argument that Keystone isn't essential to the oil sands' future.

Analyzing these kinds of questions isn't easy, several experts said.

"It's a process that takes time," said Amy Myers Jaffe, an energy expert at the University of California at Davis.

"Oil markets are complicated," said Danielle Droitsch, Canada project director at the Natural Resources Defense Council. "And it's absolutely overly simplistic to say that this pipeline wouldn't have an environmental impact."

In another complication, Keystone opponents have raised questions about ties to the oil industry by a contractor working on the State Department analysis. The department's inspector general has promised a report on that issue early this year.

2) Blame it on politics

The fierce political warfare over Keystone hasn't hastened the administration's decision-making. If anything, it may have prolonged it.

TransCanada officials say they had no idea Keystone would become so controversial when the company first applied for a permit in 2008. But environmental groups and other activists soon made defeating the pipeline one of their top priorities, a fight that ramped up after their hopes for broad climate legislation died in Congress.

Greens, led by newcomers like the climate group 350.org, organized protests urging Obama to reject the project, including sit-ins outside the White House that led to more than 1,000 arrests. Meanwhile, pipeline supporters launched an aggressive counter-offensive, with House and Senate Republicans forcing votes on pro-Keystone bills.

Soon, supporters and opponents of the pipeline were pouring millions of dollars into advertising and lobbying. TransCanada launched a $1.1 million multimedia ad campaign last fall, while billionaire anti-Keystone activist Tom Steyer's PAC spent about $1 million on four television ads timed for the Sunday talk shows last year. Steyer also bankrolled an anti-Keystone ad set to run on Tuesday, both before and after the State of the Union.

At the same time, the Canadian government orchestrated an extensive pro-Keystone lobbying campaign that has included personal appeals to Obama from Prime Minister Stephen Harper. Canadian Natural Resources Minister Joe Oliver, Canadian Foreign Affairs Minister John Baird and Alberta Premier Alison Redford have all made frequent trips to Washington to tout the pipeline.

"This has been perhaps the most studied natural resources project in the history of the world," Oliver said in an interview.

The project's first major delay came in November 2011, just as it appeared that Obama would have to disappoint one of his key constituencies --- either greens who oppose Keystone, or labor unions that support it --- before the 2012 elections. Instead, the State Department said it needed to postpone its decision until at least 2013, citing the need to study alternative pipeline routes amid concerns about an environmentally sensitive region of Nebraska.

House Speaker John Boehner criticized the delay as a "thinly veiled attempt to avoid upsetting the president's political base before the election," while the State Department insisted that "this is not a political decision." Whatever the reason, the delay shielded Obama from the political fallout, at least for a while.

A second postponement came after Republicans tried to speed the pipeline's approval by passing a bill that included a 60-day deadline for Obama to decide. Obama rejected TransCanada's application in January 2012, saying Republicans had imposed an "arbitrary" timeline that didn't allow a full review of the facts.

But he said TransCanada could reapply, which it did in May 2012.

Some long-time Keystone watchers have said the pipeline might have been approved by now if the GOP hadn't gotten involved. But Republicans have hinted they may try again by attaching pro-Keystone language to legislation to raise the debt limit.

"There's already been discussion of that as a possibility," Sen. John Hoeven (R-N.D.) told reporters this month.

3) Let's make a deal?

Another possible reason for the long wait: The Obama administration may be holding out hope that Canada will agree to tighter environmental standards if the U.S. approves the pipeline.

Obama appeared to open the door to a bargain last summer, when he told The New York Times that Canada "could potentially be doing more" to counteract the oil-sands region's greenhouse gas emissions. Harper later wrote to Obama proposing stronger efforts to tackle climate change in exchange for approval of the pipeline, and Canadian officials including Oliver have said the country is willing to work with the U.S.

David Gordon, a former Bush administration State Department official, said he expects a Keystone approval to come packaged with a broader agreement between Canada and the U.S. to reduce the environmental impact of oil sands production.

"It's likely to be approved and coincident with it, there's going to be some joint U.S.-Canada environmental initiative that will placate critics from the environmental community," said Gordon, who is now head of research and director of global macro analysis at the Eurasia Group.

But would greens go for such a deal? At least some certainly would not.

"There's no possible way to mitigate the emissions from the dirtiest oil on the planet," Daniel Kessler, spokesman for the climate activist group 350.org, said last summer. "You can't plant enough trees to make up for that."