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Keystone XL all but dead as special investigation is announced

The US State Department has a tack in its left hand and a hammer in its right. The final nail in Keystone XL’s coffin is about to be struck

President Barack Obama promised a decision on the Keystone XL pipeline from Canada’s oil sands to the US Gulf coast by the end of the year. On Monday he gave one, but it wasn’t what TransCanada or the pipeline’s backers expected.

This week, the US State Department announced a “special investigation” of the $7 billion pipeline – the day after a collection of Hollywood movie stars and activists encircled the White House in protest against the line, which would move almost 1 million b/d of Canadian crude to refineries in Texas. In doing so, the administration has signalled that rejection of the planned pipeline is all but a formality.

According to the New York Times, officials said the review would “determine to what extent the department and all other parties involved complied with federal laws and regulations”, in an agonising regulatory process that has already run for more than 38 months.

At the same time, Reuters quoted anonymous sources suggesting any formal decision could be delayed well past presidential elections in November next year. Even Obama said last week that the decision to approve the line, which crosses international borders, would be his to make, based on “public health” concerns, in addition to economics and national-security interests.

False hope

Canadian officials, including prime minister Stephen Harper, said they remain cautiously optimistic that Keystone XL will be approved. But it’s a false hope. Washington insiders told PEU earlier this summer that Obama was unlikely to reject the pipeline outright and would instead seek to impose intolerable delays to block its construction. The “special investigation” is just such a block.

With more than 1 million b/d of new oil-sands production set to come on stream by 2020, producers – including US supermajor ExxonMobil – need contractual certainty to ensure markets for those volumes. They are unlikely to wait for next year’s election to find commercial alternatives. That fact alone will all but kill the project.

Representatives of TransCanada, the project leader, insist the review will give the chance to dispel criticism, but the company’s tone is growing desperate. TransCanada is increasingly frustrated by what it sees as objections that have little to do with operating a pipeline. Chief executive Russ Girling has complained that TransCanada has become a scapegoat for the oil-sands industry. Last month, Girling said rejection of Keystone would be a “lose, lose, lose” for North American energy markets as Canada would be forced to turn to more willing buyers – such as China.

Even before the latest review was announced, company spokesman James Millar railed against “millionaire actors and professional activists” that seem to prefer oil from the Middle East and Venezuela filling US cars. “As the Washington protestors fly home, they will forget about the millions of Americans who can’t find work. Opponents can trivialise the jobs the largest energy infrastructure project on the US’ books will create. We know the 20,000 Americans we would put to work building Keystone XL feel differently,” he said.

Nothing to gain

But the latest developments suggest Obama feels otherwise. Politically, he has nothing to gain by approving Keystone XL – the pipeline’s backers are unlikely to vote for him even if he does. But it would also alienate his activist base, which has threatened to withhold support – and cash – if the link goes ahead.

As well as the reticence shown by the federal government in Washington, the state government in Nebraska has convened a special legislative session to consider ways to force TransCanada to change the route of the pipeline away from sensitive ecological areas.

Governor Dave Heineman claims he is not opposed to Keystone XL itself, but to the pipeline’s route. Bloomberg TV reported that the State Department supports his position. Given that re-routing the pipeline around the Ogallala aquifer would require two more years of engineering, it’s a moot point. And it isn’t going to happen.

Pyrrhic victory

The pipeline’s opponents clearly smell blood, but it may be a Pyrrhic victory. They are equally naive to think there won’t be negative consequences. With the latest dithering, the US is showing itself to be an unreliable partner and ally, a move which will further fuel anti-US sentiment north of the border.

Calls will grow louder in Canada to court China as a counterweight to the country’s overwhelming reliance on the US as a sole buyer for its rising oil production. With $20 billion of upstream investments in Canada over the past two years, China has already shown it is more than willing to look to Canada for supplies.

Canada and the US enjoy the largest trading relationship in the world and, despite occasional disputes over issues such as softwood lumber, the death of Keystone XL would be a huge blow to bilateral relations, underscoring Canada’s urgent need to diversify export options. It’s not just oil that’s at stake, a century of economic and social interdependence is likely to suffer irreparable harm.

Even the Financial Times opined in a Monday editorial that persistent opposition to crude from the oil sands – both in the US and the EU – is misguided, even if there are legitimate concerns over greenhouse-gas emissions. It recognised that the risks of the pipeline itself are completely manageable and that rejection of Keystone XL would serve only to antagonise a stable and friendly neighbour.

No way to stop the oil sands

And if XL’s opponents think stopping the pipeline will halt development of the oil sands, they are mistaken. The pace and scale of expansion may slow, but it will not stop. Both the federal and Alberta governments have said they will press ahead in the oil sands, as Canada strives to become a global energy superpower.

The biggest victims of XL’s rejection will be the thousands of unemployed workers in the US, which is already teetering on the verge of a double-dip recession. Texas – the destination of the pipeline – has some of the highest unemployment rates in the nation, especially in the refining centres along the Keystone route: Port Arthur, Beaumont and Texas City, which are blighted by the effects of poverty and recession.

And blocking Keystone will do nothing to reduce the US’ need for 10 million b/d of oil imports – 60% of consumption – to keep its economy running. According to T Boone Pickens’s blog, the US spent $36.4 billion on September imports alone – equating to almost $500 billion this year – at a time when the federal government is staring down record budget deficits.

A day late and a dollar short

Rejecting Keystone XL will placate celebrity campaign donors, but it will also boost profits for Opec producers, at great cost to the US heartland. Little wonder that a coalition of US construction trade unions complained this week that “Hollywood’s elite 1% should stop flying to Washington and speaking out against jobs that help the other 99% of America” and urged supporters to petition in favour of the pipeline.

But it may already be a day late and a dollar short. The Obama administration has its sights set on the November 2012 elections and has signalled that it won’t be swayed by anything other than emotional politics and photo-opportunities with celebrities. Obama may do well to get their autographs while he can.

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