11/09/2011 01:25 EST | Updated 01/09/2012 05:12 EST

State Department mulls new route for Canada oil pipeline

CALGARY - A senior TransCanada executive says the Keystone XL pipeline project could be delayed for years if the U.S. State department reconsiders the route it takes through Nebraska on its way from Alberta to refineries in the southern states.

Many participants at public meetings this fall said they wanted Keystone XL to bypass ecologically sensitive areas in Nebraska, namely the Ogallala aquifer, which provides drinking water to eight states.

A U.S. official told the Associated Press on Wednesday that the U.S. State Department, which is involved because the pipeline would cross international borders, is now mulling a new route.

Such a route change would force Keystone XL to go through environmental and wildlife studies all over again, said Alex Pourbaix, president of energy and oil pipelines for TransCanada Corp. (TSX:TRP). So far the environmental review process has taken more than three years.

"There's no doubt that if we were asked to do that, I think it would a minimum of a one- to two-year delay," he said in an interview. Most studies can only take place during the summer, prolonging the process.

TransCanada is still operating under the assumption that the State Department will hand down its decision by year-end as expected, said Pourbaix.

But Wednesday's development — as well as news the department's inspector general will review the assessment process over conflict-of-interest concerns — has called that timeline into serious doubt.

"I guess it's always possible that there could be a political decision that could change that from above," said Pourbaix.

"But at this time we've got to go with what's in front of us, and if we see a delay or a proposal for a reroute, we'll obviously respond to that."

Pourbaix said a reroute would appease a few critics, but for most opponents, the broader goal is to undermine the Alberta oilsands.

"Although everybody wants to talk about Nebraska being the problem, let's face it: the real opponents of Keystone — and I think what is creating the pressure in the U.S. — is the opposition to the oilsands and the greenhouse gases that the environmental opponents suggest are represented," he said.

Mark Toner, deputy press secretary for the U.S. State Department, was pressed about the future of the pipeline at the daily news briefing on Wednesday.

"This is part of a broad process," he said. "We're looking at a range of issues. All of the issues that were raised during these public meetings are on the table."

When pushed further and asked if the State Department was considering not approving Keystone XL at all, he replied: "I think that's always something that's under consideration ... right now we're in this review phase and have not made a decision yet."

The rerouting decision would likely push a final decision on the pipeline past the 2012 presidential election. The issue has become a hot issue for President Barack Obama, who has the power to block or approve the project.

Ralph Glass, with Calgary oil and gas consulting firm AJM Deloitte said it's virtually "pre-destined" that Keystone XL will be delayed.

"It's too costly a decision politically," he said. "They're going into an election year, and it's a pretty critical election year, in my mind, in the U.S."

The Obama administration risks angering environmental supporters if he approves the pipeline and could face criticism from labour and business groups for thwarting jobs if he rejects it.

Glass said he believes Keystone XL will ultimately be approved as the U.S. looks to wean itself off crude imports from unfriendly countries.

The US$7-billion Keystone XL pipeline would carry crude from Alberta to refineries on the U.S. Gulf Coast, traversing six states along the way. Most of the volumes would be from Alberta's oilsands — deemed by environmentalists to be dirtier than other sources — but some capacity is set aside for crude from the Bakken region of Montana and the Dakotas.

Keystone XL an extension to an existing pipeline that currently delivers crude to the U.S. Midwest and Oklahoma. The so-called Base Keystone system was temporarily shut down Wednesday for "mechanical issues." TransCanada spokesman Terry Cunha said no oil spilled.

The National Wildlife Federation, one of the environmental groups fighting Keystone XL, said the shutdown underscores the dangers of building new crude pipelines.

"We need the president to take charge and fulfil his commitments to break our addiction to oil and reduce the pollution that is heating our planet," said Jeremy Symons in a statement.

Nebraska has been the epicentre of anti-Keystone XL sentiment recently. Along with potential moves at the federal level, the state legislature is weighing legislation to give it the power to force a route change.

A supplemental environmental impact assessment by the State Department last year — which served to push back a Keystone XL decision considerably already — looked at alternative routes and determined the current one is best.

So Pourbaix said he's puzzled as to why the administration would revisit the issue now.

"If there were reroutes that we were asked to consider, we obviously could potentially consider that. But let's also understand the main opponents to this pipeline are not satisfied by a reroute in any way, shape or form."

In the event of a delay, TransCanada doesn't see the economic rationale for Keystone XL changing one or two years out. Gulf refiners will still want to replenish falling volumes from Venezuela and the Middle East with crude from a friendly neighbour, and oilsands producers will still want a lucrative market outlet for their crude.

But potential customers may lose patience if the process drags on too long, said Pourbaix.

"I'd expect our shippers to stay with us. But as the years pile on, ultimately everybody obviously is going to have to consider other alternatives."

— With files from Lee-Anne Goodman in Washington and The Associated Press