11/11/2011 11:50 EST | Updated 01/11/2012 05:12 EST

Keystone Pipeline Battle: Planners Underestimated Environmental Backlash


CALGARY - A U.S. decision to delay the Keystone XL oil pipeline could wind up killing it, Canada's finance minister warned Friday, as the line's sponsor accused opponents of peddling "mistruths and fear" about the project.

Jim Flaherty said the U.S. government's plan to delay the project for more than a year "is actually quite a crucial decision" that could derail the energy megaproject.

"I’m not sure this project would survive that kind of delay," Flaherty told Bloomberg, a business news service widely read on Wall Street and in American financial circles.

Flaherty's pointed remarks came as finance ministers gathered at the Asia-Pacific Economic Cooperation summit in Honolulu.

Meanwhile, the company behind the project, TransCanada Corp. (TSX:TRP), said it will work with the State Department to give it whatever information it needs, and that it is confident Keystone XL will be built eventually.

"What we underestimated was the mistruths and fear the professional activists and millionaire actors peddled to the American public," TransCanada spokesman James Millar said by email Friday.

The U.S. State Department said Thursday it would examine different routes Keystone XL could take through Nebraska to avoid the ecologically sensitive Sand Hills region and the Ogallala aquifer, which provides drinking water to eight states.

Keystone XL has already been through a more than three-year regulatory process — including studies of alternative routes — and the new work won't be complete until early 2013 at the earliest.

Canadian oilsands producers — and the federal and Alberta governments — had been banking on the Keystone XL line to carry millions of new barrels of oil to U.S. refineries from oilsands expansions now under way in northern Alberta.

Flaherty said Canada may need to look to other oil export markets — mainly by tanker to China and Japan — as a result of the U.S. delay.

"It may mean that we may have to move quickly to ensure that we can export our oil to Asia through British Columbia," Flaherty told Bloomberg.

He was referring to proposals like Enbridge Inc.'s (TSX:ENB) Northern Gateway pipeline across northern B.C. to the coast, which has also run into stiff environmental opposition.

TransCanada's Millar said the pipeline delay will hurt the American economy and deny badly needed jobs.

"The cheering you hear today from those against our project is disrespectful to the over 25 million Americans who are unemployed and would have found work building our project."

Most Americans, he added, would rather get their oil from Canada than from Saudi Arabia.

Prime Minister Stephen Harper described U.S. approval as a "no brainer" earlier this fall, when a decision was still expected to come by year-end.

Political and industry backers of the controversial pipeline — one of the biggest Canadian-U.S. megaprojects in years — were similarly confident shovels would hit the ground in the new year.

So when the U.S. State Department announced its delay, the reaction from Keystone XL supporters was dismay.

"Disappointed" was how the Prime Minister's Office, the minister of natural resources, the Alberta premier and Canada's biggest oil lobby group described their reactions.

Others, though, were not as taken aback.

"I'm surprised that the Canadian government is acting surprised about this," said Warren Mabee, with the Queen's University School of Policy Studies in Kingston, Ont.

"I don't think it was a no brainer."

The proposed US$7-billion pipeline would ship crude from the northern Alberta oilsands to the U.S. Gulf Coast, a major refining hub and a coveted market for Canadian oilsands operators, which include giants like Suncor, Imperial Oil and Shell.

It would also tap into U.S. oilfields along its 2,700-kilometre route from Alberta through several American states, providing a boost to the domestic energy industry.

The issue has galvanized the U.S. environmental movement more than any other in recent memory, spurring high-profile protests in Washington and uniting unlikely factions — from left-wing non-governmental organizations to conservative Nebraska ranchers to Hollywood actors — in opposition.

"People are concerned about these things, and the fact that our biggest customer is really questioning whether they should be building these projects really should be a signal to us that we should be thinking about how we're going to develop in the future," said Mabee.

The Natural Resources Defense Council was one of many environmental lobby groups to cheer the Obama administration's decision, and to declare Keystone XL dead.

"Both TransCanada and many Canadian politicians underestimated how strong the outcry in the United States has become, especially over the past few months," said Susan Casey-Lefkowitz, the NRDC's international program director.

Opposition to Keystone XL came from many fronts. Locally, there were concerns a spill could pollute the Ogallala aquifer in Nebraska, which supplies drinking water to eight states. More broadly, environmentalists were focused on what would be inside the pipe — oilsands crude they see as "dirty" and a major contributor to climate change.

TransCanada promoted its project through economic and energy security lenses. It said it would create thousands of jobs directly and indirectly and help wean the United States off oil imports from unstable regimes.

University of Alberta business professor Andrew Leach said he'd noticed TransCanada's top brass speaking with increased urgency about those issues, warning a delay could kill the project, and thereby nix for good opportunities for job-creation and more stable energy supplies.

"Obviously that wasn't enough to sway the day," he said.

Leach cautioned against jumping to the conclusion that U.S.-Canada relations are hopelessly marred after the delay, and that all future pipeline developments may suffer a similar fate.

"That's like taking the response to the 100-year storm and saying 'well, we should get off boats,'" he said.

He said several factors coalesced to result in the State Department's decision.

For starters, there's negative sentiment about the oilsands and concerns over the safety of energy development in general. At the same time, an overwhelming Not-In-My-Back-Yard sentiment prevailed in Nebraska.

And all this was taking place against the backdrop of the Occupy movement, which has focused its ire on big business' misdeeds.

While Wall Street tops the list of Occupy targets, Big Oil isn't far behind.

Leach said Keystone XL was also unique in that it crosses an international border, and needs a presidential permit to be built.

As such, top U.S. politicians — including President Barack Obama himself — had a hand in the decision making. As he seeks a second term in next year's elections, political expediency may have come into play more than would have otherwise been the case.

Mabee, the Queen's professor, also said a number of recent developments added fuel to the anti-Keystone fire.

The catastrophic BP rig explosion in the Gulf of Mexico and the Enbridge pipeline leak in Michigan last year made many Americans wary of energy development, he said. And though the Occupy movement and the anti-Keystone movement are ostensibly about two different things, they tap into the same basic themes.

"We have a huge generation coming up that feels like they're not really connected to what's going on, that the decision making power has been taken away, that their politicians are useless."