Environmental groups redouble efforts to block U.S. Keystone expansion

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U.S. opponents of TransCanada Corp.'s Keystone XL project are seizing on the growing distress in Canada's oil patch as evidence that lack of pipeline capacity can strangle oil-sands expansion and limit the growth of greenhouse-gas emissions in Alberta.

The battle over the future of the 3,000-kilometre pipeline is heating up as President Barack Obama prepares to be sworn in for his second term with climate-change hawk John Kerry as the new Secretary of State who will be responsible for overseeing the pipeline application.

On Thursday, environmental groups will release new reports that argue the lack of pipeline capacity is driving down Canadian crude prices and will, if new projects aren't built, discourage investment in the oil-sands sector.

The reports from the Pembina institute and Oil Change international echo a number of recent reports from investment analysts who underscore the importance of the Keystone XL pipeline to the industry's future.

"The pipeline capacity issue in Canada has become much more pronounced – the limitations around pipeline capacity," said lawyer Danielle Droitsch of the Natural Resources Defense Council, which is hosting a news conference to release the reports. "We are looking to bring attention to the fact that this [KXL] pipeline is a major driver to the tar-sands expansion plans."

In a letter released Tuesday, 18 climate scientists urged Mr. Obama to reject the Keystone XL pipeline, which would carry one million barrels a day of oil-sands bitumen from Alberta to the refinery hub on the U.S. Gulf Coast.

Noting that the U.S. just recorded the hottest year in its history, the scientists said the construction of the pipeline "would run contrary to the national and the [planetary] interests."

In its first environmental-impact statement on the Keystone project, the U.S. State Department determined that construction of the pipeline would have little impact on greenhouse-gas emissions because the industry would find other means to get the growing supply of crude to market.

Mr. Obama decided in November, 2011, to delay a final decision on the pipeline over concerns about the impact on an environmentally sensitive area in Nebraska. The administration told TransCanada to work with the state government to come up with a new route. It then turned down the proposal when forced by Republicans in Congress to make a decision before that rerouting was completed.

But TransCanada reapplied and has completed the rerouting, expecting approval from Nebraska in weeks. That will shift the battle back to Washington, where activists are hoping to force the State Department under Mr. Kerry to revisit the climate issue.

TransCanada spokesman Shawn Howard said there is "nothing new" in the activists' argument, and the company is hopeful for a speedy process from the U.S. government.

Former State Department official David Goldwyn said he would be surprised if the government came to a different conclusion than its initial finding that the pipeline would not result in higher greenhouse-gas emissions. At the same time, the U.S. is not looking to regulate emissions that occur in Canada, said Mr. Goldwyn, now an energy-industry consultant.

While the Gulf Coast – with its 2.4 million barrels per day of heavy-oil refining capacity – is a premier destination for Canadian producers, there may be more than one way to get it there, said Jackie Forrest, a Calgary-based analyst with IHS CERA.

While the lack of pipeline capacity has driven Canadian crude prices dramatically lower than U.S. benchmarks, the industry expects those differentials to disappear over the next couple of years with the addition of more transportation capacity, including plans by TransCanada rival Enbridge Inc. to expand its U.S. network.

"Our view is that the prices for Canadian producers are going to be discounted until you see Keystone XL and the Enbridge system built in 2014 or 2015," Ms. Forrest said.