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Keystone pipeline construction


Canada's oil sands companies have scored a major victory in their battle to win a bigger share of the American petroleum market, after the U.S. State Department gave an environmental thumbs-up to a pipeline expansion from Alberta to the world's largest refining hub on the Gulf Coast.

The State Department concluded TransCanada Corp. 's $7-billion Keystone XL pipeline will not have an undue environmental impact on air and water along the pipeline route, nor lead to greater greenhouse gas emissions.

Armed with the positive environment report, the State Department now has 90 days to make a "national interest" determination, that examines questions of environment, national security and the broader impact on the U.S. economy. It will also hold hearings in the states along the route of the pipeline.

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The Keystone XL project is seen as a critical link for Alberta oil producers to diversify their market beyond the U.S. Midwest into Texas, which houses the world's largest refining hub, one that is particularly suited to processing oil sands bitumen.

Although a senior department official insisted Friday that the ruling does not amount to a green light for the project, both supporters and critics of the pipeline described it as a major hurdle because most opposition focuses on the environmental risks.

Significantly, the State Department endorsed the more sanguine view of industry and the Canadian and Alberta governments about the oil sands' contribution to climate change, rather than the alarmed outlook of environmentalists.

The report concluded that the intensity of the oil sands' emissions is only moderately worse than oil now being consumed in the United States. And it noted that U.S. refiners are increasingly turning to heavier, dirtier sources of imported crude from Saudi Arabia, Venezuela and Colombia, while Canadian producers try to reduce the emissions intensity of the oil sands.

"Common sense seems to prevail, even in the U.S. – and they have realized that they really want more Canadian crude, which is the most friendly crude they can ever get," said Sveinung Svarte, chief executive officer of Athabasca Oil Sands Corp., which expects to produce bitumen for the U.S. market.

However, opponents of the deal – who have waged a high-profile campaign against the "tar sands super-highway" – insist the war is not over, although they concede they have lost a major battle.

"The State Department is ignoring the concerns of the public. The report is not objective and it is not thorough," said Danielle Droitsch, an analyst with the Natural Resources Defense Council in Washington.

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Opponents are hoping the U.S. Environmental Protection Agency, which had significant criticisms of the draft environmental impact statement, will withhold support for the final one.

"There's no doubt this is a major stage, but TransCanada still has several major hurdles before they can put shovels in the ground," Ms. Droitsch said. "And we shouldn't underestimate the enormous controversy over this pipeline and what's going to happen in the next stage of the national interest determination."

In the environmental impact study released Friday, the State Department said TransCanada needs to conduct more study – and possibly add more spill protection – around the Ogalla aquifer in Nebraska.

The Harper government and Alberta have lobbied heavily in Washington to win approval for the project, while Alberta Energy Minister Ron Liepert has warned that failure to build pipelines such as Keystone XL would leave the province awash in landlocked crude.

However, the State Department said that the Keystone XL pipeline is not critical to expansion of oil sands production – a conclusion that buttressed its assertion the pipeline would not lead to higher greenhouse gas emissions.

The U.S. government has promised a final decision on the pipeline by the end of November, and TransCanada expects to start construction early in 2011, with completion in mid-2013.

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The impact, both to the industry and to TransCanada, will be swift in coming. By 2013, when observers expect oil to start flowing, the company can expect a $370-million (U.S.) lift to its pre-tax, pre-interest earnings, First Energy Capital analyst Steven Paget has calculated.

By 2014, Keystone XL is likely to add just over $750-million in earnings before interest, taxes, depreciation and amortization (EBIDTA), according to BMO Nesbitt Burns analyst Carl Kirst. That will boost the company's overall earnings by 19 per cent over its 2010 results.

The U.S. government has insisted on 57 "special conditions" for Keystone, such as deeper trenches and more frequent inspections, that will go beyond normal pipeline safety regulations. But those additional requirements were expected and won't change the $7-billion construction price tag.

Mr. Kirst said the State Department's conclusions on Friday make it very likely the company will succeed in building the pipeline.

"Political risk is never zero," he said. "But you now have a three-year environmental review coming out as basically supportive. I don't see how the administration couldn't approve it."

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About the Authors
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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