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Transcanada's Keystone pipeline.

TransCanada Corp. could break up its Keystone pipeline project, building only the leg that will deliver crude oil to the U.S. Gulf Coast, if it fails to win regulatory approval for its larger plan, which aims to expand Canadian oil exports to the United States.

The Calgary-based company expects to receive final approval from the U.S. State Department by the end of this year, but is encountering resistance from the Environmental Protection Agency and some members of Congress.

Keystone is a massive, multibillion-dollar project that is being built in four stages. The first two, which bring Canadian crude to Cushing, Okla., and to Illinois, are complete. The third, a 700-kilometre pipeline from Cushing, Okla., to Port Arthur, Tex., is one that U.S. and Canadian producers are eager to see built, because it will give them greater access to the vast refinery hub in Texas and Louisiana.

The fourth phase is a 1,900-kilometre line from Alberta to Nebraska. Together, the third and four phases are known as Keystone XL.

In a conference call on Tuesday, TransCanada executives said approval for Keystone XL could be further delayed if the State Department requests a new environmental impact statement, as critics are demanding.

Costs for the overall Keystone project have ballooned to $13-billion (U.S.) from $12-billion, as the result of the higher Canadian dollar, higher-than-anticipated construction costs, and delays in regulatory approval for the final two phases of the four-phase project.

TransCanada wants to build the Keystone XL to expand export capacity from Canada and link the land-locked Cushing hub with the Gulf Coast, from which North American producers expect to push out imports from Mexico, Venezuela and Saudi Arabia.

But the proposal has gotten bogged down in environmental debates in Washington over concerns about expanding oil sands production and potential threats to groundwater sources along the route.

In response to an analyst's question, Alex Pourbaix, TransCanada's president for oil pipelines and energy, said the company would consider proceeding with the Cushing-Texas leg on its own.

"That's obviously something we would consider," Mr. Pourbaix said. "Right now, we have put all of that together in the XL permit and we're very confident we're going to receive that permit. But in the incredibly unlikely event that we did not receive the presidential permit, we would consider decoupling it."

However, TransCanada chief executive officer Russ Girling quickly jumped in to defend the critical economic underpinning of the overall project. He said the Gulf Coast line - and another spur line connecting the prolific Bakken oil field to the Keystone network - may not be commercially viable if they are not part of the larger XL project.

Industry analysts say TransCanada can expect additional delays as differing factions within the Obama administration debate the environmental impacts versus energy security implications of the pipeline.

"In the interest of reducing U.S. energy dependence on the Middle East and elsewhere we see minimal risk that approval for the expansion will not be achieved," UBS analyst Chad Friess said in a research note.

However, a report prepared for the Department of Energy and submitted to the State Department said the Keystone XL project would create surplus pipeline capacity that would not be needed until 2020 at the earliest, and perhaps not until 2025 or 2030.

TransCanada reported its fourth quarter and year-end 2010 results on Tuesday, with annual profit rising to $1.36-billion from $1.33-billion. It has increased its dividend for the 11th consecutive year.

The company also took a $127-million writedown on a loan made to the Aboriginal Pipeline Group in support of the Mackenzie gas pipeline project, citing "uncertainties" about the commercial viability of the project and whether the loans would ever be repaid.

Mr. Girling said TransCanada remains optimistic that both the Mackenzie project and the Alaska gas pipeline - which it is leading - will eventually be needed to bring natural gas supplies to North American markets.

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