Skip to main content

Demonstrators march with a replica of a pipeline during a protest to demand a stop to the Keystone XL tar sands oil pipeline outside the White House on Sunday, Nov. 6, 2011, in Washington.Evan Vucci

Keystone XL has been dealt a potentially fatal blow after the U.S. State Department told TransCanada Corp. to come up with a new route for the contentious pipeline.

The State Department, which is overseeing the permitting process, said it wants TransCanada to avoid the Sand Hills, a fragile environmental area in Nebraska. Doing that will require working through a supplemental environmental impact statement, a process that could take until early 2013 to complete.

TransCanada said it remains confident the pipeline will be approved, suggesting work it has already done could "help expedite the review process" of establishing a new route through Nebraska. But the delay threatens to extinguish a project that has been years in the making, providing shippers an opening to abandon the pipeline.

U.S. refiners, in particular, will "look at this and they will immediately turn to say, we will go elsewhere," warned Jack Gerard, the president of the American Petroleum Institute. "It sends a chilling effect to the entire industry. And what it says is you can't rely on the legal processes to make a timely decision."

TransCanada, whose shares are down almost 9 per cent in the past two weeks, has poured tremendous resources into preparing for Keystone XL, which it can now begin building at a moment's notice. It has spent $1.9-billion to secure land and parts – great quantities of which are sitting in warehouses, waiting to be installed. It had hoped for an approval next month.

Now, however, the outlook for the project is growing dimmer.

That creates serious concern for Canada's oil producers, which are just years from running out of room on existing pipelines for their product. Without more pipelines, the oil sands face being forced to slow growth, a possibility that has broad ramifications not just for Alberta, but the entire country.

TransCanada now faces a fight to keep Keystone XL alive. Underlying the $7-billion pipe are a series of long-term contracts with shippers – both producers and refiners – who have agreed to ship certain volumes on the pipe.

But a template of those agreements filed with the National Energy Board shows that shippers have an exit they may be able to access. If, by the end of this year, TransCanada cannot prove it will have oil flowing through Keystone XL by Dec. 31, 2013, shippers can provide 30 days notice and dump their contracts.

TransCanada has said that it will take two years to build the 2,763-kilometre pipeline, which is intended to pump up to 830,000 barrels a day of crude to the Gulf Coast from the oil sands and the northern U.S. It seems unlikely TransCanada will be able to file the new route and still complete construction in two years.

The crucial question now is whether shippers will bail on the pipeline, or stick with a project they have built business plans around. Legal sources suggested TransCanada will immediately work to negotiate an extension of the completion date requirement – if it has not already done so. At least one of the pipeline's supporters, Valero Energy Corp., said in a statement that it "continues to support the Keystone XL pipeline project, and we feel it makes too much sense not to approve."

Paul Reimer, senior vice-president of marketing, transportation and power for Cenovus Energy Inc., said he continues to "believe it is an important artery out of Alberta." He declined comment on whether Cenovus will consider pulling out, saying, "Keystone XL is still a reasonable and rational and appropriate route for the producers and, I think, for the U.S. energy needs."

TransCanada itself, however, made reference to the potentially ominous implications of the delay. Killing the pipe "would be a tragedy," chief executive officer Russ Girling said in a statement.

"If Keystone XL dies," he said, "Americans will still wake up the next morning and continue to import 10 million barrels of oil from repressive nations, without the benefit of thousands of jobs and long-term energy security."

For Canada's energy industry, any uncertainty over Keystone raises troubling questions about its future. Keystone XL had been tapped as the favoured route to expand Canada's oil exports to the United States. With the project delayed, other efforts to shuttle crude south, as well as to the West Coast, will now attract more attention, said Greg Stringham, a vice-president at the Canadian Association of Petroleum Producers.

"We need to be very active at putting the other alternatives ... under enhanced attention and get started on them earlier and push them much stronger," Mr. Stringham said, noting that he still thinks Keystone XL will ultimately succeed.

Yet it's clear the delay is a major setback for Canada's industry, which like many in the U.S. suggested politics is at play.

"It seems to have turned into a hot potato that President Obama doesn't want to touch until after the election," said Chris Seasons, president of Devon Canada.

The State Department denied any political involvement, saying the White House did not push for the decision. Instead, it referred to the increasingly angry insurgency in Nebraska, where everyone from ranchers to the Republican Governor argued that the pipeline should be moved away from the Sand Hills.

"The concerns of the people are a legitimate factor to respond to," State Department Assistant Secretary Kerri-Ann Jones said Thursday afternoon.

Industry had steadfastly supported Keystone XL, saying its importance should make it the primary focus for exporters. Now, however, executives are shying away from that stance, stating that their fortunes do not rest solely with Keystone XL.

"The delay – and I'll call it a delay – of a year, is not catastrophic to the industry," Mr. Seasons said. "We're a creative industry and there are alternate routes."