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In this Jan. 31, 2014 file photo, President Barack Obama speaks in the East Room of the White House in Washington.

Carolyn Kaster/AP

It's nine years and counting since the Keystone pipeline was first proposed and TransCanada Corp. is still waiting for presidential approval to build the line. An environmental assessment report from the U.S. State Department that landed last week would seem to move TransCanada's hopes forward, but the pipeline's ultimate fate is still very much in limbo.

The State Department concluded that the Keystone XL project won't lead to greater production from the oil sands and, by extension, more carbon emissions. Many see this overall assessment, which is more or less a restatement of earlier findings, as highly questionable. Indeed, just ask the oil industry itself how important new pipeline connections are to not only increasing production, but also the very commercial viability of the oil sands resource.

The report does envision scenarios in which oil sands development is curbed by a combination of lower oil prices and a lack of pipeline capacity. Ultimately, though, the State Department finds that an increase in the amount of oil moved by rail will allow new oil sands production to come on-stream whether or not new pipelines are built. The upshot, at least for the State Department, is that oil sands production will march ahead with or without Keystone. Environmental advocates, suffice to say, disagree.

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In any event, there won't be any cross border pipeline construction until President Barack Obama gives the okay. And no one knows when that will be or what he'll ultimately decide.

The President has proven to be a wily politician, particularly on the carbon front. Environmentalists were happy when he directed the Environmental Protection Agency to sanction tough new emissions standards for power generation that will effectively preclude any new coal-fired plants from being built. But he did so only after the advent of cheap shale gas had already rendered coal uneconomic, meaning many coal-fired plants would have been shuttered regardless of new rules from the EPA.

In a similar vein, the President has boldly attached a carbon standard to his approval of Keystone, but that only happened after a gush of domestic oil production made more volume from Alberta's oil sands redundant to the US market. Indeed, the US is so awash in oil that, even as Obama ponders his decision on Keystone, the American Petroleum Institute is working hard to remove restrictions on exporting crude that date back to 1975. The lobbying effort would only seem to bolster the credibility of claims by US environmentalists that the Canadian oil shipped through Keystone won't be burned by American motorists but instead shipped abroad for another country's benefit.

Regardless of the pipeline's ultimate fate, the Keystone saga highlights the enormity of the challenge that's ahead of oil sands producers. While Keystone's 830,000 barrels-a-day of throughput is significant, it's still only a fraction of the additional pipeline capacity that will be needed for producers to fulfill their expansion plans. The industry is targeting 5 million barrels a day of production within the next 20 years, an amount that it, as well as Prime Minister Stephen Harper, sees as inevitable.

Inevitability, though, is clearly in the eye of the beholder. To achieve daily production of 5 million barrels will require not just Keystone, but multiple versions of the pipeline.

According to the Canadian Association of Petroleum Producers, reaching 5 million barrels a day will require a green light for Enbridge's Northern Gateway Project and TransCanada's Energy East line, a doubling of Kinder Morgan's existing Trans Mountain Pipeline, as well as an expansion of the Alberta Clipper line – all in addition to Keystone. Even with those projects going ahead, the industry would still be shy about a million barrels a day of shipping capacity, a shortfall that CN, CP, and other railways would be expected to step in and cover.

Obama's decision on Keystone, though, is up first. Contrary to the opinion of the U.S. State Department, approving Keystone XL is indeed a necessary condition to increasing oil sands production. What happens if it doesn't get built? Canada's oil patch doesn't like to think about that scenario, but it's one that investors need to be considering.

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Jeff Rubin is a former chief economist of CIBC World Markets and the author of the award-winning Why Your World Is About To Get A Whole Lot Smaller as well as The End of Growth.

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