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TransCanada's Keystone pipeline.

The U.S. State Department has rejected key arguments of opponents of TransCanada Corp.'s Keystone XL pipeline, setting the stage for the likely approval of the project later this year.

In a draft environmental impact statement issued Friday, the department highlighted the growing demand for a "stable and reliable" source of Canadian crude oil for U.S. Gulf Coast refiners who now rely heavily on imports from offshore.

And it noted that the rejection of the XL pipeline would increase incentives for Canadian producers to pursue alternative new export markets in rapidly growing Asian countries by way of new or expanded pipelines to the West Coast.

Amid soaring oil prices, the U.S. is seeking ways to reduce its reliance on supply from unstable countries. War and revolution in the Middle East have underscored how vulnerable overseas crude markets are to political upheaval. The Obama administration has said the U.S. will look to imports from "secure" sources like Canada and Mexico as it also switches to cleaner fuels that produce less greenhouse gas emissions.

The Gulf Coast is the world's largest refining centre, processing five million barrels of crude oil per day. Canada is now shut out of that market with virtually no pipeline access for its growing oil sands production. The largest suppliers are Mexico, Venezuela, Saudi Arabia and Nigeria - and the State Department noted concerns about the reliability of each source, with the possible exception of Saudi Arabia.

There is a growing need among Gulf Coast refiners for Canadian crude, the report said. "This market demand is driven by the need of refiners to replace current feedstocks of heavy crude oil obtained from other foreign sources with crude oil from a more stable and reliable source," it said. Even if the U.S. succeeds in reducing its demand for crude, oil sands supply will be needed in the Gulf Coast market, it added.

TransCanada said it received a copy of the 900-page report late Friday and could not yet comment on it.

"We're pleased that the process continues to move forward," company spokesman Shawn Howard said. "This is in keeping with the State Department's commitment to have a decision on the permit by the end of the year."

Opponents will now have 45 days to comment on the draft environmental impact statement, and then the department will decide whether to issue a permit for the cross-border pipeline.

Environmental groups condemned both the report and the short comment period. They had urged a 120-day delay with full public hearings along the pipeline route, where many residents are opposed to the project.

"It's been a concern that a lot of people have been developing - that the State Department is not taking this environmental analysis seriously," said Alex Moore, Washington-based campaigner at Friends of the Earth. "I think a lot of people are concerned that this may be in the bag, and I hope that's not case because President [Barack]Obama has committed to transitioning us to clean energy."

The environmental impact statement played down the possibility that the pipeline would leak and threaten important sources of drinking water along the route - a major concern raised by local residents and some members of Congress.

The State Department did suggest that oil sands crude has greater greenhouse-gas-emissions, relative to other crude sources, than the Calgary-based industry and provincial and federal governments have acknowledged.

While Canadian officials say the difference is typically 5 to 15 per cent, the study said oil sands on average produce 17 per cent more emissions - from the wellhead to the car exhaust pipe - than the average crude used in the U.S.

But it said the gap is closing as the U.S. consumes increasingly heavy grades of crude. And it added that rejection of the pipeline would not affect global emissions, since oil sands production would merely be redirected to other markets.

The State Department seized on arguments put forward by the Alberta-based industry that the rejection of the Keystone XL pipeline would strengthen the push for export routes to the West Coast.

Government support for Asian exports is growing in Alberta. Premier Ed Stelmach is now actively promoting greater West Coast export capacity, saying it's needed both to tap hungry overseas market and to reduce reliance on the U.S., where growth could be muted for years to come.

"We must work very hard with the private sector to build pipelines to the West Coast for both LNG and oil," Mr. Stelmach told a Calgary fundraising dinner Thursday night.

"Given that the American economy will probably take 10 years to recover, and that we should never ever put all our eggs in one basket, I'm a tremendous supporter of growing options."

In a recent trip to Asia, the Premier said he was asked by Indian officials how much natural gas they could buy from Canada, while China wanted to know how much oil it could purchase.

"These are unbelievable opportunities that only come maybe once in a lifetime, and we've got to seize it," he said.

With a file from reporter Nathan Vanderklippe in Calgary

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