Keystone: Pipeline or Pipe Dream?

10/27/2011 9:00 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Chances are the economy and energy security will trump environmental criticism of the major oil pipe, but that’s far from a guarantee right now, writes Gordon Pape of The Canada Report.

Behind the backdrop of Prime Minister Stephen Harper’s warning that unless the G20 countries take quick and decisive action, "our nations will once again be forced to respond to a full-blown global recession, albeit this time without the full arsenal of policy weapons at our disposal," there are signs of economic hope.

If all goes well, we should know the decision of the US government on the construction of the $7 billion Keystone XL pipeline within the next two months. The odds appear to be in favor of approval, but nothing should be taken for granted.

The high-profile opposition campaign against the TransCanada Corp. (TRP) project has placed the Obama administration in a no-win situation.

If the pipeline is approved, the powerful environmental lobby—one of the President’s strongest constituencies—will be outraged, and a series of lawsuits will certainly follow. But a rejection would deliver a huge blow to the President’s credibility as a job creator and sour relations with Ottawa in numerous ways.

Because of the environmental implications, President Obama cannot even count on support from his own party if he gives the go-ahead. Last Friday, Democratic Congressman Earl Blumenauer and more than 20 other representatives drafted a letter to Secretary of State Hillary Clinton in which they claim the review process is fatally flawed, because the company used to evaluate the potential environmental impact has worked with TransCanada in the past.

The accusation is based on a report in The New York Times, which last April published an editorial opposing Keystone, arguing that its construction "poses a major threat to water supplies on both sides of the border."

The demise of Keystone would almost certainly result in a much stronger push to win approval for Enbridge’s Northern Gateway pipeline, which would carry oil-sands production from Alberta to Kitimat, BC, from where it would be shipped to fuel-hungry Asia, and China in particular.

The US would be faced with the prospect of being forced to rely increasingly on supplies from such regimes as Saudi Arabia and Venezuela, while a friendly neighbor exports its crude oil across the Pacific.

Keystone opponents argue that new US oil reserves in the Bakken region and offshore will soon make the country self-sufficient, but in fact many years of development time will be required to bring these discoveries into full production. Even then, there will likely still be a shortfall between domestic production and consumption.

Another consequence of rejection would be that Washington would have to stand by and watch as Canada forged closer energy ties with the Chinese. The Daylight Energy takeover announced last week would be just the beginning.

Don’t doubt for a moment that events wouldn’t play out that way. Failure to approve Keystone would mean the potential stagnation of oil-sands growth, something the Harper government is not about to let happen.

With Europe already branding oil sands output as "dirty" and the US door closed, Asia in general and China in particular would be the only way to assure continued expansion of Canada’s richest energy resource.

So what are the chances of rejection? RBC Capital Markets recently arranged for a client call with David Wilkins, the American ambassador to Canada from 2005 to 2009, to discuss the possibility. Some of his comments were illuminating.

  • He believes that jobs and energy security will trump the environment, and that a Presidential Permit will be issued by year-end. But it’s not a sure thing.
  • A further delay in what has already been a prolonged process cannot be ruled out. TRP made the original application back in September 2008, so a decision has already been delayed for more than three years. Secretary of State Clinton says she will "try" to announce a decision by year-end. The word "try" has raised a lot of eyebrows.
  • A flat "no" is unlikely. If the Administration is unwilling to make a decision, a further delay is the most probable outcome.
  • Lawsuits will likely fail. If the Presidential Permit is granted, Wilkins thinks it is unlikely that court challenges will block construction, noting that legal attempts to stop the building of the Alberta Clipper pipeline went nowhere.

I cannot recall when a Canadian issue attained such a high profile in the US. Keystone has clearly touched some raw nerves, and has been transformed from a fairly straightforward business proposition to a highly charged political confrontation.

As a result, the State Department’s recommendation, whenever it comes, won’t be the end of the story. If fact, it may be just the beginning.

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