Obama Making Big Mistake on Pipeline

11/23/2011 12:00 pm EST

Focus: GLOBAL

Gordon Pape

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

The decision by the Obama administration to shelve the Keystone XL pipeline is a huge slap in the face for Canada, and may fundamentally change the relationship between the two countries for years to come, says Gordon Pape of The Canada Report.

Many Canadians were stunned by the US State Department’s announcement that no recommendation on the project would be made until after TransCanada Corp. (TRP) reviews the possibility of an alternative route which would take the pipeline away from the sensitive Sand Hills area of Nebraska. That will mean a new environmental assessment, and effectively puts off a final decision until after the 2012 presidential election.

TransCanada moved quickly to try to accelerate that timetable by announcing it is prepared to shift to an alternative route that would bypass Sand Hills. Nebraska’s Governor quickly endorsed the plan, and some prominent state politicians asked that the project be expedited. But that seems unlikely.

It was just a couple of months ago that Canadian Prime Minister Stephen Harper described the $7 billion project as "a no-brainer". Not only would it provide the US with North American energy security, but it would create 20,000 high-paying jobs at a time when the economy most needs them. Most of those jobs would be in the US.

By all reports, President Obama himself played a major role in postponing the decision. Caught between the rock of the environmentalist faction of the Democratic Party and the hard place of his job-creation program, he chose to cop out. It will be up to the American people to judge whether he acted in their best interest, but many Canadians were left with a bitter taste in their mouths.

Canada will now embark on a full (and perhaps game-changing) rethink of its entire energy policy. Until now, almost all of the country’s oil exports have gone to the US. But with pipeline capacity now approaching the limit and Keystone sidelined, Canada will have to seek new markets or restrict future growth.

Since neither Ottawa nor Alberta has any interest in shutting in production, it’s clear that there will be a new emphasis on selling oil to Asia, particularly to China and Japan.

This makes Enbridge’s (ENB) proposed $6.6 billion Northern Gateway pipeline, which would move oil from Alberta to Kitimat on the British Columbia coast for trans-shipment across the Pacific, a much higher priority. With the stakes having now been raised, the on-going fight over Gateway can be expected to escalate, but at least this is a domestic issue.

Gateway’s fate will not be decided by Washington, but within Canada. If it goes through, the big loser will be the US, which will become even more reliant on imports from countries like Venezuela and Saudi Arabia to meet its domestic needs.

Even without Gateway, measures are already being taken to increase the flow of Alberta oil to the Pacific Coast. In late October, Kinder Morgan (KMI) announced it is accepting bids from companies that want to ship oil through a planned expansion to its Trans-Mountain pipeline, which runs from Edmonton to Burnaby, British Columbia.

The existing pipeline moves about 300,000 barrels a day. US-based Kinder Morgan plans to twin it and increase capacity to 700,000 barrels daily. Most of that oil will eventually end up fueling Asia.

From all appearances, President Obama’s decision to defer Keystone was based on political expediency and not on conviction—if he and his administration really believes the project is not in US interests, why not just kill it? By choosing to duck the whole issue, he has mollified many—although not all—environmentalists.

But in the process, he has soured relations with a key friend and ally, and compromised American energy security. It’s a heavy price to pay.

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