The approval process to decide whether or not the United States will allow construction of the 1,675-mile pipeline from Alberta, Canada to the oil refining hub of the country along the Gulf Coast is grinding to a conclusion.  The pipeline has received environmental approval from the U.S. State Department after strong criticism of an earlier study by the Environmental Protection Agency (EPA) for ignoring some of the environmental risks of the line.  Political pressure over the environmental risks from constructing the pipeline, which will cross the Ogallala aquifer that underlies a part of Nebraska and neighboring states through which the Keystone XL line will pass, is growing.  The line will be moving 500,000 barrels per day (b/d), and possibly as much as 830,000 b/d, of bituminous oil from the oil sands of Canada, a crude oil that has drawn the wrath of environmentalists for requiring more energy to extract than most other fossil fuels and emitting too much carbon pollution when consumed. 

The approval of the Keystone line, to be owned and operated by TransCanada Corp (TRP-NYSE) a pipeline operator with a recently sullied reputation due to a series of pipeline spills due to poor maintenance procedures in the past several years, has become an environmentally, economically and politically charged issue.  The

pipeline will increase Canada’s role as the leading supplier of imported crude oil to the United States and improve our country’s energy security.  At the present time, the U.S. imports about 2.5 million b/d of crude oil, or roughly 22% of the nation’s imported oil from Canada.  Canada’s import volume currently exceeds the combined flow from our next two largest import sources – Mexico and Saudi Arabia. 

From an economic viewpoint, the $7-billion pipeline project is estimated to create over 20,000 construction jobs and potentially 1,000 permanent positions once it is in operation, something the Obama administration would like to see occur given the problem it has had in creating new jobs.  The pipeline is supported by the U.S. Chamber of Commerce and the American Petroleum Institute because of its positive impact on the economy and the oil industry.  Many unions are supporting the line because it will be a job creator.  On the other hand, environmental opposition to building the line believes the estimated jobs impact has been overstated.  A new flash point emerged recently when it was discovered that the independent consulting firm hired by the State Department to review the environmental impact of the line had ties to TransCanada.  By not disclosing this relationship, people are questioning the independence of the firm and whether its positive recommendation is tainted.  The State Department has released data showing that this supposed conflict is wrong since the relationship comes from the extensive work the consulting firm has done for the federal government in evaluating multiple TransCanada pipeline projects and not from them working for the company.

The output from the Canadian oil sands has become highly politicized in recent years due to the nature of the oil.  It is extremely viscous, which allows for it to be mined with conventional excavation methods when it is close to the surface or through steam-assisted gravity producing schemes for deeper deposits.  In either case, the extraction method requires a substantial amount of energy adding to the oil sands carbon footprint.  The output also needs to be blended with a lighter hydrocarbon fluid in order to facilitate its transportation by pipeline.  All of these production and transportation energy needs make it one of the “dirtier” fossil fuels helping to draw the wrath of environmentalists worldwide. 

All of these production and transportation energy needs make it one of the "dirtier" fossil fuels helping to draw the wrath of environmentalists worldwide

An important geopolitical issue for the oil sands was the recent decision by the European Union (EU) to ban the use of its output due to its large greenhouse gas emissions.  The greater European economic area, which includes a number of countries not members of the EU but subject to its rules, will be impacted by this fuel ban decision.  Norway, a European community member, has criticized the EU ruling for not being scientific or transparent.  Norwegian Energy Minister Ola Borten Moe said on a recent visit to Canada that some of the conventional crude oils used in the EU may result in nearly as much greenhouse gas emissions as the oil sands, and that there is no transparency for African and Middle Eastern producers.  With the help of the UK, Canada has been able to secure a delay in the final consideration of the fuel-quality regulation until December. 

Environmentalists in the United States have been waging a vigorous protest against the oil sands and the approval of the Keystone pipeline, including a lengthy protest outside the White House that has witnessed the arrest of a number of prominent Hollywood stars.  A major protest was scheduled for last Saturday, as the decision date for the State Department draws near.  According to media reports, the State Department, which is charged with determining whether trans-boundary pipelines such as the Keystone line are in the nation’s best interest, has been meeting with the EPA over its objections to the second environmental report that determined that the pipeline would not create environmental hazards.  While the two government bodies work through the objections and concerns, it is fully expected that the EPA will still come out in the next couple of weeks and repeat its environmental concerns, including potential leaks from the pipeline and carbon emissions. 

The pipeline approval process, which has been underway for 38 months since TransCanada filed its application in 2008, was extended by the EPA interjecting itself into the process and the State Department deciding to hold public hearings in six states directly impacted by the line.  The State Department is supposed to render its recommendation by November 26th, after which eight agencies affected by the decision have 15 days to decide whether to object.  If there are no objections, the pipeline is approved.  If there are objections, the issue moves to the White House, which can take as long as required to render its decision, including possibly delaying a decision until after next November’s presidential election.

Trying to read the political tea leaves about the approval course has become more complicated in recent days.  The process took a surprising twist following an interview President Barack Obama gave to an Omaha, Nebraska television station reporter.  The interview was less than 24 hours after the President’s Press Secretary Jay Carney told White House reporters that the final approval decision would be made by the State Department.  In the TV interview, the President said he would be making the final decision, suggesting he knows at least one agency will object.  This was a surprise since it eliminates some of the political cover for the President to override whatever decision the State Department makes as a way to curry favor with those political supporters he feels he must mollify in order to boost his 2012 re-election chances.  Will he support his environmental supporters or the pro-oil and pro-jobs lobby?

In the TV interview, the President said he would be making the final decision

In his comments during the interview with Rob McCartney of KETV, the President said, “We need to encourage domestic natural gas and oil production. We need to make sure that we have energy security and aren’t just relying on Middle East sources. But there’s a way of doing that and still making sure that the health and safety of the American people and folks in Nebraska are protected, and that’s how I’ll be measuring these recommendations when they come to me.”  

In Nebraska there is growing opposition to constructing the pipeline along its proposed route.  The state legislature is now in a special session called by the governor to consider a bill to add various restrictions to the pipeline approval process.  That bill is to be referred to a legislative committee on November 7th and returned to the full body for consideration on November 9th.  The legality of adding any restrictions to the pipeline approval would likely run afoul of the interstate commerce clause of the Constitution, but it could force the pipeline approval into a legal battle that would delay its approval.  This maneuver might be tried as attempts to convince TransCanada to re-route the line have been rejected because to do so would require restarting the environmental impact assessment adding several years to the approval process.

TransCanada has rejected changing the pipeline route because delays in building the line would force shippers that have applied for capacity on the line to abandon it since they are facing 2013-2014 dates for termination of existing supply agreements with Mexico and Venezuela.  Without an assured supply in a timely manner from Canada, these refiners would begin seeking supply commitments from elsewhere.

This turn of events could force oil sands producers to seek other outlets for their oil.  Most likely, without another large volume pipeline project into the U.S., which would be a questionable strategy given the rejection of the Keystone pipeline expansion, Canadian producers would turn to Asian oil buyers.  By killing the Keystone line, the Obama administration would be forcing the U.S. to have to rely on imports from other foreign suppliers, many of which are less reliable than Canada.  Moreover, pipeline transportation is more secure and less polluting than imports hauled to this country in tankers.

Is it possible President Obama would praise the need for the pipeline but side with the environmentalists and call for additional study of the issues?  By being seen as not killing the pipeline, he could keep one important re-election constituency happy while possibly minimizing criticism from his other constituents who are in favor of building the line.  The President tried to demonstrate the multiple conflicts he must consider when deciding the fate of the pipeline project, but also the decision local citizens are considering when he told the TV station, “I think folks in Nebraska, like all across the country, aren’t going to say to themselves, we’ll take a few thousand jobs if it means that our kids are potentially drinking water that would damage their health or if rich land that is so important to agriculture in Nebraska ends up being adversely affected, because those create jobs, and you know when somebody gets sick that’s a cost that the society has to bear as well. So these are all things that you have to take a look at when you make these decisions.”

Kimberley Strassel, who writes the Potomac Watch column in the Wall Street Journal, has a different take on the President’s strategy for handling his re-election constituencies and energy decisions.  As she wrote in her column last week, she described the Keystone pipeline decision as “the clear culmination of an Obama governing philosophy that has consistently put green priorities ahead of blue-collar workers, and that is now one of the biggest threats to his re-election.”  She pointed out that “Working-class white males were the Hillary Clinton bloc in 2008 and helped her trounce him in key states such as Pennsylvania and Ohio.”  But as Ms. Strassel points out, “Rather than court this constituency, Mr. Obama has spent three years waging war on them.”  She cites all the EPA rules being enacted and the estimated job losses as proof.

Ms. Strassel reported the results of a Pew poll earlier this year that showed that 43% of the white working class didn’t believe they’d be better off in 10 years, which was the most negative view expressed by any group polled.  But the blue-collar, white workers still make up 40% of the electorate, and even more in states Mr. Obama needs to be re-elected.  “The latest 2012 census data suggest that white working-class voters could make up some 55% of the Ohio, Pennsylvania and Michigan voters.”  Ms. Strassel believes that Mr. Obama’s focus on Southern and Rocky Mountain states he won in 2008 is his attempt to find a path to victory by going around the Rust Belt.  She believes this election strategy is a reason for the delay in the Keystone pipeline decision.  Its approval would upset the green lobby.  As she put it, “…the green lobby hates it, and that green lobby is a staple of the liberal, educated, affluent base, and that’s the group the Obama team is ever more convinced it’s going to need in 2012.”  Her analysis and argument suggest that Keystone won’t know its fate until sometime in 2012, if at all. 

Between the decisions about the Keystone pipeline and Congress’ Super Committee on government deficit reduction steps, the upcoming year-end holiday season is going to be an entertaining season.  One also has to wonder what the political wrangling over these decisions will do to the mood of Americans and their holiday spending plans.  We suspect both decision dramas will have twists and turns we haven’t imagined, so stay tuned.  But also, don’t be surprised if one of those twists results in merely kicking the can further down the road given the pressures of the upcoming election.