Published on: Feb 21, 2012
TransCanada must reflect on the reasons for the latest delay to the Keystone oil pipeline, says Todd Cort, CEO of Two Tomorrows (North America)
President Obama recently indefinitely denied a presidential permit for the proposed Keystone XL oil pipeline on the grounds that the Department of State does not have sufficient time to assess if the project “is in the national interest” after being forced by Congress to hastily green-light it. Keystone has been a lightning rod since originally proposed, spawning a narrative overflowing with hyperboles on the pros and cons of the project. Here we look at the some of the more likely reasons the project may not yet have won over the President and other stakeholders.
1. Keystone as a referendum on oil sands
Some observers have interpreted President Obama’s decision to delay approval as an indictment of oil sands, suggesting that the high-profile activities of critics such as Robert Redford and Daryl Hannah swayed his decision. In reality, President Obama cited TransCanada’s decision to route Keystone across the Ogallala Aquifer as one of his actual objections. While TransCanada subsequently agreed to reroute Keystone, its plan to cross this environmentally sensitive ecosystem was questionable, and stakeholders raised it as a key concern long before President Obama did. No matter how much faith the company has in its own safety record, “trust us” doesn’t cut it so long as other pipelines continue to experience spills and explosions.
2. Made in USA
TransCanada frequently touts the economic benefits associated with construction of the pipeline, including the creation of 250,000 jobs, as primary justification for the project’s approval. With an overall price tag of $13 billion, the direct and indirect economic benefits are certainly considerable. Yet at the same time as the company claims that Keystone will result in 7,000 manufacturing jobs, its key contractor apparently sourced all the steel for the pipeline from Asia. No doubt, economics and availability drove that decision. However, when one of TransCanada's most compelling arguments for project approval is the creation of high-paying American jobs, it seems an unfortunate contradiction to source one of the most valuable and visible components of the project outside the US.
Sourcing local content should not just be a goal associated with oil and gas development in emerging economies. With the US economy struggling to recovery during the three years TransCanada has sought project approval, the company would have won over many legislators and other stakeholders with a clear commitment to purchase as close to 100% ‘Made in USA’ high-value inputs as possible as well as supporting local suppliers in all six states along the pipeline’s proposed route.
3. David v. Goliath
Gaining access to the land required to route a nearly 1,600-mile pipeline from border to sea across six states is ambitious to say the least, particularly when TransCanada seeks to secure a 10-foot wide easement along the entire corridor through some of the most productive agricultural land in the country. As we wrote in 2010, it is understandable that TransCanada is eager to secure access and complete Keystone as close as possible to its original schedule. In its attempts to get landowners to bend to its construction schedule, however, TransCanada has frequently used the threat of eminent domain before making efforts to engage in good faith with landowners and other stakeholders.
TransCanada President Russ Girling claims the company already has rights to 93% of the land it needs, yet the outstanding negotiations are likely to be the most difficult given the company’s combative stance and resulting trail of lawsuits. While all six states granted TransCanada eminent domain rights, the company should only have used this power as an option of absolute last resort. While TransCanada conducts land negotiations through a US subsidiary, the image of a 'foreign company' appearing to infringe on Americans’ private property rights has created an unfortunate image for legislators and their electorate in the Reddest of states.
Moreover, the company appears to have displayed little empathy for the David v. Goliath situation landowners undoubtedly find themselves in when facing negotiations with a large company and all the resources available to it. TransCanada should have recognized this imbalance early on and made a number of resources available to land owners to ease the burden of negotiation, including a legal fund to offset the costs of retaining their own legal counsel.
Finally, while the straightest route is obviously the most cost-effective to build and operate, TransCanada should have explored a number of alternative routes. Was it necessary to expropriate so much private property for 'green field' construction? What other routes were considered? For instance, with so much decaying infrastructure in the US, TransCanada could probably have secured easements from cash-strapped counties and states by offering to repave or rebuild roads in exchange for rights-of-way beside or beneath the roads. While they were at it, TransCanada could have partnered with companies seeking rights-of-way for fiber optic cable and transmission lines connecting orphaned wind farms, adding additional incentives for approval that align well with some of President Obama's ambitions for modernizing America's infrastructure.
Where next for Keystone?
While environmental groups are doing victory laps over Keystone’s demise, this latest setback is but one more hurdle on Keystone’s path to eventual approval. As we have commented previously, Keystone 'done right' represents a unique opportunity for TransCanada and the oil and gas industry to create a lasting and positive legacy. Hopefully TransCanada puts this presidentially mandated 'time out' to effective use, thoughtfully considers its next steps, and presents innovative and compelling options that finally win Keystone its approval from regulators and stakeholders alike.