UPDATE 1-Canada regulator approves TransCanada oil pipeline

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CALGARY, Alberta, Sept 20 (Reuters) - Canada's National Energy Board said on Thursday it approved the Canadian portion of TransCanada Corp's (TRP.TO) $2.8 billion Keystone oil pipeline project, saying the project's benefits would outweigh negatives that labor groups fear.

The NEB approved the conversion of 864 km (537 miles) of gas pipeline to oil transport use and construction of another 371 km (230 miles) of pipeline. The line would carry 435,000 barrels a day of oil to the U.S. Midwest and beyond from Alberta.

Keystone is one of a number of new pipelines planned to refineries in the United States from Canada's oil sands region.

Production from the region is expected to triple to 3 million barrels a day by 2015, requiring new lines to reach additional refining centers like the U.S. Gulf coast.

Including its U.S. leg, Keystone will run 2,969 km (1,845 miles) to southern Illinois from Hardisty, Alberta.

Construction is expected to be complete by 2009.

The company is still waiting for U.S. regulatory approvals but expects to have those in hand by early next year, when construction is slated to begin.

TransCanada, the country's biggest pipeline firm, also plans to extend the line to Cushing, Oklahoma, and boost its capacity to 590,000 barrels a day.

The company declined to comment on the regulatory clearance, saying it was still reviewing the decision.

The approval was contested by some groups and unions, who argued that exporting the oil unrefined could cause the loss of 18,000 potential new jobs.

The NEB said the project's benefits outweighed those concerns.

But both the Communications, Energy and Paperworkers Union and the New Democratic Party on Thursday urged the federal Cabinet to overturn the approval.

"Clearly, this is the wrong decision for Canada, and it brings into question the role of the board and the need for a domestic energy policy to protect Canadian interests," CEP president Dave Coles said in a statement.

"This discussion belongs in the political arena, and the federal government should take the necessary steps to make that happen."