Scenarios: Battle brews over Canada oil sands pipe

WASHINGTON Mon Jan 31, 2011 3:27pm EST

WASHINGTON (Reuters) - The Obama administration is divided over a proposed pipeline that would ease U.S. reliance on oil from politically unstable regions but boost dependence on crude from Canada's environmentally unfriendly oil sands.

The State Department may begin deciding as early as next month whether the $7 billion Keystone XL pipeline would be necessary to bolster U.S. energy security. The oil would cut dependence on imports from Venezuela and Middle Eastern countries such as Saudi Arabia.

The Environmental Protection Agency, however, is worried about the greenhouse gas emissions from production of Alberta's tarry oil sands and that the oil bounty could undermine U.S. plans to make cars more efficient and to electrify more vehicles in coming decades.

Calgary-based TransCanada Corp hopes the 510,000 barrels per day pipeline, which would bring oil from Canada to refineries in Texas and Louisiana, will be built and start in early 2013. It wants to build a link from the proposed line so that oil drilled in the northern U.S. could also be shipped to the huge Cushing, Oklahoma oil storage hub.

Here are some possible paths the plan could take if it is approved.

LIKELIEST: STATE COMPROMISES, EPA SATISFIED

In July, the EPA asked the State Department to revise its environmental impact statement on the pipeline to consider greenhouse gas emissions, other environmental concerns, and pipeline safety.

Secretary of State Hillary Clinton hinted in October her department was "inclined" to approve the line on energy security grounds. Since then a senior State Department official said approval is not a foregone conclusion.

State could finalize a new environmental review of the project without taking public comment, but that could push the EPA to ask that the final decision be made by the White House.

Or more likely, State could revise the environmental review and open it to public comment before finalizing it.

That move could open up the planned pipeline to compromises, such as diverting the pipeline route away from environmentally sensitive areas, increasing pipeline safety measures, or reducing the proposed flow on the line. That could make the project more palatable to the EPA and the project could move ahead.

LESS LIKELY: EPA ASKS WHITE HOUSE TO DECIDE

If EPA is unhappy about revisions to the environmental review after public comment, or if State finalizes it without opening up to public discussion, the regulators could ask that the final decision be referred to the White House's Council on Environmental Quality.

The CEQ is headed by Nancy Sutley who has said that clean energy and emissions reductions could help break the country's dependence on foreign oil.

Presumably State and the EPA would want to work out their differences before it gets to this stage.

UNLIKELY: STATE GREENLIGHTS, EPA DISAGREES

After a potential environmental impact review with public comment, the State Department will work on a "national interest determination."

In this process, Clinton's department will weigh the importance of the line for U.S. energy security. The process would be open to comment by agencies such as the EPA and the Department of Energy.

The EPA will likely question whether the line strengthens energy security as an expected decline in fuel demand could mean some of the Canadian oil would be refined for export.

In addition, the EPA may argue that the life cycle emissions from the oil sands -- which it says are as much as 82 percent greater than the average crude refined in the United States -- could hurt U.S. security. The damage could be from the effects of global warming in coming decades, including heat waves, droughts and rising seas. Others have argued that inaction by the United States on emissions could crystallize anti-American resentment in countries vulnerable to climate change.

MOST UNLIKELY: OBAMA DECIDES

If the EPA is not happy with the State Department's decision in the national interest determination, it could take the rare step of asking that the decision be sent to Obama. The president has pledged the United States would cut emissions and dependence on foreign oil, but an opportunity to link energy systems with close ally Canada could be hard to resist.

But the administration may be anxious to avoid this option which could leave Obama directly responsible for a project that environmentalists -- one of his important voter bases -- would oppose. The administration would likely push State and EPA to compromise instead.

(Reporting by Timothy Gardner; Editing by Alden Bentley))

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