UPDATE 3-Oil pipeline won't wreck environment-US State Dept

* Final decision on line could come by end of 2011

* State Dept: EPA seems pleased with review

* State asks TransCanada to commission water impact study

* Hundreds arrested at White House for opposing pipeline
(Adds comment from analyst)

By Timothy Gardner and Ayesha Rascoe

WASHINGTON, Aug 26 (Reuters) - A proposed $7 billion
Canada-to-Texas oil pipeline cleared a major obstacle on Friday
with the release of a U.S. State Department review that
suggested it would do little damage to the environment.

The review concluded the Keystone XL pipeline would not
lead to a big boost in Alberta's oil sands production, which
releases large amounts of carbon dioxide when produced.

"Even without it...the oil is going to develop and is going
to get to different refineries that are demanding it," a State
Department official said.

The review said the oil would get to markets by barge,
rail, and other pipelines if the Keystone XL was not built.

The TransCanada Corp (TRP.TO) pipeline would bring more
than 500,000 barrels per day of oil sands crude from Alberta to
refineries in Texas.

Environmentalists rejected the department's assessment and
said they will continue efforts to block the project. More than
320 protesters of the pipeline have been arrested this week in
demonstrations in front of the White House in an action
expected to continue into early September.

Opponents want President Barack Obama to block the line,
arguing the oil could slow the drive to electrify vehicles.

Critics, which include some U.S. Senators, also say the
pipeline risks polluting a massive aquifer in the center of the
United States. TransCanada's existing Keystone pipeline
suffered two small leaks this year.

Backers say the pipeline will create thousands of jobs and
boost oil imports from a close ally.

Besides being a major project for TransCanada, Canadian
Prime Minister Stephen Harper sees it as pivotal in a national
energy strategy to maximize production of the tar sands, the
world's third largest crude deposit.

The Canadian and Alberta governments have lobbied hard in
Washington to sell the benefits of the project, which they tout
as way to reduce dependence on OPEC and to create jobs.

The oil industry believes the increased access to the huge
Gulf Coast refining market would raise prices for oil
sands-derived crude, which are depressed by a glut of crude in
the U.S. Midcontinent region.

Lou Pugliaresi, president of the Energy Policy Research
Foundation, said the department's review was a positive step
toward the embattled project receiving the greenlight from the
State Department.

"I'm guessing it will be approved because of the large
energy security and economic benefits and the fact that most of
the environmental issues have been dealt with," Pugliaresi
said.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

FACTBOX-US findings on Keystone pipeline [ID:nN1E77O1WU]

FACTBOX-Year of Canada oil pipe ruptures [ID:nN31290944]

US greens write Obama to oppose pipeline [ID:nN1E77N1T9]

Oil sands corrosiveness unproven [ID:nN1E7711N5]

COLUMN Keystone, fixing the oil market [ID:nN31290944]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

NATIONAL INTEREST

The State Department will hold a series of meetings
beginning late next month in the five states the pipeline would
pass through before making a final decision on the line.

The State Department also will begin to assess whether the
pipeline is in the "national interest" of the United States.

With the construction and maintenance jobs the pipeline
would bring and the potential of the line to reduce oil imports
from countries that are not always friendly to Washington,
supporters of project hope the review will not be a major
hurdle.

"Through the Keystone system, the U.S. can secure access to
a stable and reliable supply of oil from Canada where we
protect human rights and the environment, or it can import more
higher-priced oil from nations who do not share America's
interests or values," Russ Girling, TransCanada's chief
executive, said in a statement after the review.

Girling hopes the line will be built by 2013.

Environmentalists are intent to fight the project

"They ignore the elephant in the room," said Bill McKibben,
an environment writer and leader of the White House protest
against Keystone XL. "They never talk about the climate
implications of opening the second largest pool of carbon on
earth to increased development."

Senator Mike Johanns of Nebraska complained that the review
found TransCanada's proposed route through the aquifer was the
best path for the line. "The State Department is now one step
away from giving the green light to a project that could have
grave consequences for our state," said Johanns, one of nearly
10 senators upset by the pipeline's route.

EPA PLEASED

The State Department said it worked closely on the final
review of the pipeline with the Environmental Protection
Agency, which had asked it to conduct more analysis.

"We feel that we have been very responsive ... the (EPA)
seemed pleased about what we had done and the changes we had
talked about," another State Department official said.

Citing the leaks this year on TransCanada's existing
Keystone pipeline, the EPA had wanted more information about
risks to water supplies, including the Ogalalla Aquifer, a vast
irrigation source across Nebraska and other states.

The State Department said TransCanada should commission an
independent study of risks to water supplies, focusing on
valves and external leak detection systems.

The EPA also wanted more analysis of the life-cycle
greenhouse gas emissions from the Canadian oil sands. The
review found that the oil sands do not produce much more carbon
dioxide than other heavy crudes such as Venezuelan oil, which
is widely used in U.S. refineries.

It also said improved extraction techniques may over time
cut the greenhouse gas intensity of oil sands crude compared to
other oils.
(Additional reporting by Andrew Quinn and Jeff Jones in
Calgary; editing by Alden Bentley)