UPDATE 1-State Department acted properly on Keystone -U.S. report

Wed Feb 26, 2014 6:45pm EST

By Timothy Gardner

WASHINGTON Feb 26 (Reuters) - The U.S. State Department acted properly in its choice of an outside contractor to review the Keystone XL oil pipeline, the agency's inspector general said on Wednesday, clearing it of accusations by environmentalists there was undue influence by the pipeline's developer.

TransCanada Corp had recommended four companies to the State Department to do an environmental review, including Environmental Resources Management, Inc, or ERM, but did not tell the department it had previously worked with the company.

Under U.S. law, major industrial projects like Keystone, which would carry 800,000 barrels a day of crude oil from Canada to the U.S. Gulf, must undergo an environmental review.

The process the State Department used to select ERM to help prepare the report on TransCanada's contentious pipeline project "substantially followed" guidance, the inspector general said in a long-awaited report.

At times, the State Department was more rigorous than it needed to be, the report added.

Wednesday's report said the contractor selection process "can be improved," as very little documentation is required by regulations. Still, the State Department met the minimal requirements, it said.

It was the second major hurdle that Keystone, which would link Canada's oil sands to refineries in Texas, had cleared in as many months. In January, the State Department said in a final environmental review that the pipeline would not cause undue environmental harm and would not speed up development of the oil sands.

Several agencies, including the Environmental Protection Agency, and the Departments of Homeland Security and Commerce have been working with the State Department to decide whether the pipeline is in the national interest since the environmental review was published. The process is due to last through April.

Secretary of State John Kerry and President Barack Obama are expected to make a final decision on Keystone after the agencies finish their work, but they are under no timeline to do so.

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