* IG: State was not biased in its Keystone review
* Says State kept TransCanada "at arms length"
* Makes some suggestions for improvements
By Timothy Gardner and Roberta Rampton
WASHINGTON, Feb 9 (Reuters) - An internal watchdog on Thursday cleared the U.S. State Department of conflict of interest allegations in its review of the stalled Keystone XL crude oil pipeline.
Lawmakers concerned about the environmental impact of TransCanada's pipeline requested the State Department's Inspector General take a closer look at the players involved in reviewing the project, which President Barack Obama has since put on ice for further environmental study,
In a 58-page report, Harold Geisel, State's deputy inspector general, said he found the department "did not violate its role as an unbiased oversight agency" in reviewing the Canada-to-Texas pipeline.
"TransCanada's influence was minimal," the review said.
Obama blocked the project last month, citing the need for further review of its route as the line would have traversed sensitive lands and an aquifer in Nebraska.
The new report will not help environmental critics who worry about pollution created from Canadian oil sands crude, but it does give new ammunition to Republicans in Congress, who are fighting to speed approval for the pipeline.
"Fundamentally, it gives the Keystone XL pipeline a clean bill of health," said Jack Gerard, president of the American Petroleum Institution, a lobby group for the oil industry.
Republicans in both the Senate and House of Representatives have introduced legislation to try to fast-track the project, which has become a prominent issue ahead of the 2012 elections.
They are trying to attach a Keystone provision to other must-pass bills to try to force the hand of the Democrats in the Senate who oppose the pipeline, and Obama, who ultimately would need to sign any Keystone provision into law.
On Thursday, another group of House Republicans introduced a new bill that would approve the pipeline, mirroring legislation developed in the Senate by North Dakota Senator John Hoeven.
"We have a constitutional responsibility and ability to do this," said Florida Republican Connie Mack.
But Peter Welch, a Vermont Democrat among the lawmakers who asked for the Inspector General review, said trying to rush the project is wrong.
"The environmental impact has do be done thoroughly and carefully and what the Republican leadership in Congress wants to do is bypass it altogether," Welch told Reuters.
The report shows the State Department will need to do better if TransCanada applies again for a permit, said Bill McKibben, the founder of 350.org, who organized protests against the pipeline at the White House last year.
"The more we learn about Keystone and the State Department's review process, the clearer it is that we were right to mount spirited protests last summer and fall," McKibben said.
Environmentalists had claimed that the State Department was influenced by the company's lobbyists including Paul Elliott, who had served as the national campaign manager for Secretary of State Hillary Clinton, during her 2008 run for president.
The review concluded however that the department had kept TransCanada's officials "at arm's length" as it met with a wide range of groups holding different views.
TransCanada said that it had been confident its conduct would be ruled to be above-board.
"We are pleased that the latest claims put forward by activists who are opposed to Keystone XL are unfounded, as we knew they would be," spokesman James Millar said in an email.
Still, the Inspector General suggested some improvements, and said State could have done more to verify that there was no conflict of interest between Cardno Entrix, the contractor hired to manage the environmental review, and TransCanada.
Steve Cohen, a Tennessee Democrat who has led Congressional opposition to the project, noted the report found State Department did not have enough expertise and experience to review the project, and did not consider alternative routes.
"This report undermines the integrity of the project's review and underscores the point that the pipeline should not be approved based on a shoddy, unscientific review," said Cohen.
The Inspector General did suggest improvements to the way the State Department conducts environmental reviews, including hiring a staff member with expertise.
The State Department has already begun to make the suggested changes and will have them in place within two months, a senior official said.