Keystone Oil Pipeline Decision Key to Obama's Energy Policy

One of the major policy decisions facing U.S. President Barack Obama is whether or not to approve the Keystone oil pipeline across the Canadian border into the United States.

If approved, the pipeline - to be built by TransCanada (NYSE: TRP) - would transport about 1.3 million barrels of oil a day from Canada's oil sands to refineries along the Gulf coast.

The Keystone oil pipeline, if approved, would benefit U.S. energy security. Not to mention TransCanada and players in the Canadian oil sands industry such as Suncor Energy (NYSE: SU).

This decision is one investors in the energy sector need to pay attention to as it will set the tone for energy policy in President Obama's second term.

Keystone Oil Pipeline Protest

The president will certainly be under heavy pressure from a key constituent of his political base - environmentalists - to reject the project again. This weekend several thousand environmental activists will gather in Washington, D.C. for a demonstration outside the White House to urge the president not to once again say no to the project.

The activists will be putting forward several arguments. The first is that the extracting oil from the Canadian oil sands releases higher levels of greenhouse gases than do other methods of extracting oil. The second concern is over possible leaks into the Ogalala Aquifer, the underground aquifer that lies beneath the Great Plains.

These same concerns led President Obama to reject the original proposal, citing the environmentally sensitive Sand Hills region of Nebraska. This rejection forced TransCanada to submit a revised plan, rerouting the pipeline around that region. The southern portion of the Keystone oil pipeline - from Oklahoma to the Gulf of Mexico - has already been approved by the Obama administration. It received final permits from the Army Corp of Engineers this past summer.

The U.S. State Department, which is ruling on the project, is currently conducting another environmental assessment on the Keystone oil pipeline project. This assessment will be concluded by the summer of 2013.

Keystone Oil Pipeline Optimism

Many observers believe the political rhetoric and think the approval for the pipeline is a sure thing.

After all, North American oil and natural gas output is expected to surge 73% in the 20 years. Something is needed to transport all those hydrocarbons and that something is likely pipelines.

The CEO of pipeline company Enbridge (NYSE: ENB), Al Monaco, is optimistic. He told Bloomberg News, "It's in everybody's interest to get [energy] infrastructure built. I think that's been the Obama administration's view."

Bloomberg also reports that Canadian Natural Resources Minister Joe Oliver told reporters Keystone oil pipeline will be approved because it is in the U.S. national interest in terms of national security, jobs and economic growth to do so.

As for TransCanada itself, it believes the Obama Administration will approve the pipeline project sometime late in the first quarter of 2013.

Reasons for Pessimism

However, the optimism may be a bit premature. Early signs from the Administration are not promising.

Since the election, the U.S. Interior Department has cut by more than half the number of acres of federal land the government will make available in Utah, Colorado and Wyoming for oil shale and oil sands development. The original acreage was set aside for development in the final days of the Bush Administration.

Moody's said in a recent report it believes President Obama's second term will see the Environmental Protection Agency (EPA) greatly expand its regulatory reach into energy. The added reach, according to Moody's, will impact not only deepwater production but also the use of hydraulic fracturing (fracking).

Keystone Oil Pipeline: What Will Obama Decide

Moody's agrees that the Keystone project will be approved. . .eventually.

It said "approval will not be quick". It even fears "a prolonged permitting process risks missing the very oil price boom that inspired Keystone XL in the first place."

Moody's may be right. President Obama may, swayed by environmentalists, delay the project again.

The decision, either way, will be a real tell on the course of energy policy over the next four years. As Jack Gerard, president of the American Petroleum Institute, told the Financial Times "It will be a threshold test as to how serious the President is about producing America's oil and natural gas."

If the perception is that the president is not serious, there is a risk. The United States may see neighboring Canada and its oil industry begin to point their pipelines to the west coast and the energy-hungry export markets of Asia.

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