US State Department report finds no conflict in Keystone XL review

Washington (Platts)--9Feb2012/536 pm EST/2236 GMT

An internal investigation by the US State Department largely cleared its handling of TransCanada's application to build the controversial Keystone XL oil pipeline, according to a report sent to Congress Thursday.

The Office of Inspector General found no evidence of improper communication with either the Canadian government or TransCanada. It also found no evidence that TransCanada influenced the State Department's selection of Cardno Entrix as a third-party contractor to conduct the lengthy environmental review and write a draft environmental impact statement.

However, the investigation determined that the State Department's "limited technical resources, expertise, and experience impacted the implementation" of the National Environmental Policy Act process.

The report identified three reforms needed for improving future pipeline permitting -- recommendations that the State Department's Bureau of Oceans and International Environment and Scientific Affairs agreed to implement.

The bureau said it would redesign its process for selecting third-party contractors by maximizing the department's control of each step and minimizing the applicant's role in the process. It also agreed to improve its screening process for avoiding conflicts of interest.

Finally, the bureau agreed with inspectors' recommendation to hire at least one full-time expert in the National Environmental Policy Act.

TransCanada CEO Russ Girling said he was pleased by the findings.

"When claims made by opponents of Keystone XL were brought forward, we welcomed an independent review by the Inspector General's office so that they could be addressed," Girling said in a statement. "At TransCanada, we conduct ourselves in an open, honest, transparent and ethical fashion, and this independent investigation confirms we followed all of the procedures and practices established by the Department of State and other federal agencies."

President Barack Obama rejected TransCanada's original application to build the 1,700-mile pipeline January 18, saying the decision rested not on the project's merits, but rather on what he said was an unreasonable 60-day deadline Congress imposed on the process.

TransCanada promised to reapply and pushed back its in-service target to late 2014.

In October, three US senators and 11 members of the House of Representatives -- all Democrats except Independent Senator Bernie Sanders of Vermont -- asked the inspector general to examine claims that the State Department let TransCanada screen applicants for the third-party contractor job and influence the selection of Cardno Entrix.

The inspector's report said the State Department followed the Federal Energy Regulatory Commission's protocol for using third-party contractors to prepare environmental documents. It found no outside influence on the process.

The report determined the selection of Cardno Entrix did not present a conflict of interest, because the contractor has minimal financial ties with TransCanada that would not "impair the contractor's objectivity" and because the investigation found no agreements between Cardno Entrix and TransCanada for future services involving the Keystone XL project.

Supporters and opponents of Keystone XL tailored their reactions to the report to suit their underlying views on the now-fraught project.

American Petroleum Institute President Jack Gerard said the findings give the environmental review of the pipeline a "clean bill of health."

"It's clear that another excuse not to build the pipeline has been removed, so we can only ask ourselves what's the excuse now for not approving Keystone," he asked.

Representative Steve Cohen, Democrat-Tennessee, one of the lawmakers who requested the investigation, said the report raised serious questions about Keystone XL. He highlighted the findings about the department's lack of expertise and experience dealing with major infrastructure projects.

"Nowhere was this failure more apparent than State's inadequate consideration of alternative routes for the pipeline," he said. "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."

--Meghan Gordon, meghan_gordon@platts.com

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