Bloomberg | 4 August 2015
TransCanada may recoup costs from U.S. if Obama rejects Keystone
A two-decade old trade accord could let TransCanada Corp. recoup some of the $2.4 billion spent on its Keystone XL project, even if President Barack Obama rejects the pipeline.
A provision in the North American Free Trade Agreement would let the Canadian company file a claim against the U.S., accusing the government of discrimination. While trade specialists say a successful challenge would be a long shot, a Nafta tribunal could award damages for costs as well as lost profit.
It’s a twist that could ensure Keystone remains an aggravation for the administration even if Obama pulls the plug.
“From what we’ve seen in past cases, TransCanada would have a potential Nafta claim,” said Melinda St. Louis, director of international campaigns for Public Citizen, a nonprofit group that has opposed trade deals like Nafta and the dispute settlement process specifically.
TransCanada has waited more than six years for permission to build the link from Alberta’s oil fields to U.S. refineries on the Gulf Coast. While Obama hasn’t said how he’ll decide, his criticism of the project’s purported benefits have encouraged environmentalists.
The project has been delayed several times. Senator John Hoeven, a North Dakota Republican and one of Keystone’s biggest Senate supporters, said on July 28 that Obama would reject the pipeline after lawmakers leave for an August recess. Hoeven cited sources he didn’t name. The Senate is set to leave this week.
Nafta, a deal signed by the U.S., Canada and Mexico that took effect in 1994, includes a process to resolve investor-state disputes. The two sides each get to appoint one judge, and those two in turn pick a third person to fill out the panel. A panel couldn’t force approval of Keystone.
Nafta has been a magnet for criticism from congressional Democrats and labor union leaders, who said it made it easier for manufacturers to take advantage of low-cost labor by opening factories in Mexico instead of in the U.S.
TransCanada Chief Executive Officer Russ Girling on Friday declined to comment specifically on the potential of a Nafta challenge when asked on a conference call to discuss its second quarter earnings with analysts and reporters.
“TransCanada will employ whatever means necessary to protect its shareholders and its shareholder value, but that’s not our focus at the current time,” Girling said.
TransCanada applied for a presidential permit to build Keystone XL in September 2008. The State Department is reviewing the application because the pipeline would cross an international border. In its financial report, Calgary-based TransCanada said it has so far invested $2.4 billion on the project.
If Obama rejects Keystone, TransCanada has a better chance of success by reapplying when a new administration takes over in 2017 than filing a Nafta challenge, said Gary Hufbauer, a trade specialist at the Peterson Institute for International Economics, a Washington-based nonprofit group that studies economic policy.
Generally, the dispute council gives countries broad discretion to apply their own rules on issues such as the environment, putting TransCanada at a disadvantage, he said.
“Legally, the deck is stacked against them,” Hufbauer, a deputy assistant secretary for trade at the Treasury Department during the Carter administration, said in an interview.
The State Department’s review of the project, as required by law, concluded last year with a largely positive environmental assessment. The department said Keystone XL was unlikely to increase overall greenhouse-gas emissions in part because the oil sands would be developed even without it.
But the report also said low oil prices could increase the importance of Keystone, which would be a cheaper transportation option than alternatives such as trains. Oil prices have dropped by about half since the assessment was issued.
Environmental advocates were encouraged by a letter the Environmental Protection Agency sent in February to the State Department disputing the assessment, and saying development of the oil sands would significantly increase global carbon-dioxide levels unless greater emissions controls were enacted.
“The Keystone regulatory decision-making process, while time consuming and probably frustrating from the point of view of TransCanada and others, is not obviously discriminatory,” said Scott Miller, a senior adviser for the Center for Strategic & International Studies, a Washington research group. “The burden required to prevail in these cases is fairly high.”
In challenging the U.S. under Nafta, TransCanada would be going against a nation with a perfect 13-0 record in such cases.
Robert Stumberg, a law professor at Georgetown University in Washington, said challengers to the U.S. may face an especially high hurdle. Arbitrators may be wary of ruling against of the world’s biggest commercial partners for fear of turning its citizens against free trade.
But he pointed to a recent case that could give TransCanada hope, if it pursues a Nafta judgment.
In March, a settlement council ruled in favor of Bilcon of Delaware Inc., which had been denied permission to build a quarry in Nova Scotia, one of Canada’s maritime provinces.
The council ruled for the company, saying Canada had subjected it to an unusual environmental review that it hadn’t applied to similar projects proposed by Canadian companies.
A separate process will determine the compensation due to Bilcon.
By demonstrating that previous cross-border pipelines have been approved, TransCanada could show that the Keystone XL project faced an arbitrary and unfair process, Stumberg said.
TransCanada already operates a pipeline, known as Keystone, that enters the U.S. at the North Dakota border. The proposed Keystone XL would cross at the Montana border then head for South Dakota and Nebraska, where it would connect to a pipeline network that extends to the Gulf Coast.
Enbridge Inc., another Calgary-based pipeline company, got the State Department’s blessing in 2009 to build the Alberta Clipper pipeline from Alberta to Wisconsin.
The U.S. may argue that since then, climate change concerns have become more serious.
“The U.S. could say, ‘Yes, we’re treating you differently. Times are changing, and governments get to change their policies,’” Stumberg said.
For a report published by CSIS, Miller reviewed about 300 cases brought under the trade-dispute process. He found that about a third settled before the tribunal ruled. Of the remaining cases, governments won about 62 percent of the time.
A further discouragement to TransCanada: Companies that won generally got far less than they sought, Miller said.
“It’s a long road, it’s an expensive process, and it’s mostly pennies on the dollar,” Miller said in an interview.
Prime Minister Stephen Harper suggested a more likely path would be to try again once Obama left office.
“I believe that whether this project goes ahead or not under this administration, it will ultimately go ahead under a subsequent administration,” Harper said in an interview Wednesday with Bloomberg.