The glacial pace of the U.S. government's review of the Keystone XL pipeline has advanced making the pipeline more likely but the slow pace of the process means a startup before 2016 looks impossible.

That's bad news for Alberta oil producers, who will probably find themselves fighting for pipeline space by then if current projections for production growth are correct.

It's also hardly great news for the environmental lobby. At best what has been won is a Pyrrhic victory. Keystone XL has been successfully delayed for years but not stopped. Meanwhile, oil sands crude flows unimpeded through other pipelines in ever-growing volumes and is set to take to the rails, an inherently more dangerous and more polluting way to move oil about the North American continent.

So far backer TransCanada is keeping quiet about timetables. But clearly, a company that has seen the completion date for this project slip from 2012 to 2015 and now likely later must be frustrated.

The root of the problem lies in President Barack Obama's desire to have it both ways on climate change policy. He wants to do something to drag America forward on tackling this issue.

But he is unwilling to force a dramatic change in policy when it comes to oil consumption. He is ready to gradually regulate coal out of existence through myriad of new rules but he will not take a stand to put climate change at the heart of all regulatory decisions.

This is why Keystone XL has been bogged down. Obama, ultimately, is unwilling to embrace the lifecycle approach to climate change regulation on oil and gas that the environmental lobby wants.

Thus the State Department seeks to weigh the merits of Keystone XL as a pipeline: it can be expected to cause a certain amount of pollution but any spill along its route would be an acceptable risk and the alternative means of moving oil, such as rail, not only emit more greenhouse gases but are more risky.

The opponents of Keystone XL would probably concede all these points but want a bigger picture review of the pipeline as an "enabler" of oil sands production. By approving the pipeline does the U.S. allow oil sands development to proceed?

An analogy might be a railway line to a coal mine. The rail link itself could pose no significant threat to the environment but by making coal production possible it becomes something harmful.


Obama has been helped in avoiding a firm stance on this issue by the fact that Keystone XL has simply not caught on with the electorate. Despite the ludicrous suggestions of some backers that it would somehow overturn the laws of the market and lower Americans' fuel prices, voters simply have not got fired up to see Keystone built.

Yet should it ever see the light of day, Keystone XL now on track to match or surpass the Trans-Alaska pipeline, a far more challenging project both in terms of environmental risk as well as engineering, for the slowest pace in pipeline construction. Under the current timetable a final U.S. government decision on Keystone XL is unlikely until the fourth quarter of this year. That means no shovels in the ground until 2014 and a slim chance the line goes into service before 2016.

And, of course, the foregoing assumes there are no legal battles. The Trans-Alaska pipeline was delayed for three years by court battles, which only ended with the 1973 Arab Oil Embargo that prompted Congress to give legal sanction to the pipeline route.

Keystone XL has not even got to the point where its opponents might challenge the pipeline in court. Indeed, all it would take for Keystone XL to be further delayed would be a sympathetic judge granting an injunction against construction pending judicial review of the State Department's decision.

In the meantime Canadian oil producers may be forced to scale back their expansion plans. With the latest forecasts for Western Canadian oil output still penciling in 150,000 to 200,000 barrels per day of annual increases in output, pipeline constraints will become a significant problem.

Here Canada will pay the price for complacently assuming the United States would buy all its oil. For all the bullish bluster from Canadian politicians they have no "Plan B." Pipelines to the Pacific and Atlantic Oceans may be feasible but they are a long way off and unlikely to have the takeaway capacity needed to provide a meaningful uplift to pricing for Canadian crude oil.

Even Canadian producers late embrace of rail is unlikely to be a big help. As late comers to the crude-by-rail party they are fighting for a place in the market, both for offloading capacity at the Gulf Coast as well as for tank cars.

But ultimately that will not stop the oil from getting to market. Crude oil has a nasty habit of finding its way out of the most difficult places and getting into consumers' tanks.

What it does mean, however, is that a pause in Alberta's oil sands development looks more likely as well as a more aggressive approach to marketing.

As such, even those who care about climate change ought to be disappointed. The environmental lobby has shot its bolt but only delayed Keystone. At the same time it has energized those who would ram through developments without an adequate review.

Oil sands crude will continue to flow across the U.S. border on existing pipelines now being quietly expanded and on diesel-fueled trains. And a meaningful discussion about the costs of climate change and how to tackle this issue will be as far away as ever.