Week Ending January 8, 2016

TransCanada Takes the U.S. to Court and Arbitration in Two-Fisted Counterpunch to Administration’s Rejection of Keystone XL Pipeline

This Article Appears as Published in Foster Report No 3081
TransCanada Takes the U.S. to Court and Arbitration in Two-Fisted Counterpunch to Administration’s Rejection of Keystone XL Pipeline

On January 6, TransCanada unleashed two independent legal actions – one in a federal court in Houston, Texas, the other through arbitration channels – to signal that it is not taking the Obama Administration’s rejection of the Keystone XL Pipeline lying down.  In a comprehensive explanatory statement published on the company’s website, TransCanada indicated that it’s committed to proceeding with the project in spite of persistently low oil prices, since its customers still wish to avail themselves of the proposed pipeline as the most economical – and environmentally sensible – way of moving production from the Albertan oil sands to Gulf Coast markets.

Keystone XL – which would transport up to 900,000 barrels per day of crude oil over a proposed 1,179-mile route in a 36-inch diameter line running from Hardisty, Alberta to Steele City, Nebraska[1] – is undoubtedly the most famous pipeline never to have been built.  In an announcement on November 6,[2] just a month before December’s Paris Climate Conference, President Obama explained to the nation that he was rejecting the proposal because approving it would send the wrong message about the U.S.’s determination to combat climate change.  TransCanada, and the many U.S. politicians who supported this major infrastructure project, were highly critical of the decision which, they said, ignored years of State Department analysis finding that the impact of the project on climate change would be minimal and its economic benefits significant.

In its publicity accompanying its initiation of legal action, TransCanada said the Administration had acknowledged its decision was “based on the perception by the international community about U.S. leadership on climate change.”  As construed by the company, this concession meant “misplaced symbolism was chosen over merit and science – rhetoric won out over reason.  As a result, in the absence of increased pipeline infrastructure, North American oil will continue to be transported in less safe, more greenhouse-gas intensive ways” (e.g., rail), and the U.S. “will continue to be reliant on oil from Venezuela, Iraq, and Saudi Arabia.”

Relief under NAFTA and Separate Constitutional Claim.  The company explained that its two-pronged legal strategy entailed entirely separate modes of relief and involved different venues.  First, pursuant to the North American Free Trade Agreement (NAFTA), it filed a document called a “Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of NAFTA” naming the “Government of the United States of America” as “respondent.”  Its arbitration notice indicates it intends to seek over $15 billion in damages to make the company whole for the lost value of its investment in the proposed pipeline.[3]

Its lawsuit in federal district court in Houston, conversely, seeks no monetary damages but requests a declaratory judgment that President Obama acted outside his constitutional authority in quashing the TransCanada proposal.  Its argument suggests that the so-called “presidential permit” Obama declined to grant is essentially a made-up process – dressed up as a “delegation of authority” to the State Department – unsanctioned by any statute.[4]  As a matter of Constitutional law, posits TransCanada, it is Congress under the separation of powers, not the chief executive that regulates international commerce.  It adds that Congress actually passed a resolution endorsing the Keystone XL project (which the president then vetoed).

TransCanada acknowledged in its public statements accompanying the legal action that it will take several years at least to bring about a resolution; however, it noted that the pendency of these legal actions does not preclude it from reapplying for a presidential permit at an appropriate time.

Notice of Intent (NOI) to Arbitrate.  The company’s NOI opens up with a narrative contending that the Keystone XL pipeline was a victim of political expediency.  It notes, at the outset, that the State Department had issued presidential permits for three pipelines carrying the same product from the same part of Alberta to the U.S. before TransCanada applied for a permit for the Keystone XL project in September 2008.  Indeed, two of the three permits were issued after the application for Keystone XL was filed.  However, TransCanada’s project was singled out by “environmental activists,” the company submits, as a “litmus test” for politicians to prove their “environmental credentials.”

Somehow the activists’ strategy succeeded, states TransCanada.  Even though the Obama Administration’s State Department concluded on six occasions that the project would not have a “significant impact on climate change,” the Administration killed the application in its seventh year of pendency.  This final decision was “politically-driven,” asserts the company, and “not based on the merits” of the project, allegedly in violation of the U.S. obligations under NAFTA.

The NOI also explains that TransCanada necessarily expended “billions of dollars” in upfront work to develop the pipeline.  It could not wait until the project received its approval to begin this pre-construction work, it adds, because if construction is not commenced within five years of the permit’s issuance, the permit itself expires.  Moreover, the company had no reason to expect that the permit would be denied, believing the Administration would process the application “fairly and consistent with past actions.”  And the Administration was well aware of all the preliminary work TransCanada was engaged in to be ready to go when the permit was issued, observes the NOI.

Although then-Secretary of State Clinton declared, over two years after the Keystone application was submitted, that the State Department was “inclined” to approve it, thereafter controversy “intensified” and State made “every conceivable excuse” to stall a decision.  When Congress, over three years into the pendency of the application, put the Administration under a 60-day deadline for deciding it, the Administration responded by denying the permit, insisting it needed more time for the review.

In June 2013, President Obama put out an announcement that the project would only be approved if it could be shown not to “significantly exacerbate the problem of carbon pollution.”  However, even though “no fewer than five environmental studies” by the State Department concluded Keystone would have “no such impact” on climate change, on 11/6/15 the president denied the permit – the first time in history, the NOI underscores, that the U.S. has ever refused to issue a permit to construct a cross-border pipeline.

TransCanada’s NOI listed several findings made by the State Department in its 2015 “Record of Decision” that presumably would have guided it to an affirmative decision.  These were that:

  • Even if the pipeline were not built, the Canadian oil would “likely find its way to market through alternative, more costly, less environmentally-friendly and significantly less safe modes of transportation”;
  • Construction of the pipeline would create 42,000 jobs over a two-year period; and
  • The project would generate “significant tax revenues” for local communities, as well as provide “meaningful economic benefits” to the U.S.

Yet, the application was denied.  The decision, TransCanada implies, was grounded in the belief that the international community would lose respect for “U.S. leadership” in climate change if the project were given the go-ahead (even though the State Department repeatedly concluded Keystone would not significantly impact climate change).  Such a “politically-driven denial,” the NOI asserts, based on worries about international “perception” and “contrary to all precedent” was “arbitrary, discriminatory, and expropriatory.”  Further, the denial “substantially deprived” the investors of “the value of billions of dollars of investment in the project.”

The Administration’s disposition of the matter clashes with several fundamental principles of NAFTA, the NOI concludes.  These include the U.S. government’s commitment to protect Canadian investors by providing “national treatment,” “most-favored-nation treatment,” “treatment in accordance with international law,” and “protection against uncompensated expropriations.”  In a nutshell, the NOI submits that the Obama Administration denied an otherwise meritorious application because it felt obligated to kowtow to a fundamentally false international perception that the Keystone project would exacerbate climate change.[5]

Federal Court Action.  The lawsuit – filed in federal district court in Houston and naming Secretary of State Kerry as the primary defendant[6] – touches off an even more complicated legal debate.  It poses the question of whether, in the absence of any supporting statute and “contrary to the expressed wishes” of Congress, the president possesses the Constitutional authority to block further development of the Keystone XL Pipeline.

In addition to challenging whether the U.S. president has “unilateral authority” to stymie the pipeline’s construction given the Constitution’s allocation of primary authority over domestic and international commerce to Congress, the lawsuit stresses precedent.  The complaint underscores that:

  • No other previous U.S. president has prohibited development of any major oil pipeline undertaking significant domestic commerce;
  • Nor has any previous president asserted that cross-border facilities supporting international commerce could be prohibited based on (1) the nature of the commerce undertaken; (2) the need to enhance negotiating power with foreign states; or (3) any other basis not related to the specific cross-border facilities at issue;
  • The project – the vast majority of which is to be built in the U.S. – is no different from the Keystone I Pipeline, which was constructed to transport the same type of crude oil from the same region of Alberta; and
  • In 2009, the State Department granted a permit for a competitor of TransCanada to construct and operate another pipeline involving cross-border facilities to transport Albertan oil sands crude into the U.S.

Moreover, the complaint insists, the Administration’s action to kill the Keystone XL project stands at odds with Congress’s position on the matter.  And even if Congress had not registered its approval of the project, the complaint submits that President Obama’s assertion of authority “far exceeds prior presidential practice” and cannot be inferred through “Congressional inaction,” since prior unilateral presidential action has been limited to raising “issues concerning the border crossing” – not a general bar of a “predominantly domestic facility.”

The complaint attacks the “novel assertion” that President Obama needed to expand his authority (at the expense of Congress) in this instance over an international commercial transaction in order to enhance his overall negotiating clout with foreign states.  This Administration theory implies “unbounded scope,” says the complaint, giving the president absolute control over domestic or foreign commerce –- without statutory authorization – whenever he opines that it could improve his leverage in dealings with foreign states.

As with the NAFTA arbitration notice, the 50-page complaint includes a long factual narrative on the multi-year permit application process TransCanada underwent before approval was ultimately denied, along with an evaluation of the reasoning the Secretary of State and President Obama gave for their decision.  The complaint then proceeds to an extended analysis of the Constitutional framework and the criteria the federal courts have employed to test whether a particular assertion of presidential authority is supported by the Constitution or statute (or, if neither, whether that “particular exercise” of authority has been tacitly accepted by Congress).

The complaint concludes that the Administration’s Keystone XL decision is “unprecedented” in breadth, unsupported by any general statute governing such determinations, not acquiesced in by Congress (indeed, it was opposed by Congress), and “encroaches on the power committed by the Constitution to Congress to regulate foreign and domestic commerce.”  Its final section (“Prayer for Relief”), the complaint requests, among other things, a declaration that the defendants are “without legal authority to prohibit TransCanada from extending the Keystone System into Canada through the construction and operation of the Keystone XL Pipeline….”

In short, TransCanada’s filing implores the court to declare the Administration’s November 6 decision a nullity, and to prevent the U.S. defendants from enforcing it.

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[1]     At the Steele City terminus, the pipeline would join up with the existing Cushing Extension (bringing the oil to Cushing, Oklahoma) and then connect to the Gulf Coast Segment (running from Cushing to Nederland, Texas). From there, Keystone oil would complete its journey to the Gulf Coast on the Houston Lateral to Moore Junction (near Houston).

[2]     For an article on Keystone’s precarious status as of Nov. 6, see FR No. 3073, pp. 1-5.

[3]     The company is required to wait six months from the adverse decision on Keystone before actually commencing arbitration.

[4]     The “Presidential Permit” process, as the company’s pleadings make clear, did not begin with the Obama Administration.  The complaint cites Executive Order No. 13337 (4/30/04) as designating the Secretary of State to screen permitting requests and “lead an interagency evaluation process.”  Although the test was “serving the national interest,” the complaint describes this assertion of presidential authority as “narrow” in nature and focused on the border facilities themselves.

[5]     The NOI includes a narrative describing the ill-fated processing of the TransCanada application and the company’s claim for damages under NAFTA based on “unjustifiable discrimination”.

[6]     The complaint also names as defendants the U.S. Attorney General, the Secretary of the Department of Homeland Security, and the Secretary of the Interior (Loretta Lynch, Jeh Johnson, and Sally Jewell, respectively).  The plaintiffs are two U.S.-based affiliates of TransCanada, of which the lead plaintiff is TransCanada Keystone Pipeline, LP. 

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Copyright © 2016 by Concentric Energy Publications, Inc.  All rights reserved.

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