Most government and industry officials in Canada seem to assume that the Obama administration’s decision to postpone a final ruling on the Keystone XL Pipeline until after the 2012 election is only a temporary setback. However, the outcome is not a foregone conclusion. The real battle is over how Alberta’s oil sands resources will be exploited. The Keystone experience contains important lessons for Ottawa, Edmonton and the pipeline and oil sands industries.

It is tempting to dismiss the Obama administration’s decision to delay a final ruling on TransCanada Corporation’s Keystone XL Pipeline until a new route through Nebraska can be found as a weakened president’s attempt to put off the resolution of a divisive political issue until after next year’s election. The pipeline would bring up to 830,000 barrels per day of oil sands bitumen from Alberta through six US states to Texas Gulf refineries. It is seen by some as an important contributor to American energy independence and jobs, and by others as a serious environmental threat. The speed with which TransCanada and Nebraska agreed to find a new route for the pipeline around the ecologically sensitive Sand Hills and Ogallala Aquifer, which supplies most of the state’s water, suggests the problem can be resolved.

However, the issue has been complicated by Republican legislators’ insistence on making the extension of President Barack Obama’s payroll tax cut bill contingent on a decision on the Keystone project by late February. The State Department, which is responsible for the permitting process, says that the deadline would not allow enough time to canvass alternative routes much less to complete environmental and safety assessments mandated by the US National Environmental Policy Act. Early indications are that Obama would reject the pipeline if he were forced to choose quickly. Other observers point out that even if the President approved the pipeline the endorsement would not survive court challenges based on a failure to comply with the act. In short, a decision Prime Minister Stephen Harper has called “a complete no-brainer” is not a foregone conclusion.

The real battle, though, is over the future of Alberta’s oil sands development. With existing pipelines expected to reach capacity within five years, expansion of the network is a crucial part of the oil sands industry’s plan to increase its output from the current 1.7 million barrels per day to 5.1 million by 2035. Oil sands extraction is an energy-intensive process, creating up to three times more greenhouse gas pollution than conventional production. While the industry accounts for only 6.5 percent of Canada’s carbon emissions, it is the fastest growing source. Alberta’s intensity-based regulatory approach limits per unit output but allows overall emissions to grow as production rises, outpacing efficiencies achieved. For its part, the federal government has yet to implement a national greenhouse gas reduction plan. Should oil sands production continue on its anticipated trajectory, Ottawa would not come close to meeting its Copenhagen Accord target of lowering Canada’s total carbon emissions by 17 percent from 2005 levels by 2020. To make matters worse, despite well-documented problems with current monitoring efforts, Ottawa and Edmonton have yet to put in place an effective system to determine the full pollution effects of oil sands operations.

The warning signs about the Keystone project have long been apparent. Prodded by the massive BP oil spill in the Gulf of Mexico and the rupture of an Enbridge Inc. pipeline into the Kalamazoo River in Michigan in 2010, the environmental movement in the United States has grown in strength. Indeed, it was already a core part of President Obama’s election campaign in 2008. Almost 18 months ago, US Ambassador David Jacobson told an audience in Calgary that while the oil sands are important to North American energy security, “more needs to be done” to improve the industry’s environmental record. The US administration is a formidable ally in promoting oil sands energy imports, but it needs Canada’s help in making the case to its own domestic audience. Instead of heeding Jacobson’s warning, Ottawa, Edmonton and the industry tried to overwhelm their opponents with a competing narrative focused on energy security, jobs and dubious ethical oil arguments. They co-opted friendly environmentalists and ignored the rest.

Government and industry officials claim that the Keystone pipeline delay underlines the need to step up efforts to export oil sands crude through British Columbia to Asian markets. But Enbridge’s controversial proposal for a Northern Gateway Pipeline to bring 525,000 barrels per day to a marine terminal in Kitimat faces stiff opposition and legal challenges from environmental groups and First Nations communities along the route. There is also strong resistance to increased oil tanker traffic plying British Columbia’s coastal waters as a result of a Northern Gateway Pipeline or an expanded Kinder Morgan Energy Partners’ Trans Mountain Pipeline to Burnaby. Neither issue will be resolved anytime soon.

A shortage of pipeline capacity would slow the pace of oil sands development. That may not be a bad thing. It could enable the industry to focus on achieving greater operational efficiencies, and governments to put better regulations and monitoring measures in place, leading to improved cost structures, a lower carbon footprint for Canada, fewer strains on Alberta’s hardpressed infrastructure and more time for governments and industry to work out acceptable delivery routes. It could also allow the Alberta government’s bitumen upgrading and refining plans to catch up with oil sands production, creating more jobs in the province and adding value to oil sands exports. Edmonton wants to increase bitumen processing, which stands at 60 percent of overall output, to 67 percent. If no progress is made, that figure will fall below 50 percent by 2020.

It remains to be seen whether the federal and provincial governments and the industry will learn the lessons of the Keystone pipeline experience. Some signs are not encouraging. Most government and industry officials seem to think the Obama administration’s decision is a temporary setback that will eventually be reversed. But that is not inevitable. While local concerns may diminish, pressures from environmental opponents will continue. The outcome could be even more problematic should President Obama be returned to office. He considers himself an environmental leader and has made the creation of “a new energy economy” a theme of his presidency. Without the need to seek re-election in his second term, he would be looking to his place in history and could well see it in his interests to side with the environmental movement rather than oil sands energy interests.

With existing pipelines expected to reach capacity within five years, expansion of the network is a crucial part of the oil sands industry’s plan to increase its output from the current 1.7 million barrels per day to 5.1 million by 2035.

The Prime Minister and some industry representatives have also questioned the motives of US charitable foundations that help to fund environmental groups’ oil sands campaigns. One version contends that the foundations are supporting anti-Northern Gateway Pipeline groups to ensure the United States retains a virtual monopoly on oil sands exports. In fact, the principal recipients are against the Keystone project too.

Claims such as this invite scrutiny of government and industry behaviour. TransCanada and the US State Department have recently been embarrassed by allegations of improper communications between the company’s chief Washington lobbyist and senior operative in Secretary of State Hillary Clinton’s 2008 presidential campaign, and department officials. As well, the State Department’s Inspector General has launched a “special review” into whether the State Department complied with federal laws in evaluating the Keystone project. The review follows reports that the department accepted TransCanada’s recommendation in hiring Cardno Entrix, a Houston-based environmental consulting firm that calls TransCanada a “major client,” to conduct the environmental assessment and organize public hearings for the project. The department’s report concluded that the pipeline would have “limited adverse environmental impacts” if regulations were followed.

In its rush to access other markets for oil sands energy in the wake of the Keystone pipeline setback (and perhaps to sway US decision-making on Keystone) the federal government appears to be looking for ways to expedite approval of the Northern Gateway project. Under the guise of “nationbuilding” (the same rationale used to justify the controversial National Energy Program some 30 years ago) Ottawa has quietly shifted the emphasis of the National Energy Board-Canadian Environmental Assessment Agency Joint Review Panel’s evaluation of the project from its “environmental effects” to its “public interest” importance. Appealing to opponents “as Canadians,” the president of Enbridge adds that we “have a responsibility to often accept things that are in the national good that might not necessarily be our favourite individual project.” Alberta’s new premier, Alison Redford, calls the Northern Gateway Pipeline the contemporary equivalent of the Canadian Pacific Railroad. However, as one perceptive commentator has noted, as the opposing sides confront each other “the pipeline threatens to become a divisive rather than a nationbuilding project.” It will likely leave participants bruised, just as the National Energy Program did.

Another industry executive suggests that governments and industry need to broaden their public relations strategy to include direct communication with the public, the goal being to win a “social licence” in the form of public acceptance of oil sands energy. But a social licence is based on trust. Public communications efforts will have no chance of success until Ottawa, Edmonton and the industry develop a credible environmental message based on effective regulation, state-of-the-art monitoring and full industry compliance.

Pessimists claim that even an improved environmental performance would not have any impact on opponents who will settle for nothing less than an end to oil sands development. Yet most environmentalists are practical. They recognize that the world still depends upon fossil fuels and want governments and industry to foster more environmentally responsible practices.

In this respect they are probably no different than Albertans who, according to a recent poll by Think HQ Public Affairs, recognize the oil sands industry’s economic importance but give poor marks to its environmental performance. A plurality would choose protection of the environment over jobs and economic growth.

Ottawa faced a similar two-audience problem in the 1980s in dealing with the issue of acid rain. Domestic concern about acid rain pollution was on the rise, although with half of the pollution in Canada originating in the United States it needed Washington’s help. The Reagan administration and US industrial emitters were against new restrictions. Ottawa had some success in mobilizing the support of US legislators whose states were similarly affected. But Canada was vulnerable to charges that its own pollution laws were lax. Prime Minister Brian Mulroney took a major step toward resolving the problem by reaching an agreement with seven eastern provinces to reduce sulphur dioxide emissions by 50 percent by 1994 and to require new Canadian vehicles to meet stricter US auto emissions standards. The 50 percent reduction formula (with the Americans to comply by 2000) became the centrepiece of a revised US Clean Air Act in 1990 and the follow-up Canada-US Air Quality Agreement a year later. In dealing with the Keystone pipeline, an issue that is keenly watched on both sides of the border, governments and industry should take a page out of Mulroney’s playbook.