Washington (Platts)--26Aug2011/303 pm EDT/1903 GMT

Advancing the Keystone XL pipeline closer to approval, the US Department of State said Friday that TransCanada's proposal beats not only 14 major route alternatives but also the prospect of no pipeline at all.

TransCanada and other supporters applauded the final environmental impact statement issued Friday, while environmental groups called the findings woefully incomplete.

Despite the favorable findings, the State Department dismissed the notion that Secretary of State Hillary Clinton has made up her mind to approve the $7 billion project. "This is not a final decision, this is not the final stamp, this is not a lean in any way toward one particular decision or another," Assistant Secretary Kerri-Ann Jones told reporters in a briefing.

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With the final environmental review out, TransCanada now waits for the State Department to rule on its application for a presidential permit. That phase looks at whether the pipeline carrying crude from Alberta's oil sands to the Texas Gulf Coast serves the US national interest.

Jones said many other considerations beyond environmental impact would go into that decision, including energy security, economics and foreign policy. "We are at a point of neutrality," she said.

The 1,700-mile pipeline would originate in Alberta, cross the US-Canada border in Montana, continue through Cushing, Oklahoma, and extend to refineries on the Gulf Coast.

The report dismissed alternative pipeline routes -- proposed to avoid the Ogallala Aquifer and Nebraska's Sand Hills region -- after finding them "financially impracticable" and not technically feasible. Several would have cost about $1.7 billion more and disturbed more land and crossed more rivers than the original route, the State Department said.

The review also concluded that demand for heavy crude in the Gulf Coast would continue to grow over the next decade with or without Keystone XL.

Refineries would, therefore, look for heavy crude elsewhere and transport it by other US pipelines, railroads, trucks or barges. If they turned to crude produced outside North America, the report reminded, the imports would exacerbate reliance on oil from unstable regimes.

"As a result of these considerations, DOS does not regard the 'no action alternative' to be preferable to the proposed project," the report said. "Whether or not the proposed project is implemented, Canadian producers would seek alternative transportation systems to move oil to markets other than the US."

DENYING PIPELINE WOULD NOT SLOW OIL SANDS MINING

The report sided with pipeline supporters on another major point of contention regarding greenhouse gas emissions from oil sands production.

TransCanada CEO Russ Girling, for example, said in an interview with Platts this month that opponents were misguided in thinking that blocking Keystone XL would slow oil sands development.

"The proposed project is not likely to impact the amount of crude oil produced from the oil sands," the State Department said.

However, the report conceded that life-cycle emissions for oil sands crude were higher than other types of crude. For the annual volumes TransCanada would ship on the pipeline, the difference amounted to between 3 million and 21 million mt of carbon dioxide, or emissions equivalent to the combustion of fuels in 588,000 to 4.1 million passenger vehicles.

To improve pipeline safety, TransCanada has agreed to 57 conditions not required by federal code. Nevertheless, the report calculated that the system could spring 1.18 to 1.83 leaks greater than 50 gallons each year, with the frequency estimated to be 1.78 spills/year to 2.51 spills/year.

The State Department also announced the final round of public hearings along the six-state route. In late September, it will hold meetings in Glendive, Montana; Pierre, South Dakota; Atkinson, Nebraska; Lincoln, Nebraska; Topeka, Kansas; Midwest City, Oklahoma; Austin, Texas; and Port Arthur, Texas. It scheduled the last meeting for October 7 in Washington, DC.

The final EIS starts a 90-day clock for other federal agencies to offer their last comments on the environmental review. The Environmental Protection Agency is expected to be the toughest critic of the finding, after lodging objections last year and this year as preliminary reviews emerged.

The environmental statement comes halfway through a two-week demonstration outside the White House, where hundreds of protesters have been arrested. The opponents frame the pipeline decision as President Barack Obama's best chance to fulfill a campaign promise to fight climate change.

Clinton has promised to act on the application by the end of the year. The decision would head to the White House, where any agencies that oppose it would have 15 days to persuade Obama to override State's decision.

CEO SEES GROWING US SUPPORT FOR PROJECT

TransCanada welcomed the final environmental review and said it confirms earlier findings that the benefits of the project outweigh potential harms.

"Support for Keystone XL continues to grow because the public, opinion leaders and elected officials can see the clear benefits that this pipeline will deliver to Americans," Girling said in a statement. "The fundamental issue is energy security."

The American Petroleum Institute and the National Petrochemical and Refiners Association cheered the report's conclusions. "After a long and careful review, the State Department has found that there are no environmental reasons to block construction of the Keystone XL pipeline, which would bring American consumers a sure and steady supply of oil from our close friend and neighbor Canada," NPRA President Charles Drevna said.

On the other side, the Natural Resources Defense Council called the findings flawed and said the report lacked information on pipeline safety, refinery emissions and pollution from oil sands mining.

"It is utterly beyond me how the administration can claim the pipeline will have no significant impacts if they haven't bothered to do in-depth studies around the issues of contention," said Susan Casey-Lefkowitz, NRDC's international program director. "The public has made their concerns clear and the administration seems to have ignored them."

US Senator Mike Johanns, Republican-Nebraska, also panned the report.

"I am tremendously disappointed that running the pipeline through the Sand Hills continues to be the State Department's preferred route," he said in a statement. "The State Department is now one step away from giving the green light to a project that could have grave consequences for our state."

--Meghan Gordon, meghan_gordon@platts.com