Aug. 7 (Bloomberg) -- An ethics probe of the contractor assessing the environmental impact of TransCanada Corp.’s proposed Keystone XL oil pipeline has energized critics who say it should be grounds for the project to be delayed.
The State Department inspector general’s office said it is looking at conflict-of-interest complaints relating to the contractor writing the analysis of the $5.3 billion pipeline, which would connect Alberta’s oil sands to refineries in the U.S. Gulf Coast.
The review is “hopelessly tainted,” because of conflicts between the contractor, ERM Group Inc., and Calgary-based TransCanada, said Ross Hammond, a campaign coordinator for Friends of the Earth in Berkeley, California. “The review should be tossed out and the review process started again.”
Known as a supplemental environmental impact statement, the analysis gained new importance after President Barack Obama said in a June speech on climate change that he would reject Keystone if it was found to “significantly exacerbate” carbon pollution.
Environmental groups criticized a draft analysis released in March that found Alberta’s oil sands would be developed with or without Keystone, meaning the project would have little impact on the climate.
Critics, including the San Francisco-based Sierra Club, say Keystone will promote development of oil sands, which have a larger carbon footprint than conventional crude oil.
Friends of the Earth and The Checks and Balances Project, a watchdog group, allege the London-based ERM didn’t disclose a financial tie to TransCanada through its venture with Exxon Mobil Corp. in Irving, Texas, called the Alaska Pipeline Project. The project, underway since 2009, is developing a natural gas pipeline.
Marketing materials from the Anchorage-based Alaska Pipeline Project list ERM among the companies involved. Yet ERM answered “no” when asked if it had an “existing contract or working relationship” with TransCanada in filling out the application to write the environmental analysis on Keystone.
“Unless they have a different definition of ‘no’ that I’m not familiar with, they’re lying,” Hammond said.
Tom Steyer, a co-founder of the hedge fund Farallon Capital Management LLC and a critic of the pipeline, said in a statement that the environmental analysis has “lost credibility.”
ERM didn’t respond to an e-mail request for comment.
“TransCanada has not entered into any contracts with ERM related to our partnership in the Alaska Pipeline Project, and we have verified that our project partner has worked with ERM before,” Shawn Howard, a TransCanada spokesman, said in an e-mail.
The State Department, which is conducting the review of the project because it would cross the U.S. border, has defended its selection of the contractor in part by saying that engineering firms capable of doing broad environmental analysis often have worked for the oil industry.
“Our rigorous conflict of interest procedures ensure that no contractors or subcontractors have financial or other interests in the outcome of a project,” said Jen Psaki, a State Department spokeswoman. “The selected contractor works directly with and under the sole direction of the Department of State while the applicant pays for the work.”
The inspector general opened an inquiry into the conflict questions and will complete its work in the next two months, Douglas Welty, a spokesman for the office, said in an e-mail. The unit audits the State Department’s operations for effectiveness and efficiency and investigates fraud and mismanagement.
Scott Amey, general counsel for the Project on Government Oversight, a Washington-based watchdog group, said the inspector general is probably trying to determine whether the potential conflict is “substantial and material.”
Analysts looking for clues to how Obama will ultimately decide on Keystone say the biggest one may be the supplemental environmental impact statement, or SEIS, because it will evaluate the project under the standard Obama set in a June 25 speech on climate change.
“From our perspective, we are waiting on the final SEIS, because that’s what it takes for the pipeline to move ahead,” Christine Tezak, an analyst with ClearView Energy Partners, LLC, a financial research group in Washington, said in an e-mail.
The inspector general probe is another potential delay to the release of the environmental analysis, along with a lawsuit alleging that Nebraska’s approval of the section of the pipeline through the state was improper, Tezak said. She also said there isn’t any indication that the SEIS has been slowed by the allegation yet.
The environmental review isn’t the final say. After that is completed, the State Department will conduct a separate 90-day assessment to judge whether Keystone is in the national interest, a decision that weighs other issues including the impacts to the economy, energy security and foreign relations.
Keystone critics, already energized by Obama’s climate speech, were further emboldened by comments he made in a July 30 speech on the economy in Chattanooga, Tennessee, dismissing the pipeline as a job creator. Once completed, the project will create only about 50 permanent jobs, Obama said.
The environmental review the State Department is overseeing is necessary to analyze a new route that TransCanada proposed after Obama rejected an initial pathway. Nebraska officials had complained the first route threatened the state’s Sand Hills, a network of dunes and wetlands, and the Ogallala aquifer underneath. The latest route largely avoids the region.
Environmental impact statements are required under the National Environmental Policy Act, which hands the agencies overseeing the project the responsibility for assessing its environmental risks. The State Department has oversight over Keystone because it crosses an international border.
Conflict of interest questions have been raised before in relation to Keystone, including by Friends of the Earth. An environmental review of the first route prompted complaints that Cardno Entrix, the contractor writing the report, worked in the oil industry.
In a February 2012 report, the inspector general said while it found “specific contractual and financial relationships” between TransCanada and Cardno Entrix, “these relationships did not present a conflict of interest” because they didn’t directly relate to Keystone.
It did question whether the State Department had the expertise to conduct NEPA reviews, and whether its protocols were sufficient to ensure conflicts don’t exist. The department said it was hiring additional staff and would implement new procedures to examine conflicts.
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