TransCanada Fights Keystone Denial With $15 Billion Appeal

  • Company plans claim under North American Free Trade Agreement
  • Lawsuit against U.S. filed in Houston court over rejection

TransCanada Corp. opened one of the largest trade appeals ever brought against the U.S., seeking to recoup $15 billion tied to the Obama administration’s rejection of the Keystone XL oil pipeline.

The Canadian company intends to start a claim for costs and damages under the North American Free Trade Agreement against the U.S. after President Barack Obama’s rejection of the $8 billion project in November, according to filings Wednesday. The pipeline builder also sued the U.S. government, arguing Obama didn’t have the constitutional power to decide on the cross-border line.

A Nafta challenge has been floated as an option for years by proponents of the pipeline frustrated with the protracted U.S. review. The case has merit, according to trade specialists who point to political reasons for Obama’s denial following seven years of U.S. study. Obama said the line would have undercut U.S. global leadership on climate change and wouldn’t have contributed meaningfully to the nation’s economy or energy security.

“This does not look like a kosher process when it comes to pipeline approval,” said Todd Weiler, a London, Ontario-based attorney who focuses on investment treaty law. TransCanada has a “very strong case” in arguing that Keystone XL didn’t receive the same standard of review as other pipelines that have been approved, and it may take three to four years to be resolved by a three-person arbitration panel, he said. 

Valid Rejection

White House Press Secretary Josh Earnest said Keystone XL’s rejection was “consistent with all of our international obligations, including our obligations under,” Nafta. A spokesman for the State Department said by e-mail, "We do not comment on pending litigation."

Keystone XL would have carried as much as 830,000 barrels a day and spanned 1,179 miles (1,897 kilometers) from Alberta to Nebraska, before connecting to an existing pipeline network feeding crude to U.S. Gulf Coast refineries. Heavy Canadian crude fell below $20 a barrel for the first time Wednesday as global prices sank.

The project’s rejection was a victory for environmental advocates, who sought to couple the pipeline with campaigns to combat climate change.

TransCanada is “wrong to try to force American taxpayers to pay for its mistakes,” Anthony Swift, Canada Project director at the Natural Resources Defense Council, said in an e-mail. “These lawsuits are about a foreign company trying to undercut safeguards that protect the American people.”

Boosters’ View

Keystone’s boosters are praising the company for filing the appeal. Backers said Keystone XL would create thousands of jobs, increase U.S. energy security, and help an important ally in Canada develop its energy resources.

TransCanada has a legitimate argument that Obama ruled on Keystone XL based on political considerations, not on the pipeline itself or the merits of the project, said Rob Merrifield, a former Conservative Canadian lawmaker who served as an envoy for the project in Washington for both the federal and Alberta governments.

“I’m betting for TransCanada on this one and certainly hoping they win the case,” said Merrifield, now a senior adviser with the Canadian Strategy Group, an Alberta-based consulting firm.

Nafta Appeal

TransCanada is appealing under Chapter 11 of Nafta, a deal signed by the U.S., Canada and Mexico that took effect in 1994. While a tribunal couldn’t force approval of Keystone, it could award damages for costs and lost profit.

Nafta claims by corporations against the U.S. are relatively rare. While the nation has a good track record in winning -- it has only lost one of 14 such appeals filed -- companies typically emerge victorious in similar international disputes, said Lori Wallach, director of Public Citizen’s Global Trade Watch.

“In a case like these facts and those claims, I have seen repeatedly, enormous amounts of money extracted from governments’ treasuries and taxpayers and doled out to corporations,” Wallach said.

Constitutional Powers

Similarly, the company is seen to have a good argument that the president acted above his powers in its U.S. court case. Congress, not the president, has the constitutional power to regulate the cross-border trade at issue, TransCanada said in its filing to a U.S. court in Houston.

“If Congress says one thing and the president says exactly the opposite, the legislative branch typically wins” in court, said Anthony Schutz, who teaches law at the University of Nebraska in Lincoln.

TransCanada’s Nafta appeal has already provided fodder to opponents of the Trans-Pacific Partnership, another international trade agreement. The TPP includes a similar investor-state dispute resolution system and opponents are using TransCanada’s case to illustrate -- just days before the State of the Union -- how companies can take advantage of the process.

TransCanada, which has invested C$4.3 billion ($3.1 billion) on Keystone XL, said Wednesday it plans to take an estimated C$2.5 billion to C$2.9 billion after-tax writedown. The company intends to stick to its plan to grow dividends by eight to 10 percent a year through 2020.

Baked In

TransCanada shares fell 3.7 percent Thursday in Toronto, as the Standard & Poors/TSX Energy Index declined 3.8 percent and U.S. crude futures dropped to a 12-year low, reflecting turmoil in China’s markets. Moody’s Investors Service analysts said late Wednesday that the Nafta challenge has no impact on the company’s credit rating, and the costs incurred for Keystone were already reflected in TransCanada’s balance sheet.

Investors have already written off the project, said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary, who doesn’t own TransCanada shares. Appealing the U.S. rejection in court and through Nafta could help the company keep the project alive politically until Obama’s successor is named, he said.

Pelletier is among observers who have suggested TransCanada would have better luck winning approval for Keystone XL by re-applying after the 2016 presidential election, particularly if a Republican wins, because of the party’s support of the line.

“They’ve got nothing to lose,” Pelletier said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE