WASHINGTON, D.C. - The U.S. government on Thursday delayed approval of a Canada-to-Texas oil pipeline until after the 2012 U.S. election, bowing to pressure from environmentalists and sparing President Barack Obama a damaging split with liberal voters he may need to win re-election.

 

The decision to explore a new route for TransCanada Corp's Keystone XL oil pipeline to avoid fragile territory in the Sand Hills of Nebraska dismayed the Canadian government, which had lobbied assiduously for the $7 billion project.

 

It also drew a harsh reaction from the oil industry and from Republicans in Congress who accused Obama of sacrificing jobs for the sake of his re-election.

 

The State Department suggested that looking at new routes for the pipeline within the state of Nebraska would take until at least the first quarter of 2013, well beyond the November 6, 2012 U.S. election. The department had previously said it hoped to make a final decision by the end of this year.

 

TransCanada, which proposes to build and operate the pipeline, said it remained confident that it would ultimately win approval. Industry analysts had previously said a significant delay could kill the project.

 

The Obama administration said U.S. domestic politics played no part in the decision. Analysts suggested the delay may actually be an effort to split the difference.

 

"Politically it's an effort to avoid antagonizing either side of the issue," said David Pumphrey, a senior fellow at the Center for Strategic and International Studies and former Energy Department official.

 

"Both sides are likely to be disappointed, but since it's impossible to calculate the most damaging outcome, better to buy time," Pumphrey said.

 

Jobs sacrificed?

Obama said the decision was made on the merits.

 

"Because this permit decision could affect the health and safety of the American people as well as the environment, and because a number of concerns have been raised through a public process, we should take the time to ensure that all questions are properly addressed," Obama said in a statement.

 

Critics said the president was putting politics ahead of job creation and a chance to reduce U.S. dependence on Middle East oil.

 

"More than 20,000 new American jobs have just been sacrificed in the name of political expediency," House of Representatives Speaker John Boehner said in a statement.

 

It was an abrupt reversal for a project that six months ago had looked all but certain to move forward before being derailed by an environmental campaign. The decision could strain relations with Canada and prompt companies to renew efforts to build new Western export routes to China.

 

Analysts say the delay could kill the project to deliver Canada oil sands crude to U.S. Gulf Coast refiners. As TransCanada returns to the drawing board, other projects may lock in its customers.

 

It was one of the most closely watched energy policy decisions for global oil traders, who had expected the Keystone line to help relieve a supply bottleneck that has caused an unprecedented disconnect between depressed U.S. Midwest oil prices and global rates paid on the coast.

 

If built, the pipeline would transport 700,000 barrels per day or more of crude, most it from Alberta's oil sands, the world's third largest oil reserve. That is nearly 4 percent of the 19 million barrels the United States uses every day.

 

"It suggests to us that he has made a determination that he'd prefer the United States continue to import from sources outside North America as opposed to further solidifying our great relationship with Canada." said Jack Gerard, president of the American Petroleum Institute, a leading industry group.

 

The State Department said it decided to look at rerouting the pipeline chiefly because of concerns about its running through the Sand Hills area of Nebraska, which has fragile wetlands, a sensitive ecosystem and shallow groundwater.

 

"The White House did not have anything to do with this decision," Assistant Secretary of State Kerri-Ann Jones told reporters. "There was no effort to ... influence our decision. It was our decision."

 

The State Department said it was only looking at moving the pipeline's route within Nebraska and estimated that a new route would affect about 75 to 250 miles of the conduit.

 

Victory for environmental groups

The decision was a victory for environmental groups, who say producing oil sands crude emits large amounts of greenhouse gases.

 

"The president should know that nothing that happened today changes our position -- we're unequivocal in our opposition," said Bill McKibben, leader of protests at the White House against the pipeline that drew thousands of opponents.

 

"If this pipeline proposal reemerges from the review process intact we will use every form of nonviolent civil disobedience to keep it from ever being built," he said.

 

While the decision hurt Obama with industry and Republicans, it may shore up his support from environmentalists, an important constituency for the president and his fellow Democrats.

 

TransCanada shares closed down 73 Canadian cents at C$39.85 on the Toronto Stock exchange.

 

Canada's dilemma

Analysts said any damage to U.S.-Canadian relations should be short-lived. Still, the delay creates a dilemma for Canada as it tries to expand markets for its most lucrative export.

 

Keystone XL is one of two projects oil sands producers have been counting on to boost returns by relying less on the oversupplied U.S. Midwest market. Canada now exports about 2 million barrels of oil a day, almost all to the United States.

 

Government and industry officials say a major delay in the Keystone XL decision would prompt increased efforts to push forward Enbridge Inc's C$5.5 billion ($5.5 billion) Northern Gateway pipeline across British Columbia to the West Coast, where more than half a million barrels of crude a day could be loaded onto tankers and shipped to Asia.

 

Pushing harder on that proposal "could be part of the discussions" as Canada's natural resources minister meets with officials during his current visit to China, Prime Minister Stephen Harper's spokeswoman said on Thursday.

 

However, that project is anything but a sure thing. More than 3,000 people have registered to be heard at the Natural Energy Board hearing, due to start in January. The project faces considerable opposition from environmentalists and several native groups, who have said they would not want the pipeline crossing their land under any conditions, and the Keystone XL experience may embolden critics.

 

A Keystone XL delay may also hamper Canada's efforts to convince the European Union not to label oil sands crude as inherently polluting under a new fuel quality directive.

 

(Additional reporting by Jeff Mason and Ayesha Rascoe in Washington and by Jeffrey Jones and Scott Haggett in Calgary; Editing by David Gregorio and Russell Blinch)

 

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