Legal challenge keeps Keystone XL dispute alive

In its planned $15 billion arbitration claim against the United States over the Keystone XL pipeline, Canadian pipeline giant TransCanada is venturing onto a legally muddy field against an undefeated champion in the one of the highest-stakes proceedings of its kind ever attempted.

The challenge TransCanada announced Wednesday will rest on whether it can convince a panel of three arbitrators that the U.S. rejection of a key permit for the border-crossing pipeline violated its commitments under the North American Free Trade Agreement. The United States never has lost such a challenge since NAFTA took effect in 1994.

The Obama administration rejected the Canadian company's application to build a portion of the pipeline that would have linked oil sands in Alberta with a U.S. pipeline system that reaches the Gulf Coast.

Besides the NAFTA challenge, TransCanada filed a suit Wednesday in Houston federal court alleging that President Barack Obama exceeded his constitutional authority in rejecting the Keystone XL permit. That case, like the separate arbitration, will explore among other issues how much authority a U.S. president has in dealing with foreign policy and national security.

The administration, through its State Department, rejected the permit on grounds that the pipeline isn't in the national interest.

During the seven years from the application for the permit to its rejection, the Keystone XL became a touchstone issue between labor and energy interests with a stake in building it, and environmentalists who said it could pollute areas it traversed and promoted fossil fuels that contribute to climate change. The arbitration and federal court proceeding will play out against the same raucous political backdrop.

The challenges are bound to keep the Keystone XL in headlines and in political stump speeches as the U.S. approaches an election that will put a new administration in the White House next January.

Early success before courts or arbitrators could give TransCanada leverage in subsequent negotiations.

Comparable NAFTA arbitrations are too rare to provide many hints from the past about how this one might play out, said Todd Weiler, a lawyer who specializes in disputes between companies and nations.

"They're going where few have gone before," he said.

Weiler estimates that nations and companies have sparred in about 800 arbitrations under modern rules, and TransCanada's $15 billion claim is the largest the U.S. has faced.

NAFTA, a trade deal signed by the U.S., Canada and Mexico, includes provisions that require each country to treat the other two countries' companies fairly. It also provides a process to resolve disputes if companies feel they've been wronged. The U.S. has faced about a dozen such claims and has won them all.

In saying Wednesday that it will initiate the arbitration process, TransCanada said it was wronged when the U.S. denied the Keystone XL permit. The Keystone XL line would carry a thick form of crude called bitumen from Alberta to Steele City, Neb. TransCanada already has built links inside the United States, including one that runs from the key oil pipeline hub in Cushing, Okla., to the Gulf Coast.

The pipeline company makes two main arguments - that the administration unfairly politicized the permitting process when it singled out the Keystone XL to make a stand on global emissions and that TransCanada didn't receive the same treatment as other pipeline companies and projects.

"The State Department radically altered its approach and based its decision on factors that had never before served as the basis to deny an application," attorneys for TransCanada argued in arbitration filings.

Specialists in international disputes offered a range of views on TransCanada's prospects for success.

The arbitration process is designed to give companies an even footing when dealing with sovereign governments, said Tracy Hester, who teaches environmental law at the University of Houston Law Center.

In addition, the high-profile political process surrounding the permit's rejection will leave TransCanada with plenty of ammunition to argue that the State Department didn't adhere to its normal process.

"That's the sort of thing that an arbitration panel would listen to," Hester said.

Still, TransCanada won't have an easy route to victory.

When companies do win proceedings against nations, it's often because the country has done something egregious such as seizing assets, said James Loftis, a partner who leads Vinson & Elkins' international dispute practice.

In this case, TransCanada is alleging the U.S. wronged the company by denying a permit - a permit the company knew in advance it might not get.

"It's pretty unprecedented," Loftis said. "It's a tough hurdle to cross."

Major arbitration proceedings can last years, and neither side is showing much inclination to negotiate a settlement.

In a statement Wednesday, TransCanada said it is "prepared for a lengthy process that could take several years."

At a news briefing Thursday in Washington, White House press secretary Josh Earnest touted the U.S. record in arbitration.

"The United States has never lost a case," he said. "We certainly feel confident in the arguments that we'll be able to make."

The back-and-forth and the fresh headlines they generate may be one reason TransCanada is pursuing the case, said Michael Goldberg, a partner who chairs Baker Botts' international arbitration section.

"You can't ignore the political ramifications of these issues," he said. "Some may say the filing of notice was simply a bargaining chip for the next administration and to keep the project alive."