WASHINGTON (Reuters) - A small Nebraska state commission that has never considered a major oil pipeline route could soon play a pivotal role in deciding the fate of the Keystone XL pipeline, a project brimming with political risk for both the U.S. and Canadian governments.
A court ruling this week reinstating the Nebraska Public Service Commission's authority over TransCanada Corp's $5.4 billion project from the Alberta oil sands has raised new questions about a long-delayed project that Canada considers crucial to its economic future.
As a result, Keystone XL may face several more months of uncertainty while the state's judicial system finally decides who has the power to approve its proposed path.
The commission could start its review once TransCanada submits an application, but the company will likely wait to see whether the lower court's ruling stands up against appeals.
If the commission does end up evaluating the pipeline's route, it would open the door for more snags for the project.
"It's another round of approvals that gives the project opponents another opportunity to challenge it in litigation or somewhere else," said Lowell Rothschild, an attorney for Bracewell and Giuliani who represents clients on environmental compliance issues.
The fresh uncertainty could lead to another pause in the Obama administration's federal permitting process as well. The president, who has the last word on whether the project can proceed, had been expected to issue his decision as early as this spring. Now all bets are off, even as Canada steps up pressure on the administration to give its blessing.
The commission first gained authority over oil pipeline routes in Nebraska a little more than two years ago, just as Keystone - which would deliver Canadian crude to U.S. Gulf refineries - was taking on national significance.
But the commission, which has existed in one form or another for more than a century, was cut out of the process in 2012 when the state legislature passed a law putting the final decision on the route in Nebraska Governor Dave Heineman's hands.
A state court decision on Wednesday restored the commission's authority.
Unless that ruling is overturned or a new law passed, TransCanada will have to submit an application to the commission for the untested review process, which could take seven months or more to complete.
The agency's five elected commissioners would take on the task of deciding whether the Keystone route was in the public interest, placing them in the middle of a political tug-of-war.
Opponents say the pipeline would exacerbate climate change by supporting carbon-intensive development of oil sands crude.
Supporters in Congress and the energy industry say Keystone would improve U.S. energy security and create thousands of jobs. They have pressured the White House to speed up federal review of the project, now in its fifth year.
For Canada's oil industry, the pipeline is considered key to accessing the high-value refining market on the U.S. Gulf Coast, where bitumen from the oil sands can compete against more expensive heavy oil from Venezuela and Mexico.
Approval of the pipeline is viewed as critical to a further expansion of oil sands production. With output now pressing against the capacity of Canada's existing export pipelines, Keystone XL could remove constraints that have made expensive rail shipments popular with producers.
The Nebraska commission's regulations lay out a detailed process for assessing impacts of the pipeline that includes at least one public hearing.
State law gives the commission seven months to issue a decision on an oil pipeline, though an extension to 12 months or more is possible under certain circumstances.
Environmentalists, who were active in the commission's process for developing the oil pipeline regulations, welcomed the move to the panel that is generally viewed as apolitical.
"We think it's a much better process than the process that was thrown out," said Ken Winston, the Nebraska policy advocate for the Sierra Club, referring to the legislation, rejected by the court, that put the decision in the hands of the Republican governor.
A potential roadblock that TransCanada would face during the commission's process is that the agency will have to consider the views of local counties and governments surrounding the route, some of which oppose the pipeline's route over concerns about harm to fragile ecosystems in the state.
A spokeswoman for Governor Heineman directed inquiries about the commission to the state's attorney general office, which also declined to comment.
While the agency would not look at the safety of the pipeline or the risk of leaks, it would have to assess "intrusion" of pipeline construction on natural resources and the economic and social impacts of the project.
Nebraska law also requires that state agencies such as the Department of Environmental Quality (DEQ) and the Department of Natural Resources provide input on pipeline applications, and it allows the commissioners to ask the agencies to submit reports related to proposed projects.
Since the DEQ already released an environmental review of the pipeline last year ahead of the governor's decision, the commission's assessment could wrap up in seven months, said Christine Tezak, an energy analyst with ClearView Energy Partners in Washington.
The DEQ report found the pipeline would avoid the sensitive Sand Hills region of the state and that construction of the project would have "minimal" environmental impacts in the state.
"That substantial dry run would seem to help a first-through-the-process project," Tezak said.
If the commission does wind up taking on the Keystone case, it would likely have to hire outside contractors to help carry out the review. The commission's natural gas department, which would handle the Keystone application, has two people on staff full time.
Nebraska State Senator Jim Smith said he was not concerned about the commission's ability to issue a decision on the project's route, although he prefers that the state prevail in its appeal of the overturned law.
"I don't think the Public Service Commission would have any problem or difficulty with the review," Smith said.
Smith, a Republican, sponsored the legislation that gave authority over Keystone to the governor and the state's environmental agency.
He said he introduced the bill because the commission was still getting its regulations for oil pipeline routes in place.
The U.S. State Department last month issued an environmental impact statement that found that approving Keystone XL would not unduly worsen climate change.
Reporting by Ayesha Rascoe; Editing by Peter Cooney and Frank McGurty