TransCanada takes next step in NAFTA case on Keystone pipeline

15 July 2016

Canadian energy giant TransCanada has now filed a request for investor-state arbitration in connection with the US government’s rejection last year of its application to build the cross-border Keystone XL oil pipeline.

The Canadian company has claimed that the decision violates provisions of the North American Free Trade Agreement (NAFTA), which includes the US, Canada, and Mexico as members. TransCanada also refers to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), along with related legal instruments to support this move.

The request follows a notice of intent that TransCanada filed in January 2016. The parties to the dispute also held consultations in which they failed to reach an amicable settlement. (See Bridges Weekly, 14 January 2016) [Editor's note, Bridges Weekly is ICTSD's flagship publication on trade and sustainable development]

Long-running saga

Last November, US Secretary of State John Kerry confirmed that Washington was denying a Presidential Permit for building the pipeline, citing, among other findings, that the project would have negligible domestic economy and energy security benefits; would not lead to lower domestic gas prices; and would facilitate the transportation of a “dirty” source of fuel. 

The critical component, he noted at the time, was that “moving forward with this project would significantly undermine our ability to continue leading the world in combatting climate change.”

The Keystone XL saga began in 2008, when TransCanada submitted its initial application for the pipeline. The State Department denied Keystone’s initial application in 2012 after Congress enacted legislation forcing a decision, with the agency stressing that it needed more time to assess whether the project was in the national interest. Its 2015 decision was based on a new application which Keystone submitted in 2012.

The pipeline was to extend between Alberta, Canada, and the US state of Nebraska, where it would connect with a broader pipeline network. TransCanada projected that Keystone XL would transport up to nearly 900,000 barrels per day of crude oil, and supporters of the project touted its potential contributions to job creation and energy security.

The pipeline has acted as a political lightning rod, provoking intense public scrutiny, lobbying efforts, and protests. It became a focal point for numerous environmental organisations, who mobilised to encourage opposition to the pipeline both at the grassroots level along its intended route and among lawmakers in Washington.

The project has also at times strained Canada-US relations, and factored into election campaigns on both sides of the border. Canada held its elections last year, while the US is in the midst of its own national election process, which culminates in November.

In the lead-up to this year’s US presidential election, there is a clear divide between Democrats, whose 1 Julydraft policy platform supports the Obama Administration’s Keystone XL rejection, and Republican presidential candidate Donald Trump who has stated that he would ask TransCanada to renew its permit application for the pipeline.

TransCanada’s arbitration request is also fuelling debate over the inclusion and nature of investor-state dispute settlement (ISDS) provisions in the 12-country Trans-Pacific Partnership (TPP), which has been signed but not yet been ratified. 

Some high-profile TPP opponents have criticised TransCanada’s attempt to file a claim under NAFTA, including US Senator Elizabeth Warren of the Democratic Party, who has presented it as an example of the alleged “dangers of ISDS.”

TransCanada: State Department delay “unjustified”

According to TransCanada, the State Department’s delay in reaching a decision was “unjustified” because the reasons it provided, such as the need for additional information and analysis, were immaterial to the final decision. 

The company adds that the State Department delayed its decision in the knowledge that TransCanada was investing in the pipeline under the “legitimate but ultimately false belief” that the application would be decided on its merits.

Instead, TransCanada asserts, the lengthy timeline allowed the pipeline to become a political symbol that fuelled controversy surrounding the project, ultimately contributing to a decision that “opportunistically seized on the symbolism of the pipeline as a basis to deny the application, all in an effort to bolster the Administration’s environmental credentials.”  

TransCanada also claims that the denial failed to rely on objective factors rooted in policy direction and past practice, which had informed the company’s expectations of the application process. It argues, for example, that while the State Department concluded on multiple occasions that the pipeline did not raise any significant environmental concerns, a factor applied in previous pipeline decisions, the decision instead cited factors that had never before contributed to a decision. 

TransCanada adds that because the US previously approved other pipeline applications, including those of US and Mexican investors, in a significantly shorter timeframe and based on factors that TransCanada argues would equally have allowed for the Keystone XL permit, the State Department’s denial was discriminatory and damaging to the company.

Requesting US$15 billion

TransCanada is invoking NAFTA provisions that permit investors to submit claims to arbitration under ICSID Convention.  In its request, TransCanada states that it meets relevant jurisdictional rules under both NAFTA and the ICSID Convention, including investor nationality and the existence of an investment, as well as requirements related to consultations, timing, and ICSID membership.

TransCanada claims that the US breached provisions under NAFTA’s Chapter 11 on investments, citing obligations related to non-discrimination, minimum standard of treatment, and expropriation and compensation.

In relation to these alleged breaches, TransCanada is seeking more than US$15 billion in costs and damages, claiming that it lost revenue as a result of the delayed decision, and invested significantly in preparatory work carried out while waiting for confirmation of the State Department’s review. 

Next steps

As a next step, the Secretary-General of ICSID must determine, on the basis of the information contained in TransCanada’s request, whether the request should be registered or if the dispute is “manifestly” outside of its jurisdiction – a process that should be completed this month.

After the registration, an arbitration tribunal will be set up to hear the case.

ICTSD reporting; “TransCanada Files $15B NAFTA Claim on Keystone XL Rejection,” BLOOMBERG, 25 June 2016.

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