TransCanada Announces Plans for ISDS Claim Under NAFTA

14 January 2016

The TransCanada Corporation, the major North American energy company which had proposed the construction of the Keystone XL pipeline, announced last week that it has filed a notice of intent to initiate a multibillion-dollar investor-state claim against the US government under the North American Free Trade Agreement (NAFTA).

The move, the company said on 6 January, came in response to the Obama Administration’s decision in late 2015 to deny a Presidential Permit for the cross-border pipeline. TransCanada has also challenged the constitutionality of the decision in a US domestic court.

The news brings the famously controversial pipeline project back into the limelight, in an already difficult atmosphere in Washington given election-year politics; separate efforts by US President Barack Obama to push for the ratification of the Trans-Pacific Partnership (TPP) Agreement; and the scepticism in some quarters over the merits and design of investor-state dispute settlement (ISDS) provisions in trade deals.

Continued saga

The Keystone saga dates back to September 2008, when TransCanada applied for a Presidential Permit from the US Department of State to build the Keystone XL Pipeline, which would carry crude oil from Western Canada to the United States.

The pipeline would be capable of delivering up to 830,000 barrels of crude oil per day, though the yearly quantities would likely vary.

In US Executive Order 13337 and Executive Order 11423, as amended, the US Secretary of State was delegated by the President the authority to determine whether granting a permit for certain types of border facilities would serve the national interest, and subsequently whether the permit merited approval.

Over the years, US Congress approved legislation on multiple occasions aimed at speeding up a decision on the pipeline project, citing the prolonged nature of the process – prompting in each case a presidential veto.

For example, in December 2011, lawmakers voted in favour of legislation that sought to require a permit decision for the 2008 application within 60 days – which was vetoed by Obama in early 2012, citing an arbitrarily tight deadline which did not allow sufficient review time. (See Bridges Weekly, 18 January 2012)

TransCanada submitted a revised permit application later that year, which included adjustments such as an altered route to avoid some environmentally-sensitive lands. In early 2015, Obama vetoed once more legislation by Congress that would have required a pipeline decision. In November that same year, the US president announced that the State Department would not be approving the permit. (See Bridges Weekly, 26 February 2015 and 12 November 2015, respectively)

During the State Department review process, concerns had been raised over the carbon footprint from the extraction and refining of Canadian sands oil, along with whether the pipeline itself could pose an environmental risk and whether there would indeed be significant, long-term job creation as a result.

Proponents of the project, however, had argued that Keystone would be a major job creator, while ensuring reliable access to oil in a time when energy security continues to be a significant concern. Whether the perceived environmental and climate risks were as high as some detractors and analysts claimed was also raised by Keystone backers. (See Bridges Weekly, 12 November 2015 and 5 November 2015)

In announcing the denial decision, US Secretary of State John Kerry said that the critical factor was that “moving forward with this project would significantly undermine our ability to continue leading the world in combatting climate change.”

Along with the climate change concerns, Kerry said that the proposed project has a negligible impact on US energy security and will not reduce domestic gas prices, while doing little for the American economy. Kerry also cited questions over the effects the pipeline might have on heritage sites and water supplies, while warning that Keystone “would facilitate transportation into our country of a particularly dirty source of fuel.”

NAFTA claim: TransCanada pushing for US$15 billion

The 22-year old NAFTA pact between the US, Canada, and Mexico, which features a series of trade and investment rules geared toward slashing trade barriers between these parties, sets out under its investment chapter a framework of rules and disciplines that aim to provide investors from participating countries with a predictable, rules-based investment climate.

The chapter also outlines how dispute settlement procedures should work between investors and a NAFTA party government.

In its Notice of Intent to Submit a Claim to Arbitration, TransCanada argued that the denial of a Presidential Permit was “based on politics, not on the merits of the application,” noting among other claims that Keystone would not have been fundamentally different from some oil pipeline projects that have received the permits in the past.

TransCanada asserted that “environmental activists, however, turned opposition to the Keystone XL Pipeline into a litmus test for politicians – including US President Barack Obama – to prove their environmental credentials,” a claim that has also been raised by other proponents of the pipeline, including some US lawmakers, who suggested that the move was made more to ensure the Administration’s climate legacy.

TransCanada also quoted several studies by the Obama Administration and argued that the State Department had concluded on various occasions that the Keystone XL pipeline would not have a significant impact on climate change.

Therefore, TransCanada said, the company invested billions of dollars in the preparatory work for the pipeline project while the Keystone XL Pipeline application was pending, all with the “reasonable expectation that the Administration would process Keystone’s application fairly and consistently with past actions,” given the lengthy lead time that construction would have required.

Under State Department rules, the energy company explained, if construction of a pipeline does not begin within five years after a permit is issued, the permit then expires, prompting the need to begin preparations beforehand. 

“The politically-driven denial of Keystone’s application was contrary to all precedent; inconsistent with any reasonable and expected application of the relevant rules and regulations; and arbitrary, discriminatory, and expropriatory,” the company claimed, arguing that the November 2015 denial was extremely costly – to the tune of several billion dollars.

TransCanada also claimed that the US government breached its NAFTA commitment to provide all Canadian investors with “core investment protections,” including national and most-favoured nation treatment, treatment in line with international law, and “protection against uncompensated expropriations.”

Consequently, TransCanada will be seeking to recover more than US$15 billion in costs and damages that it claims to have suffered as a result of this alleged breach of investment rules.

Constitutional claims

On a separate track, TransCanada is also suing under the US Federal Court in Houston, Texas, asserting that the White House decision to deny construction of Keystone XL exceeded Obama’s constitutionally-granted powers, given that Congress is delegated the role of regulating commerce domestically and with other countries.

“While the President has traditionally granted permits on narrow, established grounds, any such power does not exist when Congress has acted to the contrary or when the decision is based on the unprecedented and symbolic grounds that are the foundation of the denial in this case,” TransCanada said in a press release, noting also the early 2015 veto by Obama of congressional legislation requiring a decision on the pipeline project.

Next steps

In its notice of intent, TransCanada welcomed further discussion with the US government, as Article 1118 of NAFTA provided that “the disputing parties should first attempt to settle a claim through consultation or negotiation.”

NAFTA’s investment chapter requires a minimum of 90 days to pass between a notice of intent and the submission of a claim to arbitration.

ICTSD reporting.

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