Keystone XL: Will Obama use the NAFTA option?

As the Obama administration puts off once again any decision on authorizing the Keystone XL pipeline, there are whispers of another intriguing possibility. If the U.S. government fails to approve the pipeline soon or rejects it outright, the Canadians may challenge the delay or rejection under the provisions of the North American Free Trade Agreement (NAFTA) signed by both countries. This move opens up a politically attractive option not previously available to the Obama administration, something I'll discuss below.

I've been wondering about how NAFTA might affect any decision. Under its provisions, Canada is obliged to maintain the same ratio of exports to total production of oil and natural gas as prevailed in the previous 36 months regardless of the situation, that is, emergency or no. The pain of any voluntary restriction by Canada must be borne in proportion to its current consumption. Each party to the treaty would be obliged to suffer the same percentage decline in oil or gas deliveries from Canadian production.

So, what if Canada decides to expand oil production from the tar sands and export that oil to Asia? Would that production be included in total Canadian production for the purposes of the treaty? Could the United States proceed against Canada for reducing the proportion that the United States is receiving from total production? 

Or, what if the Canadians build an eastward-flowing pipeline that simply delivers the extra oil to eastern Canada ending that region's dependence on imported oil? The answers to these questions are not clear to me. The treaty doesn't seem to envision such scenarios.

But now it seems that with the U.S. government dithering over the Keystone XL pipeline decision, it is Canada that is the aggrieved party. Still, until recently I couldn't see how the NAFTA rules about export ratios would have any bearing on the Keystone decision. As the importer in the treaty, the United States seems to have an avenue for protesting any reduction or cutoff of oil deliveries, but the Canadians do not seem to have any leverage to force the United States to take more Canadian oil.

However, a reader alerted me to the current thinking in Ottawa which includes preparations for a possible challenge to any rejection by the U.S. government of the Keystone XL. Under entirely different provisions of NAFTA the Canadian government is readying itself to claim that the Keystone XL project is being treated differently from other previously approved pipeline projects which now cross the U.S.-Canadian border and that such discrimination is not allowed under NAFTA.

It turns out that the company proposing the pipeline, TransCanada, would also have standing under NAFTA to bring such a complaint. But the company is at present noncommittal about any such move.

Now let me spin a possible interpretation of these events without claiming any inside knowledge about the motives of the parties involved. With Congressional elections coming up later this year, it seems obvious that President Obama is loathe to anger environmentalists--some of whom are large donors--by approving a pipeline which they claim will aggravate climate change by increasing the exploitation of the tar sands. (Of course, oil from the tar sands could simply be shipped elsewhere.)

The president has now put off any decision for two elections hoping to placate his supporters. But he has angered the Canadian administration in the process.

Now, here is the kind of situation where I've asked myself in the past whether Obama just doesn't see the whole picture or whether he is actually 10 steps ahead of everyone else including me. This is because I fully expected him to approve the pipeline after the 2012 election. I didn't think he could put it off. And, I thought his own supporters would see him as cynical for merely postponing until after the election a decision he had already made.

But Obama has successfully delayed once again. So, I began thinking along the same lines as I did in 2012: He'll surely have to approve the pipeline after the 2014 election. He'll have no choice. His own State Department says that it is no less safe than any other pipeline. In fact, it will be safer because the latest safety technology will be applied. And besides, the State Department says explicitly that the oil will simply go elsewhere if the United States doesn't take it. So, the president will finally be forced to exhibit his cynicism on this issue.

But with the Canadian move, there is another possibility that would work out perfectly for Obama and the Democratic Party. After the election and seeming to stand on principle, the president rejects the Keystone XL pipeline application. This is hailed as a big win for the environmental movement.

After the celebration dies down, the Canadians challenge the decision under the arbitration provisions of NAFTA. Any decision by the arbitration panel is final. The panel then decides that the failure to approve the pipeline is discriminatory under the treaty and reverses President Obama's decision. The president reluctantly complies. What else can he do? His hands are tied by the treaty.

Is this what the president wants to have happen? I claim no power to read minds. But, perhaps some people in the administration know the answer. It is possible that they haven't thought of this scenario, but I doubt. And so, just this once the president may not be 10 steps ahead of me. We'll see.