Keystone XL and NAFTA

Famous Case Revisited

No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law and [Minimum Standard of Treatment]; and

(d) on payment of compensation

NAFTA, Investments, Art. 1110

Introduction

In 2008 TransCanada Corporation filed its first application for a Presidential Permit with the U.S. Department of State to build the $8 billion Keystone XL project, a 1,179-mile (1,897 km), 36-inch diameter crude oil pipeline beginning in Hardisty, Alberta and extending south to Steele City, Nebraska.  It will have the capacity to transport 830,000 barrels of oil per day and create 9,000 American jobs.

This column is not about a judicial decision.  Instead, it describes the legal and political background to the failed TransCanada Keystone XL pipeline approval process in the context of a NAFTA claim.

The Need for a Presidential Permit

The new President also took office on the promise to re-negotiate or rescind NAFTA.  Nevertheless, he inherits the existing TransCanada claim and potential liability.  He cannot strike that out by Presidential fiat.

There is already a pipeline from Hardisty to Steele City, but this proposed Keystone XL line is much shorter (more direct) and would have a larger-diameter pipe.  The four other phases of the Keystone pipeline project on U.S. soil to refineries and American markets have been completed.

A Presidential Permit is required for pipelines crossing into the U.S. After receiving extensive input and an Environmental Impact Statement (EIS), the Secretary of State makes a National Interest Determination (NID) regarding the Permit. In this case, the EIS identified environmental concerns in the Sand Hills of Nebraska.

Presidential Permit Denied

TransCanada was willing to change the route.  The Permit was denied anyway.

The company re-applied for the Presidential Permit in 2012.  The new EIS was released in January 2014 but the NID was delayed.  Congress introduced a bill to approve the pipeline. And on January 29, 2015 the U.S. Senate passed the Keystone XL Pipeline Act by close to a 2 to 1 margin.  On February 11, 2015 the House of Representatives also passed the legislation with the same margin.

The American Constitution authorizes the U.S. President to send a bills back to Congress. The bill will then not become law unless two thirds of the House of Representatives and two thirds of the Senate both vote to override the President’s veto.  The Keystone XL Pipeline Act was vetoed by President Obama on February 24, 2015.  On March 4, 2015, the Senate attempted to override President Obama’s veto but came up a few votes short.

Meanwhile, there still had been no ruling on the 2012 application.  After some seven years of review, President Obama rejected the Keystone XL pipeline because it did not serve the U.S. national interest.  It was the first cross-border pipeline ever rejected.

The President’s rationale for rejection appears to be largely political.  Secretary of State John Kerry, in a statement released contemporaneously, offered five other reasons that had little to do with free trade:

 The proposed project has a negligible impact on our energy security.

 The proposed project would not lead to lower gas prices for American consumers.

 The proposed project’s long-term contribution to our economy would be marginal.

 The proposed project raises a range of concerns about the impact on local communities, water supplies and cultural heritage sites.

 The proposed project would facilitate transportation into our country of a particularly dirty source of fuel.

The success of a TransCanada claim against the United States under Chapter 11 of NAFTA will never be a certain thing.  The U.S. has won every NAFTA case that it has faced against Canada.

This rejection was an obvious blow to TransCanada, whose shares immediately dropped 4% on the TSX, and the company wrote down almost C$3 billion after tax.  Calling the pipeline rejection “arbitrary and unjustified”, TransCanada launched a US$15 billion (plus interest and costs) investor-state damages claim against the United States under NAFTA [http://www.keystone-xl.com/wp-content/uploads/2016/06/TransCanada-Request-for-Arbitratio-2n.pdf].  It also brought a separate lawsuit seeking an injunction in U.S. federal court in Houston alleging the President’s decision had exceeded his constitutional authority when he prohibited a cross-border commercial installation in order to enhance his international stature.

A NAFTA Remedy?

The North American Free Trade Agreement (NAFTA) seeks to “eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties” (Art. 102).  Chapter 3, National Treatment and Market Access for Goods, would seem to apply to the Keystone XL pipeline, but what section?  Section A on National Treatment and Section B on Tariffs are not directly applicable. Section C, Non-Tariff Measures, states that none of the NAFTA countries may “adopt or maintain any prohibition or restriction on the importation of any good of another [country] or on the exportation or sale for export of any good destined for the territory of another [country]”.

Chapter 6, Energy and Basic Petrochemicals, Art 603, Import and Export Restrictions, is to the same effect.  These provisions could provide recourse for TransCanada because the rejection of the Keystone XL pipeline effectively blocked Canadian oil export into the U.S.  Yet, this relates only to the import and export of goods and the pipeline itself is merely the infrastructure for the import and export of crude oil.

TransCanada’s claim, technically separate from imports and exports, comes under Chapter 11 of NAFTA, Investment.  Article 1102 contains the National Treatment protections:

 Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

Likewise, Article 1103 (Most-Favored-Nation Treatment) applies:

Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

TransCanada also accused the U.S. of violating Article 1105 (Minimum Standard of Treatment) and Article 1110 (Expropriation and Compensation) which is set out at the beginning of this article.  Ultimately, the issue will become whether the Presidential Permit process (especially as experienced in the Keystone XL application) is consistent with NAFTA Chapter 11.

Defences

 The success of a TransCanada claim against the United States under Chapter 11 of NAFTA will never be a certain thing.  The U.S. has won every NAFTA case that it has faced against Canada.

For example, despite environmental concerns being addressed and signed off, a case could be made under Art. 1114:

 Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

New Trump Administration

After some seven years of review, President Obama rejected the Keystone XL pipeline because it did not serve the U.S. national interest.  It was the first cross-border pipeline ever rejected.

The United States inaugurated a new President on January 20, 2017.  Four days later, President Trump signed a Presidential Memorandum to revive Keystone XL.  It invited TransCanada to re-apply for the Presidential Permit, and directed an “expeditious review” by the State Department so that a final decision would be made within 60 days.  That third application was made almost immediately.

The Houston lawsuit is on hold for three months and the NAFTA arbitration slowly grinds along as does the environmental and indigenous opposition.  The President has requested unspecified re-negotiation of the project, including that the pipe steel be made in the United States. (the pipes are already fabricated).

The new President also took office on the promise to re-negotiate or rescind NAFTA.  Nevertheless, he inherits the existing TransCanada claim and potential liability.  He cannot strike that out by Presidential fiat.

The enduring entanglement of politics, economic nationalism and law in cross-border investments was precisely what NAFTA was intended to eliminate.  The Keystone XL pipeline project provides an example of how challenging that separation is to achieve.

Authors:

Peter Bowal
Peter Bowal

Peter Bowal is a Professor of Law at the Haskayne School of Business, University of Calgary in Calgary, Alberta.

 

Michael Carroll

Michael Carroll will graduate this spring with a B.Comm. from the Haskayne School of Business and starts law school in the US in the fall.

 


A Publication of CPLEA