By Jeffrey Jones and Roberta Rampton
CALGARY/WASHINGTON (Reuters) - TransCanada Corp said on Monday it will build the southern leg of its $7 billion Keystone XL oil pipeline first, skirting a full-blown U.S. review and giving President Barack Obama ammunition to hit back at Republicans who have blasted his energy policy.
Building the portion of the contentious pipeline that would run to Texas refineries from the Cushing, Oklahoma, storage hub before the northern section would help remove a pinch-point that has led to deep price discounts for U.S. and Canadian crude and forced refiners to rely more heavily on imports.
TransCanada said it wants the $2.3 billion southern leg in service by mid- to late 2013. It said construction would create 4,000 U.S. jobs, compared with its previous estimate of 20,000 for the overall project, a figure environmental groups disputed.
The company also wrote to the U.S. State Department on Monday detailing plans to refile an application shortly for the remainder of line running to Steele City, Nebraska, from the Canada-U.S. border, reminding officials that much of the environmental assessment work is already done.
The development in the long-running battle over the pipeline comes as Obama seeks to fend off Republican jibes about quashing the project, with surging U.S. gasoline prices and a push for job creation among top election issues.
Obama rejected the initial Keystone XL application in January after more than three years of study, saying it needed more environmental review than could be completed before a tight deadline that had been set by Congress.
The White House welcomed the move, and said it would work to expedite permits for the southern portion of Keystone XL, which in its entirety is widely criticized by environmentalists for its route near underground water supplies in Nebraska and its potential to fuel more development of Canada's oil sands.
"Moving oil from the Midwest to the world-class, state-of-the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production," White House Press Secretary Jay Carney said in a statement.
One benefit to TransCanada of building the 700,000 bpd Cushing-to-Texas portion is the elimination of a lengthy State Department approval, as the line would not cross the Canada-U.S. border. That is where the project stalled in January.
For the northern portion that still requires the agency's green light, TransCanada believes it can have a new route finalized with the state of Nebraska by October or November of this year, Alex Pourbaix, the head of the company's pipeline division, said in an interview.
Given environmental work done to date, the State Department could make its decision as early as the first part of next year, Pourbaix said. That would mean startup in 2015.
The department said it would have to see the application before it could talk about timelines.
"The hope is that it could be more expeditious because we could make use of the work that we've already done, but we still have to do this right and we still have to allow an opportunity for input from all of the folks who we are mandated to allow to have an opinion," State Department spokeswoman Victoria Nuland said.
COOL RESPONSE FROM REPUBLICANS
A chopped-up project comes as cold comfort to Canada's oil sands companies, which have been struggling with widening price discounts for their burgeoning output, partly due to tight export pipeline capacity.
Ottawa has lobbied Washington intensively to move Keystone XL forward as a way to increase returns for one of the country's most lucrative exports. Since it was rejected, the Canadian government has pushed hard for a new export route to the West Coast, where the crude could be shipped to Asia.
That has spurred warnings, especially from Republicans, that China would be the ultimate winner in the debate.
"Under this administration, this is perhaps the best that can be done right now to help move domestic supply to Gulf Coast refiners," said Republican Senator David Vitter of Louisiana.
But completing the whole line is essential to bringing in Canadian oil to offset Middle East imports, Vitter said.
Republicans in Congress vowed to continue their battle to legislate approval for the entire project as part of a highway and infrastructure funding bill.
The full Keystone XL project would extend 1,661 miles to the Port Arthur, Texas, area from Hardisty, Alberta, moving 830,000 barrels a day. Canadian approval is already in hand.
The Gulf Coast portion would help lessen a glut of oil supply at Cushing, a major factor cited for deep price discounts on land-locked North American oil compared with international grades, such as the Brent benchmark.
In the past month, the spreads, especially on Canadian and North Dakota crudes, ballooned, in some cases to record levels, due to tight pipeline space and surging production.
The segment would compete with the Seaway pipeline, run by Enbridge Inc and Enterprise Products Partners.
A reversal in the direction of flow in that line is expected to be completed by June, allowing 150,000 bpd to move to Houston-area refineries. The companies have talked about expanding it to as much as 800,000 bpd.
Pourbaix said he believes that there is more than enough forecast new supply at Cushing - up to 2 million barrels a day - to accommodate both projects.
It is unlikely TransCanada's conduit would run at capacity until the rest of Keystone XL gets built, UBS Securities analyst Chad Friess said.
"I would expect that the returns on this initially will be quite low," Friess said. "I don't think that in the end it will really change anything, other than what's been changed by the cost overruns that have happened so far."
TransCanada shares rose 39 Canadian cents, or 1 percent, to close at C$42.39 on the Toronto Stock Exchange.
Environmental groups were upset that a portion of a project they have fought hard against for more than a year appears to be moving ahead, calling it a "piecemeal gimmick."
"Even though this doesn't bring new oil in from the tar sands, we stand with our allies across the region who are fighting to keep giant multinational corporations from condemning their lands," Bill McKibben, founder of 350.org, said in a statement.
"This fight is uniting people, from environmentalists to Tea Partiers, in all kinds of ways."
(Additional reporting by Jeff Mason and Ross Colvin in Washington; Editing by Rob Wilson)