The U.S. State Department has ordered an environmental assessment for a new Keystone XL pipeline route, allowing U.S. President Barack Obama to shelve the controversial issue until after the 2012 elections.

Calgary-based TransCanada Corp. has been trying to build the $7-billion pipeline to carry mostly Canadian oilsands bitumen from Hardisty, Alta., to the Texas coastline in the Gulf of Mexico since 2008.

The State Department will assess the potential of alternative routes in Nebraska after public concerns surfaced regarding the environmental sensitivities of the current proposed route through the Sand Hills area.

“Obviously very, very disappointed,” said TransCanada CEO Russ Girling. “After 40 months of rigorous review, hundreds of public meetings and onsite consultations, thousands and thousands of pages of documents, a draft environmental assessment, a supplementary draft environmental assessment, a final environmental assessment to come to the conclusion that we need more study is obviously disappointing for us and is going to be disappointing for our customers.”

Girling said TransCanada looked at eight possible routes through Nebraska, so he thinks the discussion for a new route will start with one of those options that avoids Sand Hills.

However, he said TransCanada feels the smallest impact on the environment lies with the proposed route.

In a special briefing teleconference from Washington, D.C.,Thursday, Bureau of Oceans and International Environmental and Scientific Affairs assistant secretary Kerri-Ann Jones said that while some of the other options avoided Sand Hills they didn't follow the original route so a new segment that hasn't been studied yet may be needed.

But Girling said the company has been building pipelines for 60 years in every condition imaginable safely and reliable.

“We can route a pipeline through the Andes, over the Rocky Mountains, through the Everglades, through the Sand Hills,” he said.

Girling said he is surprised by the push-back. He thinks it has turned from a pipeline approval request into a flashpoint of fierce debate about renewable sources of energy versus fossil fuels and America's dependency on foreign oil, sparking ever-larger and louder protests in the United States.

“To have a debate about that over a pipeline is ridiculous,” he said, adding there is no choice to not use fossil fuels in today’s world. Girling said the question is where America gets oil from until that day arrives.

Girling said TransCanada supports a migration to a less carbon-intensive energy world, which he said is demonstrated by the company’s wind, nuclear and gas-fired power plant initiatives.

TransCanada CEO Russ Girling says TransCanada will work with the State Department on new options. CBS

“We understand where the future is going, but we are not going to get there tomorrow,” he said. “We need oil in this continent and we need safe and secure oil, that’s what keeps the economy rolling.”

The assessment could take as long as 18 months, which would delay the ultimate decision until sometime in early 2013.

"I support the State Department's announcement today regarding the need to seek additional information," Obama said in a statement. "We should take the time to ensure that all questions are properly addressed and all the potential impacts are properly understood."

TransCanada still confident of approval

TransCanada said it will work with the State Department in looking at new options for the pipeline route.

"We remain confident Keystone XL will ultimately be approved," said Girling in a release.

"This project is too important to the U.S. economy, the Canadian economy and the national interest of the United States for it not to proceed.”

Just last week, Girling had warned that any delay could cause oil companies to back out of commitments to use the pipeline.

"If Keystone XL dies, Americans will still wake up the next morning and continue to import 10 million barrels of oil from repressive nations, without the benefit of thousands of jobs and long-term energy security," Girling said. "That would be a tragedy."

Opponents have raised concerns about crossing above the Ogallala aquifer, which supplies the drinking water to 1.5 million people in eight states.

A victory for environmentalists

The decision represented a stunning victory for the North American environmental movement. For months, Keystone XL has been the target of angry protests on both sides of the Canada-U.S. border.

The Pembina Institute, an Edmonton-based environmental organization, applauded the decision, saying similar considerations should be used to assess the pipeline proposed by Enbridge to carry oilsands crude from Alberta to Kitimat, B.C.

"This decision stands in stark contrast with the Canadian government's approach to the proposed Enbridge Gateway pipeline," Pembina Dan Woynillowicz said in a release.

"Rather than maintaining an objective perspective on this pipeline, Prime Minister Harper and his cabinet have been actively promoting its approval before public hearings on the environmental impacts of the project have even begun," he said.

The Prime Minister's Office expressed disappointment with the delay.

"We continue to believe the Keystone XL pipeline will create thousands of jobs and billions in economic growth on both sides of the border," said Harper's spokesman Andrew MacDougall in an email. "While we are disappointed with the delay, we remain hopeful the project will be decided on its merits and eventually approved."

"In the meantime, our government will continue to promote Canada, and the oilsands, as a stable, secure, and responsible source of energy for the world."

Alberta premier reacts

Alberta Premier Alison Redford also expressed disappointment and said she will go to Washington next week to get some answers.

Redford called it a setback for Alberta's oil industry.

Alberta Premier Alison Redford said she hoped the State Department's decision was based on 'science and evidence and not rhetoric and hyperbole from very well-organized interest groups.' CBC

"I sincerely hope that the State Department made this decision based on science and evidence and not rhetoric and hyperbole from very well-organized interest groups," she said in a release.

Alberta's NDP Leader Brian Mason said the uncertainty over the project is an opportunity to reconsider building the pipeline.

He urged the premier to reverse her support for it and commit to upgrading Alberta bitumen in Alberta. Gil McGowan — the president of the Alberta Federation of Labour — agreed, saying the government should consider Alberta's needs and future ahead of our neighbours south of the border.

Proponents say the pipeline will provide thousands of jobs, billions of dollars worth of economic activity and supply a steady stream of reliable oil to the U.S. market. But opponents say it is an ecological disaster waiting to happen.

A lobbyist for TransCanada expressed dismay about the decision, saying it stemmed from "a couple of senior advisers" in the White House.

"It's breathtaking; the White House's political operation gave in to the protesters, going completely outside the national interest and the three-year permit process that's been a painstaking one," the lobbyist, who asked not to be identified, told The Canadian Press.

"The ballsier thing would have been to either approve it or deny it, but to kick the can again is actually more difficult for the president politically. There's 20,000 jobs on the table and they did this to save one — Barack Obama's."

The White House was reportedly increasingly concerned that the Canadian pipeline would cost Obama much-needed votes in the election. Environmentalists within his liberal base had vowed to stay home if he gave Keystone XL the green light.

TransCanada shares closed down 73 cents, or 1.8 per cent, at $39.85 on heavy volume on the Toronto Stock Exchange.

With files from The Canadian Press