Canada's Flaherty less optimistic on Keystone prospects

DAVOS, Switzerland (Reuters) - U.S. President Barack Obama's emphasis in his inaugural address on fighting climate change may not bode well for the contentious project to build the Keystone XL oil pipeline, Canada's finance minister said on Friday.

The Canadian government has been an enthusiastic supporter of TransCanada Corp's plan to build the $5.3 billion pipeline, which would open up a huge new market on the U.S. Gulf Coast for crude derived from oil sands in Alberta.

Washington faces a decision in the next few months on whether to approve the project, a possible cure for deeply discounted Canadian crude prices.

'I had reason for optimism before the election that the president would approve it, were he re-elected, but his speech the other day was not encouraging,' Finance Minister Jim Flaherty told Reuters at the World Economic Forum in Davos.

Obama promised in his address on Monday to combat climate change, citing recent fires, drought and storms, 'knowing that the failure to do so would betray our children and future generations'. The United States had to be a leader in sustainable energy, Obama said, putting the issue as a matter of national security and economic opportunity.

Environmental groups oppose Keystone XL, saying it would encourage more carbon-intensive tar sands development.

Surging output and tight export pipeline capacity has pulled the price of Canadian heavy crude in recent months to less than half the value of international benchmark Brent crude. This is hurting the public finances in Alberta, which warned this week of a C$6 billion ($6 billion) shortfall in revenue for its 2013-14 fiscal year as a result.

The Canadian economy, which depends heavily on energy and commodity prices, is also suffering, according to the central bank.

Flaherty pointed out that the energy industry was putting together alternative plans to move Alberta crude to new markets.

Some include Enbridge Inc's C$6 billion Northern gateway pipeline to the Pacific Coast, proposals to ship the oil to Quebec and further east, and even a scheme to build a railroad to Alaska, where the crude could be shipped to the oil port at Valdez.

'We will go wherever we have to go. We are going to create markets for Canadian commodities,' Flaherty said. Asked how fast such plans could be put in motion, he said: 'We'll do it quickly. We have major projects right now on our agenda and we will encourage them.'

TransCanada first applied to build Keystone XL in 2008. Obama rejected it last year, saying it needed a new route around the environmentally sensitive Sandhills region of Nebraska.

This week, Nebraska's governor approved the reworked path that skirts the area, and 53 U.S. senators wrote to Obama urging him to approve the project, citing energy security and jobs benefits. The state department, which is handling the issue because the pipeline would cross the Canadian border, said it will not make a ruling until at least the end of March.

(Reporting by Ben Hirschler; Writing by Jeffrey Jones; editing by David Stamp)