The U.S. government has denied an application by TransCanada to build the Keystone XL pipeline, the State Department announced Wednesday.

A statement released by the department said it doesn't preclude the Calgary-based TransCanada from applying again with a different route, and the company said in a press release that it will do just that.

Natural Resources Minister Joe Oliver said the government hopes a new TransCanada application will be approved but that Canada is going to look to other markets to sell its oil.

"It is clear that the process is not yet over," Oliver said.

"Our focus is, as you know, on diversifying our markets. We currently have one customer for our energy exports. That customer has said that it doesn't want to expand at the moment. So it certainly intensifies the broad strategic objective of the government to diversify to Asia."

In an interview with Evan Solomon, host of CBC's Power & Politics, Oliver said he expects other pipelines to be built to the U.S. and said Canada's efforts now are being put toward that diversification.

"Moving oil to the West Coast and on by tanker to Asia is even more important," he said.

Prime Minister Stephen Harper spoke to U.S President Barack Obama on the phone about the decision to deny TransCanada's Keystone XL pipeline. The company has indicated it will reapply for a presidential permit. (Deb Ransom/PMO)

In its statement, TransCanada said the company will submit a new application based on "the exhaustive" record compiled over the past three years.

"While we are disappointed, TransCanada remains fully committed to the construction of Keystone XL. Plans are already underway on a number of fronts to largely maintain the construction schedule of the project," said Russ Girling, TransCanada's president and chief executive officer.

"Until this pipeline is constructed, the U.S. will continue to import millions of barrels of conflict oil from the Middle East and Venezuela and other foreign countries who do not share democratic values Canadians and Americans are privileged to have," he said.

The company says it's working with the state of Nebraska to design a new route around an ecologically sensitive area and expects to have finished that process by September or October of 2012.

Social Media Keystone denial spurs strong online reaction. Read more.

Girling said the company expects a new application "would be processed in an expedited manner to allow for an in-service date of late 2014."

Kerri-Ann Jones, assistant secretary at the U.S. Department of State, said in a briefing that if TransCanada submits a new application, it would trigger "a completely new review process."

"It would just have to go through all of the requirements that are needed for this kind of application review," she told reporters.

Jones said guidelines existed that would allow some of the information generated in the earlier process to be used but she said it would still be treated as a new application.

"I can't really speak to a defined timeline or anything else, because there's no application, and it really is much too speculative," she said.

Alberta Premier Alison Redford said her government will do everything it can to support the Keystone XL project.

"It is good news, in our perspective, that TransCanada Pipeline has decided that they will continue with their application and file a new application," she said.

"I actually believe that it is entirely possible for this project to proceed."

Redford said she expects to travel again to Washington, D.C., to discuss the file.

Obama blames Republicans

A statement released by U.S. President Barack Obama put the blame on Congressional Republicans, who inserted a 60-day deadline for a decision on the pipeline in a December 2011 bill to continue U.S. payroll tax cuts.

"The rushed and arbitrary deadline insisted on by Congressional Republicans prevented a full assessment of the pipeline’s impact, especially the health and safety of the American people, as well as our environment," Obama said in the statement.

What's next? Before TransCanada submits a new pipeline application, it will have to iron out the alternate route the U.S. government had asked for last November for the part of the pipeline that passes through the environmentally sensitive Sandhills region of Nebraska. The area contains the Ogallala aquifer, which supplies eight states with water for drinking and irrigation, and concern about the impact a possible oil spill would have on the aquifer was one of the main reasons behind opposition to the pipeline. The company is already in talks with the Nebraska government about possible alternatives but will have to do further environmental assessments once it establishes a new route. "My view is that the U.S. government doesn't want to move forward with a plan until they have all their 'i's dotted and their 't's crossed, which they don’t have at this time," said Geoff Ready, a Calgary-based oil and gas industry analyst with Haywood Capital Markets. The company's new application will also have to address other concerns raised by the U.S. government, such as the solidity of the pipeline itself. "There is some concern from the U.S. over how corrosive [the oil is]," Ready said. "They believe that oil from Canada is more corrosive than general light oil from other places, so they want to make sure that the pipeline specs … [are] sufficient to meet what they believe to be harsher, more corrosive oil." Ready and other analysts agree that it would be premature for the company to abandon the pipeline because of Wednesday's decision since it seemed to have more to do with U.S. politics than the merits of the project. "[U.S. President Barack] Obama doesn't want to make a decision here right now, because he's got conflicting parties on it," Ready said. "He's got support from labour unions that want it to go through, and he's got environmental groups that don't want it to go through, and if you definitely pick one side or the other, then he's going to alienate some supporters in advance of a presidential election. "So, politically, he wants to defer the final decision under the premise that they want to gather more information, which keeps him safe in both interests' views until after the election." By Kazi Stastna, CBC News

"This announcement is not a judgment on the merits of the pipeline, but the arbitrary nature of a deadline that prevented the State Department from gathering the information necessary to approve the project and protect the American people."

Even before the State Department made the announcement, Republican congressmen criticized the decision, saying Obama had chosen to "create jobs in China" rather than the U.S., as Canada turns to Asia for energy exports.

"The president's policies are making the American economy worse, rather than better," House Speaker John Boehner said, vowing Wednesday's announcement wasn't the end of the fight.

A statement from Prime Minister Stephen Harper's office said Obama phoned Harper earlier Wednesday afternoon.

"The president explained that the decision was not a decision on the merits of the project and that it was without prejudice, meaning that TransCanada is free to reapply," the statement said.

"Prime Minister Harper expressed his profound disappointment with the news. He indicated to President Obama that he hoped that this project would continue given the significant contribution it would make to jobs and economic growth both in Canada and the United States of America.

"The prime minister reiterated to the president that Canada will continue to work to diversify its energy exports."

Harper, Oliver and Foreign Affairs Minister John Baird had all said they supported the Keystone XL pipeline and that they would find alternate markets for Canadian energy if the U.S. isn't interested.

Harper is visiting China next month and is expected to discuss ways to increase trade.

U.S. fears over proposed route

The original proposal would have seen the pipeline run from Alberta through several states to the coast of Texas. It raised concerns in Nebraska because it would pass through an area that supplies drinking water to millions of people. The XL pipeline is an extension of an existing Keystone pipeline.

In November 2011, TransCanada agreed to change the proposed route so that it wouldn't pass through the environmentally sensitive Sandhills area of Nebraska, a move that would add up to 65 kilometres of pipeline and another pumping station to the project.

Last fall, U.S. officials said they would defer a final decision on the pipeline until the end of 2012 — after the next presidential election.

NDP Environment critic Megan Leslie says the U.S. has a legitimate process that has to be completed before an approval.

"I think Americans have legitimate environmental concerns about this pipeline and in the magic of democracy, their president actually listened to them," she said.

"That is in stark contrast to what we have here in Canada, where the Conservative government is dead set on barrelling ahead, fast-tracking applications for energy projects at any cost ...[and] calling people who care about the environment radicals."

Demonstrators call for the cancellation of the Keystone XL pipeline during a rally in front of the White House on Nov. 6, 2011. (Joshua Roberts/Reuters)

A spokesman for Environmental Defence congratulated people in Nebraska and across the U.S. who fought the pipeline.

"Today President Obama acted on the hopes thousands of Americans who stood up for a clean and safe environment in the face of intense pressure from wealthy big oil interests. We applaud his decision to reject TransCanada's proposed Keystone XL tarsands pipeline," Rick Smith said in a statement.

A statement issued by the Pembina Institute said decisions such as the one on Keystone XL are made based on a broad understanding of the issues and the public interest.

"President Obama has recognized the risks this project could pose to the health and safety of the American people and to the environment, and the need to adequately review those concerns. Due public process is critical to making an informed decision," said Ed Whittingham, Pembina's executive director.

"The denial of this project provides clear evidence that industry and government must do much more to address the impacts of developing and transporting oilsands — it's a signal from our customer that cannot be ignored."

In an interview with CBC chief correspondent Peter Mansbridge earlier this week, Harper said it was clear that Canada had to diversify its trade beyond the United States after U.S. President Barack Obama said he would delay a decision on Keystone XL until the end of next year. That deadline would put a decision after the next presidential election.

"I think what's happened around the Keystone is a wakeup call, the degree to which we are dependent or possibly held hostage to decisions in the United States, and especially decisions that may be made for very bad political reasons," Harper said.

"It puts an emphasis on the fact that we must perform our regulatory processes to get timely decisions on diversification of our markets."