WASHINGTON  Tue Feb 3, 2015 8:03pm GMT

Oil prices have dropped so low that the Keystone XL pipeline could play a bigger role in the development of Canada's oil sands and raise greenhouse gas emissions, Obama administration environmental regulators said.

The U.S. Environmental Protection Agency's comments in a letter to the State Department give weight to President Barack Obama's view that the controversial pipeline should not be approved if it significantly increases carbon pollution. The letter, sent on Monday, was released on Tuesday.

The EPA implied that oil prices, which have more than halved since the summer, mean that shipping Canadian oil to the United States would not be economical unless the pipeline was built.

The State Department, which is evaluating the project because the TransCanada Corp pipeline would carry oil from a foreign country, is expected to make a recommendation to Obama soon, after reviewing comments from the EPA and other federal agencies.

Obama will make the final decision on Keystone, which has been pending for more than six years. He has said the project should not be approved if it substantially raises emissions linked to climate change.

The EPA said more attention should be paid to the "potential implications of lower oil prices on project impacts, especially greenhouse gas emissions." The White House had no comment on whether the letter shows the project fails Obama's climate test, noting the State Department's approval process was ongoing.

In January 2014, the State Department's environmental review of Keystone XL concluded that it would not affect the rate of oil sands development or significantly raise emissions because rail cars would carry the oil to U.S. markets even if the pipeline was not built.

The EPA urged the State Department to "revisit" its conclusions from last year that the pipeline would not lead to a rise in emissions.

Transporting oil by rail is more expensive than shipping it by pipeline. So, the lower oil prices go, the more likely a new pipeline would speed up the rate of oil sands development. Keystone XL would ship 830,000 barrels per day of crude, mostly from Alberta's oil sands, to refineries and ports on the Gulf Coast.

Last year's State Department review found that oil sands production is expected to be most sensitive to transport costs when prices are $65 to $75 per barrel. If prices fell to that level, "higher transportation costs could have a substantial impact on oil sands production levels," the review said. On Tuesday, U.S. oil futures were trading at about $51 a barrel <O/R>.

The EPA also said the State Department's final review showed that until efforts to cut emissions from oil sands production are widespread, development of the resource "represents a significant increase in greenhouse gas emissions."

Lawmakers are trying to push through the Keystone project on their own. Next week, the House of Representatives will take up a Senate bill passed last week to approve Keystone. Obama is expected to veto the bill.

Environmental groups seized on the EPA letter, saying it paves the way for Obama to reject the pipeline.

"Keystone XL continues to be a step backwards and simply does not make sense given low oil prices and the high carbon content of tar sands," said Jane Kleeb, president of activist group Bold Nebraska.

Energy company interests slammed the EPA comments, saying that the crude price drop was likely temporary. A TransCanada spokesman said emissions from Canada's oil sands are falling as technology improves, while emissions from similar oil deposits in countries that export to the United States are going up.