But a federal judge in Montana ruled Thursday that the Trump administration's reversal ignored information about the pipeline's environmental impact to support reversing the Obama administration's decision.
Environmental groups had sued TransCanada and the U.S. Department of State in federal court in Great Falls.
The same environmental analysis that the department carried out before denying the permit in 2015 was ignored when the department turned around a year ago and approved it, the judge argued.
The Indigenous Environmental Network, River Alliance and Northern Plains Resource Council filed a pair of lawsuits against the U.S.in March 2017 shortly after President Donald Trump gave his approval for the project to cross the U.S.
The pipeline is created to run from tar sand oil fields in Canada's Albert province, through Montana, South Dakota and part of Nebraska, to existing facilities in that last state.
Environmentalists called the ruling a "major setback" for the pipeline project.
He said the decision also fell short in other areas, including the impact on Native American lands, and did not take into proper consideration issues like oil spills and low prices.
"The Trump administration tried to force this dirty pipeline project on the American people, but they can't ignore the threats it would pose to our clean water, our climate, and our communities", Mr Hayes added.
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The ruling also blamed President Donald Trump's administration, several times, for failing to explain why it had reversed a previous decision made by the Obama administration that cited climate change as a reason for rejecting the project, The Hill reported on November 8.
The administration can appeal against the decision. It has become one of the most controversial oil projects in North America, but it is also one of the most important for Canadian crude oil producers hit by a significant pipeline capacity shortage.
It's meant to be an extension of TransCanada's existing Keystone Pipeline, which was completed in 2013. In the US, the pipeline would stretch 875 miles through Montana, South Dakota and Nebraska, with the rest continuing into Canada.
USA benchmark WTI little changed after the decision, trading down 0.1 percent.
Morris said, however, that there have indeed been changes since the 2014 assessment and that the Trump administration failed to consider them.
- The State Department, in issuing the permit, failed to "analyze the cumulative greenhouse gas emissions" of the Keystone project and the expanded Alberta Clipper pipeline. He ordered the department to complete a full review.
"An agency can not simply disregard contrary or inconvenient factual determinations that it made in the past", Judge Morris said in his ruling.
Morris' order does not permanently extinguish hopes Keystone XL will go ahead, but it will require the administration to come up with a better explanation as to why it should proceed.