The focus of the Keystone XL debate has shifted from a fierce lobbying war in Washington to Lincoln, Nebraska, where the state’s Supreme Court has been asked to weigh a legal challenge to the pipeline.

The U.S. Department of State, which is responsible for reviewing whether the project is in the nation’s interest, said April 18 that it would delay making a recommendation until legal questions about the way the route was approved through the prairie state are resolved. That could spare President Barack Obama from having to decide on a project that splits supporters of his in the environmental and labor movements before an important congressional election in November.

“Once again, the administration is making a political calculation instead of doing what is right for the country,” Terry O’Sullivan, general president of the Laborers’ International Union of North America, said in an email. “It’s clear the administration needs to grow a set of antlers, or perhaps take a lesson from Popeye and eat some spinach.”

If the seven-member state Supreme Court upholds a lower court decision, TransCanada Corp. (NYSE: TRP), the Calgary-based company that wants to build Keystone, will need to apply to the Nebraska Public Service Commission. The commission, by law, has seven months for its pipeline reviews.

“Effectively, this likely postpones the decision until after the U.S. midterm elections,” Robert Kwan, an analyst with RBC Capital Markets, a subsidiary of Royal Bank of Canada, said in a research note April 20.

TransCanada fell 3.3% to CA$49.62 as of 10:30 a.m. in Toronto, the biggest drop in more than two years.

The State Department said the possibility of a new route coming out of that process justified hitting the pause button. The announcement drew a strong reaction from all sides -- including pledges from congressional leaders to force a decision sooner by legislation.

“President Obama is going to try to prevent this project from going forward,” Sen. John Hoeven, a North Dakota Republican, said in an April 18 interview. “He’s trying to defeat it by delay.”

Hoeven said a bill he authored to require Keystone approval is about four votes shy of the 60 needed to advance legislation in the Senate. The announcement may put pressure on a half dozen colleagues, who support the line but have opposed his bill, to give the administration time to reach a decision.

Senate Democrats are trying to retain a slim majority in the midterm elections, and the list of incumbents at risk includes several in states where support for Keystone is strong, including Sen. Mary Landrieu, a Democrat from Louisiana and chair of the Energy and Natural Resources Committee. Landrieu is among 11 Democrats who signed a letter earlier this month that urged Obama to approve the pipeline by May 31.

David Domina, an Omaha lawyer representing the landowners who brought the lawsuit against the pipeline, said the case won’t be argued before the Nebraska high court until September or October. After that, a decision wouldn’t come until months later, he said.

“It’s a case that involves some complexity,” Domina said.

Nebraska Attorney General Jon Bruning’s office didn’t respond to a request for comment on how quickly the court could hear the case.

Pipeline opponent Jane Kleeb predicted the case will take at least until January to be resolved and, if the landowners win, the commission’s decision wouldn’t come until July 2015 at the earliest because of the seven-month requirement. Meanwhile, she said, a permit for the portion that goes through South Dakota is due to expire in June and a renewal could add more time to the clock.

“Pipeline dies under its own weight,” she said in an email.

Shawn Howard, a spokesman for TransCanada, said the permit doesn’t expire.

John Kilduff, partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, predicted the project would probably win the U.S. blessing -- although that could take awhile.

“The Obama administration is probably looking for a way to not approve it but, given the studies, it is going to get approved,” Kilduff said. “It’s just a matter of timing it right with the elections to ease the wrath of the environmentalists.”

David McColl, an analyst at Morningstar Inc., said the delay would raise the costs to build the pipeline, though probably not to a level that would kill it.

“The cost could become prohibitive when the toll for the pipeline equals the cost to move by rail,” McColl said in an email April 18. “This would require a significant cost increase, likely well north of $10 billion -- we don’t think this is likely to happen.”

Without Keystone XL and other pipelines aimed at allowing Canadian crude to earn world prices, Canada’s economy is losing about CA$50 million a day, according to the Canadian Chamber of Commerce. In addition, the surging oil production from Alberta’s oil sands region risks becoming a “significant issue” as volumes quickly catch up to transportation capacity in the next three to four years, Alberta’s Finance Minister Doug Horner said in an April 9 interview.

Western Canada Select, the Canadian heavy crude benchmark, on April 17 traded at an $18.25 per barrel discount to West Texas Intermediate. The discount has been as much as $42.50 in recent years.

In the meantime, railways have stepped in to help meet the rising demand from Canadian oil producers to get their fuel to the U.S. Gulf Coast and other coastal regions of North America.

Companies including Cenovus Energy Inc. (NYSE: CVE) and MEG Energy Corp.  (TO: MEG. TO) are among companies with expanding oil shipments by rail as they boost production. Cenovus has shipped crude to California and even Asia, while MEG Energy transports oil to the Gulf Coast.

Both TransCanada and Enbridge Inc. (NYSE: ENB) are proposing alternative pipelines to Keystone XL. TransCanada is considering a CA$12 billion pipeline from Alberta to Canada’s Atlantic Coast called Energy East, while Enbridge is awaiting a decision by Prime Minister Stephen Harper for the company’s controversial CA$6.5 billion Northern Gateway line from Alberta to Canada’s Pacific coast.

The Nebraska court is reviewing a case brought by three landowners along the proposed route who challenged a state law that gave Gov. Dave Heineman the power to approve the project. A lower court invalidated the law, saying such decisions rest with a special commission established in 1885 to take politics out of the taking of land for railroads.

Until last week, the State Department said the court case wouldn’t affect its ongoing review to determine whether Keystone was in the nation’s interest to build.

A senior State Department official, who spoke on a conference call with reporters on the condition of anonymity, said the delay was prudent given the route could change if it is rejected in Nebraska. The governor and a majority of the state legislature support the project, however.

“Agencies need additional time based on the uncertainty created by the ongoing litigation in the Nebraska Supreme Court which could ultimately affect the pipeline route,” the State Department said in a statement.

Critics said the delay allows Obama, who has said he will make the final call after the State Department review is complete, to punt a politically difficult decision.

“It’s shameful that as we begin spring construction season, that hundreds of my constituents will be denied an opportunity to go to work on a project that will help secure America’s energy future solely because the president wants to placate his political base in an election year,” Rep. Lee Terry, a Nebraska Republican, said in a statement after the State Department announcement.

The pipeline’s path in Nebraska, one of three states the unbuilt northern leg of Keystone would cross, was thrown into doubt in February when a state judge invalidated legislation that let the Republican governor approve the path.

The judge said that only the state’s Public Service Commission -- an agency created to take politics out of decisions involving the taking of land for private projects -- had that power.

Critics of Keystone, a $5.4 billion project that was first proposed by TransCanada in 2008, argue it’s a risk to the climate because it would encourage production of Alberta’s oil sands, which releases more greenhouse gases than the production of more conventional types of crude.

The State Department, which has jurisdiction because the project crosses an international border, was completing its review to decide if Keystone was in the national interest. It was weighing the project’s environmental, economic and diplomatic impacts. Eight federal agencies had until about May 1 to weigh in -- a deadline that is now indefinitely pushed back.

On Jan. 31, the department released a lengthy environmental review that found that Keystone probably wouldn’t significantly contribute to climate change because the oil sands in Alberta would be developed with or without the pipeline.

Environmentalists contend Keystone is a linchpin to oil sands development.

“This decision is irresponsible, unnecessary and unacceptable,” Landrieu said in a statement that called the move “nothing short of an indefinite delay.”