U.S. District Judge Brian Morris put on hold the $8 billion project, ruling that the potential impact had not been considered as required by federal law. It basically ordered a do-over.
Under President Trump, the State Department wrote "there have been numerous developments related to global action to address climate change, including announcements by many countries of their plans to do so" since the Obama administration's decision two years earlier.
"Today's ruling makes it clear once and for all that it's time for TransCanada to give up on their Keystone XL pipe dream", Sierra Club senior attorney Doug Hayes said.
Since its conception, the pipeline has sparked a backlash from environmentalists and indigenous peoples who say it violates historical treaty boundaries and would bring environmental problems. "TransCanada does not have an approved pipeline at this point". The Obama-appointed judge specifically called out State's disregarding the climate change arguments against the pipeline it had made under Mr. Obama.
Thursday's ruling deals a major blow to President Donald Trump and the oil industry. No immediate comment came from the administration after the pipeline order.
Work can not proceed until the State Department completes a supplement to the environmental impact statement that complies with the National Environmental Policy Act and the Administrative Procedure Act, Morris ruled. A presidential permit is required for infrastructure projects that cross worldwide borders.
It's meant to be an extension of TransCanada's existing Keystone Pipeline, which was completed in 2013.
The US$8-billion project would help carry 830,000 barrels of crude a day from Hardisty, about 200 kilometres east of Red Deer, to Steele City, Neb., where it could then move on to refineries in the central USA and Gulf Coast.
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.
It met sustained opposition from environmental advocacy groups, as well as from Obama, who anxious about the contribution it would make toward climate change.
They argued that the pipeline would support the extraction of crude oil from oil sands, a process that pumps more greenhouse gases into the atmosphere than standard crude oil extraction.
The permit approval followed years of intense debate over the pipeline amid steadfast opposition from environmental groups.
US benchmark WTI little changed after the decision, trading down 0.1 percent.
"And frankly, approving this project would have undercut that global leadership", he said, adding that the "biggest risk" the USA faced was "not acting". He also demanded that the State Department provide a "reasoned explanation" for the turnaround.