What’s the issue?
The risk to projects used to end when a pipeline went into service, but the recent litigation over DAPL and Enbridge’s Lines 3 and 5 shows that is no longer the case.
Why does it matter?
Risk drives up the cost of doing business and risks of shutdowns after a pipeline has been operating, like DAPL for three years or Line 5 for almost 70 years, is a recent development that could drive up the costs for all privately-funded infrastructure projects in the future.
What’s our view?
Following a turn of events by the judge reviewing a request to shut down the pipeline, we think DAPL faces a reduced risk that the court could order it to be shut down this week. Line 5 is negotiating for its life with the help of its friends in the Canadian government and Line 3 faces a decision in less than sixty days that could create a “DAPL risk” for that project as well.
We first wrote about the Dakota Access Pipeline (DAPL) on January 9, 2017, in a Special Report: Tribe and Army Corps File Briefs Opposing Dakota Access's Motion, in which we noted that the U.S. Army Corps of Engineers (USACE) was still trying to decide whether to grant an easement to DAPL. At the time, DAPL was unconcerned, because it was certain the incoming Trump administration intended to grant the easement. We last wrote about DAPL just two weeks ago in Threat of DAPL Shutdown Grows, where we noted that the same judge from 2017 would soon be deciding whether to shut down the pipeline, even though it has been safely operating for three years, because that same easement was judged to be not adequately justified by the environmental review conducted by the USACE.
This brief history shows how long the risk of litigation over a single regulatory decision can plague a project. It also demonstrates a new risk not previously encountered -- the risk that an operating pipeline could be shut down. This operational shutdown risk is no longer borne by DAPL alone, however, because, as we discuss today, the operation of Enbridge’s Line 5 has been threatened by the State of Michigan over an easement granted in the 1950s. Also, Enbridge’s Line 3 replacement project has been allowed to continue construction because the regulator and the courts have determined they could order it to shut down once it is operating. This determination means they do not view the construction of the project as “irreparable harm.”
Because the return needed to compensate investors increases with risk, these growing risks to operating pipelines emanating from long rendered and historically long-standing governmental approvals will only increase the cost of operating pipelines. These costs, in turn, will likely be passed on to shippers and ultimately consumers. Such uncertainty, therefore, benefits no one.
Since we just wrote about DAPL two weeks ago, and because litigation moves at a glacial pace, you would not expect there to be any change to the project’s risk profile. That is decidedly not the case. As we noted then, DAPL indicated to the court that it was going to request a rehearing of the appellate court’s order upholding the lower court’s decision voiding the easement. Less than two weeks after DAPL filed its rehearing request, the appellate court denied the request because not a single judge on the court thought the case was worthy of revisiting. This means DAPL’s last chance for upholding the USACE’s easement is convincing the Supreme Court to take the case, which we do not believe is very likely.
We also noted that the court granted DAPL time to file supplemental information about the harm that would come from a shutdown order. DAPL did so, and last Friday the opposition filed their response. At that point there was nothing standing in the way of the court ruling on the pending motion to order a shutdown. But then, this Monday, the court issued a single line order directing the USACE to file, by May 3, 2021, a status report that gives its latest estimate for the completion of the ongoing EIS and its position, if it has one, on whether the court should issue an injunction against the pipeline. This seems to be a clear indicator that Judge Boasberg did not appreciate the Biden administration trying to make him the fall guy for a shutdown order and so he wants, in writing, exactly what the administration’s position is. We think this greatly improves DAPL’s chances of avoiding a shutdown order as the executive and judicial branches seek to hide behind each other, and neither appears willing to order a shutdown at this point -- but we will know more on May 3.
Even if we are misreading Judge Boasberg and he decides to order the pipeline shut down, DAPL will appeal that decision to the DC Circuit. Absent a poorly reasoned analysis by the lower court, which we view as unlikely, we expect the DC Circuit to again uphold the lower court’s decision on the shutdown question. That would leave DAPL with only an appeal to the Supreme Court for this issue as well, which also seems unlikely to succeed. But if a stay is granted, DAPL would likely continue operating until the EIS is prepared and a final decision on a new easement is made.
We first wrote about Enbridge’s Line 5 in January 2019 in Enbridge’s Line 5 In Michigan - No Good Deed Goes Unpunished. At that time, Enbridge had reached an agreement with the then governor of Michigan, Rick Synder, to replace the portion of the line under Lake Superior with a tunnel that would cost $350 million. The new governor, Gretchen Whitmer, and Michigan Attorney General Dana Nessel both promised during their campaigns to decommission Line 5 even without a replacement. One reason may be that there is no viable replacement. A quick customized map search in the Arbo Liquids Commerce Platform indicates the cost to be about $0.50 per barrel to traverse nearly the entire state of Michigan (from Lewiston to Marysville). It would be nearly impossible to replace the supply volume and low cost of these commodities for the state.
This dispute over an easement first granted in 1953 led to Governor Whitmer sending a purported termination notice late last year to be effective 180 days later, which would be May 12, 2021. The Attorney General of Michigan simultaneously filed a lawsuit in state court seeking to do the same. Enbridge countersued the state in federal court and sought to have the state’s suit transferred to federal court in what is called a removal action. The benefit of filing a removal action is that until the federal court decides the appropriateness of the removal, the state court is prohibited from taking any action. Strategically, this was a very wise move by Enbridge because, even if it were to eventually lose that removal request, it has bought a substantial amount of time.
Therefore, although the state has asserted that oil should stop flowing on May 12, there is no risk of that occurring so long as Enbridge’s actions in federal court remain pending. In the meantime, the federal court has ordered Enbridge and the state to participate in an effort to mediate the dispute.
The first report from the court-appointed mediator filed last week states that the parties met on April 16 for the first time and have scheduled two additional mediation sessions for April 28, today, and May 18, which is after the supposed shut down date. While Enbridge is clearly intent on keeping the pipeline flowing, it is also receiving high-level political support from the Canadian government, which has reportedly raised the continuing operation of the pipeline at every meeting with the Biden administration at every level of interaction.
In testimony before a Parliamentary committee, the Canadian Minister of Natural Resources, Seamus O’Regan, testified that the government was “fighting for Line 5 on every front and we are confident in that fight. The operation of Line 5 is nonnegotiable.” So while this particular shutdown may ultimately be avoided, it is yet another example of how changes in political administrations can reopen long-standing permits and easements.
Enbridge has also been working with the State of Minnesota to replace the portion of its Line 3 running through that state since 2014. It currently has two separate appeals pending before the Minnesota Court of Appeals. The first appeal is a consolidated group of appeals challenging, for a second time, the approvals granted to the project by the Minnesota Public Utilities Commission (MPUC). The second appeal challenges the issuance of a water quality certificate by the Minnesota Pollution Control Agency.
The Court of Appeals has so far refused to grant any stays of ongoing construction, but the reason for denying the stay of construction presents its own risks. In addressing the need for a stay of construction, the MPUC and the Court of Appeals found a stay wasn’t required, because if the approvals are ultimately reversed, the Court of Appeals would be able to order the pipeline to cease operations even if construction was completed, “which would remove the risk of an accidental oil spill ... the most serious potential impact raised by opponents of the Project.” So, as in the DAPL litigation, the potential exists that Enbridge could complete the project, but the court can reverse a previous approval and order a shutdown. In the past, this was often viewed as an idle threat; given the DAPL experience, it can no longer be considered so idle.
In fact, at the conclusion of the oral argument held in March concerning the MPUC approvals, two of three judges hearing the case asked the pipeline’s opponents what they should do if they find the MPUC’s decision needed to be revisited. The answer, of course, was to void the approvals and require Enbridge to reapply. While we don’t think that is likely, the court may well send the case back to the MPUC for further review. Under Minnesota law, the Court of Appeals has ninety days following oral argument to issue its decision, which would mean Enbridge should know by June 23 whether or not the court has found the approvals deficient.
If Enbridge avoids a reversal in that case, the other appeal hearing is not scheduled until June 10, which would put the decision out until September, by which time the project should be almost completely constructed. If either appeal goes against Enbridge, it would need to decide whether to complete construction with a “DAPL risk” hanging over its head. That decision would likely turn on the grounds for any potential reversal of the underlying decision and how far along in the construction process Enbridge is at that point. But certainly, as DAPL shows, putting the pipeline into service while approvals remain subject to court review is a new risk that can no longer be ignored.