A Dangerous Precedent

This week I would like to weigh in on the Dakota Access Pipeline (DAPL) project that has been dominating the news recently. I will explain the background, the issues and the reasons why the latest move by the Obama Administration sets a dangerous precedent.

The DAPL is being built by a subsidiary of Energy Transfer Partners (NYSE: ETP) to transport 470,000 barrels of crude oil from the Bakken/Three Forks formations in North Dakota to markets and refineries located in the Midwest, East Coast and Gulf Coast regions of the United States. The purpose of the pipeline is to help relieve a logistical bottleneck for crude oil producers in North Dakota. The major alternative is shipping crude by rail; this hazardous traffic has increased in recent years alongside the region’s oil output.

The DAPL project involves building approximately 1,172 miles of pipeline through the states of North Dakota, South Dakota, Iowa and Illinois, terminating near Patoka, Illinois. Here is the pipeline’s route:


Source: Energy Transfer

Before construction on the pipeline could begin, multiple agencies had to approve it. The North Dakota Public Service Commission (PSC), South Dakota Public Utilities Commission, the Illinois Commerce Commission and the Iowa Utilities Board all had to grant permission at the state level.

Most of the pipeline is being built on private property, and the initial approval process took place through the PSC. Three public hearings were held in North Dakota to discuss the pipeline. At no time during this process did any member of the Standing Rock Sioux Tribe (SRST) appear at the hearings to voice objection, nor did the tribe present any written statements opposing the pipeline.

A portion of the pipeline (~3%) does go across federal lands, so the DAPL also had to obtain the approval of the United States Army Corps of Engineers. Again, unsuccessful attempts were made to engage the SRST on the pipeline’s route and potential impact. After two years of proceedings the Army Corps of Engineers approved the DAPL in July 2016.

Then in August 2016, the SRST sued the Army Corps of Engineers over the permit it had granted, and sought a preliminary injunction to halt work within the Army’s jurisdiction. A month later, federal Judge James E. Boasberg denied the tribe’s request, in a ruling which can be read in full here.

Judge Boasberg noted that the SRST was not legally objecting on the basis of environmental claims, nor did it argue on the basis of “potential environmental harms that might arise from having the pipeline on its doorstep. Instead, it asserts only that pipeline-construction activities — specifically, the grading and clearing of land — will cause irreparable injury to historic or cultural properties of great significance.”

The 58-page ruling is comprehensive. The judge noted that the Corps attempted to meet with the SRST five times without success. He further noted that the DAPL had been rerouted 140 times in North Dakota, and had in places used an existing natural gas right of way to avoid culturally significant sites. In conclusion, the judge wrote:

“As it has previously mentioned, this Court does not lightly countenance any depredation of lands that hold significance to the Standing Rock Sioux. Aware of the indignities visited upon the Tribe over the last centuries, the Court scrutinizes the permitting process here with particular care. Having done so, the Court must nonetheless conclude that the Tribe has not demonstrated that an injunction is warranted here. The Court, therefore, will issue a contemporaneous Order denying the Plaintiffs’ Motion for Preliminary Injunction.”

Just a few hours after this decision, the U.S. Department of Justice (DOJ) overruled the court. The DOJ issued the following statement:

“The Army will not authorize constructing the Dakota Access pipeline on Corps land bordering or under Lake Oahe until it can determine whether it will need to reconsider any of its previous decisions regarding the Lake Oahe site under the National Environmental Policy Act (NEPA) or other federal laws.  Therefore, construction of the pipeline on Army Corps land bordering or under Lake Oahe will not go forward at this time.  The Army will move expeditiously to make this determination, as everyone involved — including the pipeline company and its workers — deserves a clear and timely resolution.  In the interim, we request that the pipeline company voluntarily pause all construction activity within 20 miles east or west of Lake Oahe.”

This is an extraordinary decision for several reasons, but primarily for the precedent it sets. The message is that a permit already granted can simply be revoked. In this case the company  received all appropriate permits, invested billions into building a pipeline, got very far along toward its completion and now has been stalled as a result of protests. This precedent dramatically increases the risks of doing business, and could have a chilling effect on future projects, which is in fact the objective of some protesters.

Make no mistake, the environmental organizations lining up behind these protests are not doing so because they care deeply about the rights of Native Americans. I am not saying that they don’t care at all, but this is primarily a means to an end, and that is to drive up the costs of using fossil fuels so they are kept in the ground. The Obama Administration has implicitly endorsed this agenda on multiple occasions, most notably with its endless foot-dragging and eventual decision against the Keystone XL Pipeline.

As with Keystone XL, should this project be stopped one of the big beneficiaries will be Warren Buffett. Buffett’s Berkshire Hathaway (NYSE: BRK.B) owns the Burlington Northern Santa Fe (BNSF) railroad, and moving oil out of the Bakken has been a major source of revenue for that business. Pipelines such as the DAPL compete directly with rail for the oil shipping business. During the week following the Sept. 9 DOJ ruling, Berkshire Hathaway shares outperformed Energy Transfer Partners units by 8%.   

As I have noted on multiple occasions, while there is no 100% failsafe way to transport anything, pipelines are certainly safer than rail for shipping crude. The 2013 Lac-Mégantic rail disaster in Quebec, which killed 47 people in a blast caused by a runaway train transporting oil from the Bakken to a refinery in New Brunswick, is one recent example of the risk in crude-by-rail.

Just to be clear, I am not opining on the merits of the Sioux tribe’s objections. I am simply arguing that these objections should go through the proper legal channels. Given the extensive oil and gas pipeline network in the U.S., it is critically important to have clear and consistent laws and procedures governing their construction. Businesses need to have consistent rules if they are going to be willing to invest billions of dollars into massive infrastructure projects.  

We continue to cover the investment implications of this case in The Energy Strategist and MLP Profits. Please consider subscribing to stay up to date on the latest developments.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)


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