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Builder’s Financial Fragility Could Doom Dakota Access Pipeline

lars plougmann/Flickr
lars plougmann/Flickr

In the immediate aftermath of the U.S. Army Corps of Engineers’ blockbuster decision last week to deny a final permit for the Dakota Access Pipeline, conventional fossil industry wisdom held that the incoming Trump administration would reverse the decision at its earliest opportunity. But a flurry of analysis over the last week suggests a more complicated, tortuous path for the project.

Pipeline company Energy Transfer Partners originally was expected to finish the pipeline before the end of this year, but the Army’s move likely delays it by several months,” Associated Press reports. That reality on its own “is unlikely to kill the project completely,” industry analysts say. But “delays have already cost Energy Transfer Partners more than US$450 million, the company said in court documents last month, and continued delays cost $83.3 million per month.

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Trump takes office January 20. Even if that’s the day the pipeline receives final approval, ETP will need two to three months to complete its intensely controversial tunnel under Lake Oahe—and by the company’s own account, that may be longer than project proponents can hold out.

Dakota Access attorney William Scherman said in a November 15 document filed in U.S. District Court in Washington that further delay could ‘threaten the very survival’ of the $3.8-billion, privately-funded project,” AP notes. “He said the company has long-term transportation contracts with nine shippers indicating the pipeline will be in service by January 1, 2017, and the shippers have the right to terminate those contracts if terms aren’t met.

Wood Mackenzie Vice President Skip York said it’s unlikely fossil producers will cancel contracts outright, since it would cost them less to ship their product via DAPL than by rail. But they may take the opportunity to renegotiate contracts signed when oil was selling for US$95 per barrel, compared to today’s range of $45 to $50.

The delay may also be longer than the AP report suggests, according to ClearView Energy Partners analyst Kevin Book. “The Army Corps didn’t block the pipeline per se, but rather said further study on alternative routes is required,” Bloomberg notes. “This could entail nothing more than a delay of just over a month. Alternatively, if it lets pipeline opponents get a further injunction against the current proposed route, then a longer delay or even a costly rerouting cannot be ruled out entirely.”

All of which might be a problem for a development partnership that is already showing signs of severe financial stress.

There is of course a penalty to having any growth project potentially delayed, as eventual profits get pushed farther out in time,” Bloomberg analyst Liam Denning writes. “But the more pertinent issue here is cash.”

The financial wheeling and dealing behind Dakota Access included a merger between two business consortia, Energy Transfer Partners and Sunoco Logistics. By the time the Army Corps announced its decision last week, that partnership had lost $3.7 billion, or about 12% of its value. After the announcement, ETP stock fell 7%, though it later recovered more than half of the loss.

Relief was supposed to take the form of a $2-billion cash infusion by the end of the year, after ETP and Sunoco sold off about half of their stake in the project to two other ventures, Marathon Petroleum Corporation and Enbridge Energy Partners. Now, “it isn’t clear if that payment has been made already—in which case the acquirers might ask for it back until things are clearer—or will simply be delayed,” Denning writes. But with cash flow tight, “neither situation would be helpful.

All of which leaves ETP to deploy what Bloomberg calls “heightened emotion” around the Army Corps announcement, in a bid to “reassure investors that help will arrive soon from Washington, DC.” The upshot, analysts and industry groups told Reuters, is “an unsettling precedent,” since “Energy Transfer had undergone the necessary environmental reviews and permitting processes to move ahead with construction.” The risk for investors is that “pipelines could face higher risk premiums and have a harder time getting volume commitments from shippers that underpin such projects,” Reuters writes, citing Sarp Ozkan, manager of energy analytics for Drillinginfo.

“Until you see that Trump has a track record of approving things and showing that things can get built in time, it’s tough to say it’s not a murky environment for pipelines,” Ozkan said.

That view is reinforced in analysis by the Institute for Energy Economics and Financial Affairs (IEEFA), which points to the “headline risk” and “reputational risk” associated with controversial fossil infrastructure projects, adding that DAPL “is so superfluous as to be a poster child for old-energy-economy overbuild.

“Existing pipeline and refinery capacity in the Bakken will be more than adequate to handle the region’s oil production,” note IEEFA’s Cathy Kunkel and the Sightline Institute’s Clark Williams-Derry. “The Dakota Access Pipeline could well become a stranded asset—one that was rushed to completion largely to protect favourable contract terms negotiated in 2014.”

And needless to say, Standing Rock won’t be the last major battle around North American fossil infrastructure. In Canada, First Nations and others are already gearing up and raising funds following federal approval of Kinder Morgan’s Trans Mountain pipeline. “From Virginia to Vancouver, B.C., communities are getting ready to fight big fossil fuel projects,” writes correspondent Natasha Geiling at Think Progress.

“I’m sending a shout out to all the other pipelines that people are fighting,” said Kandi Mossett of the Indigenous Environmental Network, “that we need to continue to fight and we need to continue to remain vigilant.”

“Standing Rock is yet another very concrete example of how when you fight a pipeline with an unlikely alliance, you win,” added Bold Alliance President Jane Kleeb. “We saw that on Keystone XL, on the Constitution pipeline in New York and Pennsylvania, and now we saw it with the Dakota Access Pipeline.”

She added that the economic populist argument against pipelines makes sense in conservative states like Georgia and South Carolina, where rural Americans take eminent domain seriously and “tend to balk at the idea of large corporations or big government coming onto their land and dictating how that land will be used,” Geiling writes.

It’s the same story in Iowa, AP notes, where Energy Transfer Partners is still in court against a dozen landowners challenging what they see as an illegal eminent domain ruling that allowed the company to extend pipe across their properties. A judge was scheduled to hear arguments in that case this Thursday.

“Pipelines serve as this concrete thing that incorporates place-based organizing. You’re able to communicate to your neighbors why you care about climate change, or eminent domain, or water quality, or Native American sovereignty rights,” Kleeb told Think Progress. “From my perspective, pipelines offer that like no other environmental issue does.”