Dakota Access Pipeline fate up to judge after Army Corps lets it stay open for now

Houston — The fate of the Dakota Access Pipeline is in the hands of a federal judge after the US Army Corps of Engineers said April 9 it will not independently order a shutdown of the primary Bakken Shale crude artery.

US District Judge James Boasberg, who previously ordered the 570,000 b/d pipeline shuttered last year before his order was halted on appeal, will rule as soon as late April on whether to close the pipeline while a more thorough environmental review is conducted by the Army Corps that could last until early 2022.

The DAPL case is closely watched by industry and environmental observers alike because it could potentially set a standard for attempting to close existing pipelines and other fossil fuel infrastructure.

The plaintiffs, led by the Standing Rock Sioux, asked Boasberg to shut the Energy Transfer pipeline as soon as possible because courts have ruled the pipeline is operating illegally and the Army Corps is not taking more direct action.

Boasberg expressed some surprise and disappointment that the Army Corps refused to take a stronger stance after he had already granted a 60-day time extension to allow the new Biden administration to get up to speed on the case.

"It seems I don't have any other option than to go ahead and decide on the motion," Boasberg said during the April 9 court hearing. "I too am a little surprised this is where things stand 60 days later. I would have thought there would be a decision one way or another at this point."

Army Corps lawyer Ben Schifman told the judge that the federal agency is monitoring the status of the 1,200-mile pipeline that runs from North Dakota to Illinois, and ensuring it remains in compliance.

If issues arise, Schifman said, "The government is able to take an enforcement action at any time."

Boasberg granted Energy Transfer 10 days until April 19 to update its arguments against closure, as well as the economic consequences of a pipeline shutdown, especially with higher oil prices in 2021 and the coronavirus vaccine rollout well underway that should further boost oil demand.

The plaintiffs urged for an expedited ruling.

"I think what we're hearing is an attempt to slow walk this decision," Standing Rock and Earthjustice attorney Jan Hasselman said of the defendants.

Hasselman also criticized the Army Corps under President Joe Biden for essentially maintaining the same stance as during the previous Trump administration.

While the US Court of Appeals for the District of Columbia Circuit last year prevented an immediate shutdown of DAPL, the appellate court ruled in January that the pipeline is operating in violation of federal law. The court moved the case back to Boasberg and the Army Corps to decide whether to allow the pipeline to continue operating during the ongoing Environmental Impact Statement study that could ultimately grant the required water crossing easement to put the pipeline back into good legal standing.

"With or without oil flowing, the pipeline will remain an encroachment, leaving the precise consequences of [easement] vacatur uncertain," the court opinion stated in January.

The appeals court agreed with Boasberg's prior ruling that the Army Corps violated the National Environmental Policy Act by approving the pipeline easement without an EIS despite the opposition from some tribes and environmental activists. And the court opinion acknowledged the unprecedented situation of a major pipeline being allowed to operate illegally.

Dakota Access lawyer David Debold said the pipeline owners will ask for an a rehearing en banc of the appellate court ruling, and he urged Boasberg to hold off until that issue is decided. But Boasberg said he can issue his ruling independently of the other court.

While the Army Corps under former President Trump opposed any actions against DAPL, it was previously unclear if the stance would change under the new Biden administration.

Although President Joe Biden has never publicly stated his position on DAPL, he has made both oil pipelines and climate change concerns a major part of his initial days in office. He canceled the permitting for the long-debated Keystone XL Pipeline as promised and he issued a moratorium on new oil and gas lease sales on federal lands and waters. However, both Vice President Kamala Harris and Interior Secretary Deb Haaland have supported shuttering DAPL.

Dollars and barrels

If DAPL is ordered shut by Boasberg in the coming weeks, energy analysts believe drastic measures will not become necessary so long as the closure is temporary only through the back half of the year until the EIS is completed, although an unprecedented permanent closure would have much bigger long-term impacts.

With Bakken crude production and activity already diminished from the ongoing coronavirus pandemic and, to a lesser extent, DAPL uncertainty, a temporary closure would keep projected Bakken production growth from occurring, but it would not trigger substantial reductions in volumes, analysts said.

With the potential loss of DAPL capacity, analyst consensus mostly expects at least 200,000 b/d to move to existing pipeline alternatives, about 200,000 b/d more to crude-by-rail, and up to another 100,000 b/d or so in increased trucking volumes. Some analysts predict crude-by-rail volumes could even grow by at least 300,000 b/d with some modest optimization and expansion work.

North Dakota crude production fell from a high of about 1.5 million b/d at the end of 2019 to less than 865,000 b/d in May during the peak of pandemic lockdowns. Output bounced back to 1.2 million b/d late last year before dipping back to 1.15 million b/d in January.

With fewer than 15 drilling rigs active in the Bakken -- which is 35 lower than the same timeframe last year -- S&P Global Platts Analytics actually expects production to dip a bit more this spring even if DAPL remains open. So a closure would have much less of an impact than during normal times.

Platts Analytics projects average annual production in the Bakken to fall by 45,000 b/d in 2021 year on year and increase by 120,000 b/d in 2022, ending 2022 at 1.3 million b/d -- if DAPL is operating.

In order to financially incentivize large rail growth, Bakken crude prices within the basin would need to at first fall to a nearly $7/b discount to WTI at Cushing, analysts said.

The Bakken spot price at Williston, North Dakota averaged at a 45 cents/b premium to WTI during March, up $1.95/b from February, S&P Global Platts assessments show. So differentials would need to substantially widen.

How did we get here?

In 2016, construction of the Dakota Access Pipeline temporarily became the epicenter of the US environmental movement against fossil fuels, as climate activists teamed up with Native American tribes that wanted to protect their lands and waterways.

Headline-grabbing protests, security clashes and arrests ensued.

In December 2016, outgoing President Barack Obama blocked the completion of the pipeline in a largely symbolic gesture that was quickly overturned after Donald Trump was sworn in, and the pipeline came online later in 2017.

Behind the scenes, the legal fights continued over the fast-tracked environmental permitting the pipeline received under Trump. And Judge Boasberg stunned industry observers when he ordered the pipeline shut in July 2020. One month later, the shutdown order was halted on appeal.

Even with the pipeline's fate in question, operator Energy Transfer was still moving forward with expanding the crude pipeline's capacity by the end of 2021, although the timing is now unclear. Early construction work, including surveying and concrete pouring to build new pumping stations, began last year.

"We do not see a scenario where the pipeline will be shut-in," Energy Transfer co-CEO Thomas Long insisted on the company's earnings call on Feb. 17.

The pipeline would climb to about 750,000 b/d of crude capacity as part of the capacity expansion project, according to Energy Transfer. The company has planned to expand Dakota Access to 1.1 million b/d. But, with the ongoing coronavirus pandemic hurting crude demand, the expansion is taking a phased-in approach.