Permits affirmed for Line 3 replacement pipeline project, Minnesota court rules

Construction may continue on the Line 3 replacement project to move more Canadian heavy oil to the US by the end of 2021 now that the Minnesota Court of Appeals on June 14 upheld the pipeline's permitting approvals.

The key court ruling prevents any major delays for now to Enbridge's biggest pending project that would increase Line 3's crude pipeline capacity from 370,000 b/d now to 760,000 b/d as it transports Canadian crude from Alberta to Superior, Wisconsin, although the bulk of the remaining construction work is in Minnesota.

The Minnesota appellate court ruled in a split 2-1 decision that -- despite errors in the permitting process -- substantial evidence supports the need for the pipeline replacement and that the court should defer to the expertise of the Minnesota Public Utilities Commission that approved the project.

After US President Joe Biden revoked the permitting for the competing Keystone XL Pipeline that was formally terminated last week by TC Energy, the Line 3 project became the top pipeline expansion slated to relieve the Canadian pipeline bottleneck slowing the flow of heavy oil into the US. However, the White House has stayed out of the Line 3 debate, despite protests of several hundred people trying to push Biden to act.

The heavy oil pipeline is more than 60% completed in Minnesota after a two-month spring pause, but construction recently resumed June 1 with plans still on track for a fourth-quarter startup this year.

More appeals and other lawsuits will continue against Line 3, but the Minnesota appellate court decision was considered the biggest potential roadblock to Line 3, potentially delaying construction by a year or so if the regulatory processes needed to be restarted.

"After six years of community engagement, environmental review, regulatory and legal review, it's good to see confirmation of previous decisions on the Line 3 replacement project," said Enbridge Executive Vice President Vern Yu in a statement. "From the start, the project has been about improving safety and reliability for communities and protecting the environment."

When it comes online, Enbridge also will ramp up the volumes on its recently expanded Wisconsin-to-Illinois Southern Access crude oil pipeline, with capacity growing from 996,000 b/d to 1.2 million b/d.

Canadian producers are especially banking on the Line 3 project to help export more crude oil to the US and reduce their partial reliance on crude by rail. Producers also are looking forward to the expansion of the Canadian government's Trans Mountain Pipeline, which is slated for completion by the end of 2022.

A positive court ruling for Enbridge was baked into WCS crude prices already, so the market reaction on June 14 was muted.

The Line 3 replacement project is a vital piece of infrastructure that supports growing Canadian production volumes, according to S&P Global Platts Analytics.

Canadian production is expected to reach new highs by the fourth quarter of 2021, so the startup of the pipeline will be timed well to absorb the growing volumes. With the new pipeline capacity, WCS should be priced at pipeline economics, keeping the differential tight moving into 2022 and reducing the reliance on crude-by-rail exports, according to Platts Analytics.

Western Canadian supply, including diluent, is expected to rise by 410,000 b/d in 2021 on average, and by an additional 110,000 b/d in 2022, according to Platts Analytics.

Legal dispute

Plaintiffs in the Line 3 case contended the utility commission failed to account for the risks of oil spills and did not properly weigh the need for the pipeline replacement, especially considering the ongoing energy transition away from fossil fuels.

But a majority of the three-judge panel ultimately disagreed.

"While reasonable minds may differ on the central question of need for replacement Line 3, substantial evidence supports the commission's decision to issue a certificate of need," the court ruling concluded. "Finally, the commission reasonably selected a route for the replacement pipeline based upon respect for tribal sovereignty, while minimizing environmental impacts."

However, the ruling made clear this was not an easy decision.

"With an existing, deteriorating pipeline carrying crude oil through Minnesota, there was no option without environmental consequences," the court decision stated. "The challenge: to balance those harms. There was no option without impacts on the rights of indigenous peoples. The challenge: to alleviate those harms to the extent possible. And there was no crystal ball to forecast demand for crude oil in this ever-changing environment."

In the dissenting opinion, Judge Peter Reyes Jr. said the utility commission committed legal errors and acted arbitrarily in its permitting in favor of Enbridge.

Reyes noted that the pipeline project traverses 340 miles of Minnesota land, impacting the environment, Native America tribes, and hunting and fishing activities "with no benefit to Minnesota."

"Such a decision cannot stand," Reyes argued. "Enbridge needs Minnesota for its new pipeline. But Enbridge has not shown that Minnesota needs the pipeline."