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Court preserves Nexus pipeline permit but remands eminent domain issue to FERC

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Court preserves Nexus pipeline permit but remands eminent domain issue to FERC

In a decision that could have implications for other U.S. natural gas infrastructure projects with foreign customers, a federal court refused to throw out the certificate for the 1.5-Bcf/d Nexus Gas Transmission LLC pipeline but questioned the certificate's eminent domain authorization because some gas on the line goes to Canada.

Gary Kruse, director at energy research firm LawIQ, said the remand without vacatur somewhat dulls the impacts of the Sept. 6 court decision on the Nexus gas pipeline and the Federal Energy Regulatory Commission, which issued the Natural Gas Act certificate. The 256-mile pipeline, which began moving Appalachian Basin gas to customers in the Midwest and Canada in October 2018, will remain in operation.

Still, "[the U.S. Court of Appeals for the District of Columbia Circuit decision] does increase the risk to pipelines whose sole customers are the LNG export terminals they are designed to serve," Kruse said.

"First, it means FERC has to come up with an explanation that will pass muster at the D.C. Circuit when it reconsiders its prior decision," he said. "Second, it has to come up with a justification that works for a project where none of the gas being shipped is for a shipper with a domestic need."

Consulting firm ClearView Energy Partners LLC said the risk from the decision for pipeline projects connected to LNG terminals appeared to be "quite low to negligible" for most, "but Jordan Cove appears to face significant risk." ClearView also said developers of cross-border pipelines into Canada and Mexico may need to address the issues raised by the court if they will need to use eminent domain, which allows a developer to take property if a landowner refuses to sell.

Like many interstate midstream projects serving the U.S. Northeast producing region, Nexus has faced heavy opposition from environmental groups worried about the impact on wildlife and waterways and from residents concerned about the impact on their properties. Nexus, a partnership between Canada's Enbridge Inc. and Michigan utility DTE Energy, has faced scrutiny over taking private land in Ohio to complete the pipeline.

The D.C. Circuit dismissed a request by landowners and the city of Oberlin, Ohio, to throw out a lower court ruling that said Nexus had the right to exercise eminent domain to condemn easements over properties. However, the D.C. Circuit agreed with the petitioners that FERC had failed to adequately justify a determination that Nexus's contracts with foreign shippers could serve as evidence of market demand for the pipeline. Out of eight entities that had precedent agreements for gas transportation capacity on Nexus, two are Canadian companies serving customers in Canada. On this narrow issue, the court ordered the commission to provide a better explanation.

Even so, the issue might not go much further. "We find it plausible that the commission will be able to supply the explanations required," the appeals court said.

The court added that it would not throw out the certificate approval because doing so "would be quite disruptive, as the Nexus pipeline is currently operational." (U.S. Court of Appeals for the D.C. Circuit docket 18-1248)

Project need

Oberlin and the landowners argued that the commission's finding that Nexus shipper agreements were the best evidence of the need for the pipeline project was not supported by substantial evidence. Proof of project need is part of the test for acquiring a Natural Gas Act certificate from FERC that allows the taking of private land through eminent domain. Among other things, the petitioners said Nexus' precedent agreements were not meaningful evidence because half of them are with affiliates of the pipeline sponsors.

The D.C. Circuit rejected that argument, saying in part that it has previously recognized that it is "commission policy to not look behind precedent or service agreements to make judgments about the needs of individual shippers."

The petitioners also argued that the Nexus shipper agreements were not strong evidence of market demand because a substantial portion of them are dedicated for gas exports from the U.S. They said crediting export agreements toward a Natural Gas Act Section 7 finding of project need runs afoul of the takings clause because a private pipeline selling gas to foreign shippers serving foreign customers does not qualify as a public use. This challenge found traction with the D.C. Circuit.

"This argument raises legitimate questions, which the commission has heretofore failed to adequately answer," the appeals court said in its ruling.

Markets served

Nexus is a greenfield pipeline project backed by a mix of Appalachian gas producers and Midwestern end users, designed to transport gas production from the Marcellus and Utica shale plays to demand markets. Flows this quarter have averaged roughly 1.2 Bcf/d through the Wadsworth compressor station. The volume represents approximately 88% of operational capacity, S&P Global Platts Analytics data showed.

The project has helped drive additional Northeast supplies into the Midwest market region, joining the likes of Rockies Express Pipeline and Rover Pipeline in providing outlets for otherwise constrained Appalachian production volumes, which now exceed local demand in the Northeast.

A substantial portion of the gas on Nexus travels through leased capacity on the Texas Eastern Transmission LP system in southwestern Appalachia, and deliveries into the Midwest market are affected through a set of capacity leases on the DTE and Vector Pipeline LP systems.

Harry Weber is a reporter and Eric Brooks is an analyst with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.