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Dakota Access Pipeline to remain open as environmental impact review continues, court rules

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Dakota Access Pipeline to remain open as environmental impact review continues, court rules

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Environmental review could drag out to late 2021 or beyond

Biden-led Army Corps could close pipeline while review is pending

Closure would widen Bakken price discounts to cover rail costs

Houston — The much-litigated Dakota Access Pipeline can continue flowing crude oil for now, a federal appeals court ruled Jan. 26, but a federal environmental review will move forward under a new Biden administration that may take a more stringent view of the major Bakken shale artery.

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The decision from the US Court of Appeals for the District of Columbia Circuit maintains the district court ruling that the 570,000 b/d pipeline is operating in violation of federal law. But the court opted against taking the admittedly unprecedented step of shuttering a major pipeline that's been operating for nearly four years.

However, the Biden administration could seek to close the pipeline now that the federal court has affirmed it doesn't have the necessary legal easement.

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 more immediate impact would be seen in spot crude pricing and, eventually, North Dakota Bakken shale output. Bakken prices for Williston, North Dakota barrels injected into DAPL weakened in July after a court ruling ordered the line to shut down in August, drying up spot market activity. Bakken at Williston averaged at a $4.42/b discount to Cushing WTI in July, widening from a $3.27/b discount in June, S&P Global Platts data shows.

However, discounts again narrowed as the pipeline continued to operate. Bakken at Williston has averaged at a $3/b discount to WTI so far in January, Platts data shows.

If DAPL is shut, flows would be impacted into Clearbrook, Minnesota, the Rockies and Western Canada, requiring crude by rail shipments to increase substantially, according to S&P Global Platts Analytics. Such a scenario would cause Bakken at Clearbrook, which is moved out of North Dakota via the Enbridge pipeline system, to fall to a steeper discount to Cushing WTI, widening by several dollars, according to Platts Analytics.

One trading source said a DAPL closure could push the price for Bakken in the Williston Basin to as low as WTI minus $7/b or minus $8/b to cover the rail arb to the Gulf Coast.

North Dakota crude output has yet to recover from the impacts of the coronavirus pandemic. North Dakota production averaged 1.224 million b/d in November, according to the latest figures from the state's Department of Mineral Resources. That was up from 862,000 b/d in May, when output tumbled because of low oil prices, but down from 1.519 million b/d in May 2019.

Plaintiffs could seek new injunction

The court ruling now leaves it up to the US Army Corps of Engineers to complete a more stringent Environmental Impact Statement review that could last until late 2021. But the appeals court also highlighted that the Army Corps could move to close the pipeline in the interim. Such a shutdown almost certainly would not have occurred under former President Trump, but the new administration led by President Joe Biden could decide otherwise.

"It may well be — though we have no occasion to consider the matter here — that the law or the Corps' regulations oblige the Corps to vindicate its property rights by requiring the pipeline to cease operation," the court opinion stated.

With greater legal standing, the plaintiffs, led by the Standing Rock Sioux Tribe, also could seek a new injunction to shutter the pipeline, and such a matter is currently pending before US District Judge James Boasberg, who made the initial shutdown ruling in 2020.

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 environmental impact statement despite the opposition from some tribes and environmental activists. And the court opinion acknowledged the unprecedented situation of a major pipeline now being allowed to operate illegally.

"With or without oil flowing, the pipeline will remain an encroachment, leaving the precise consequences of [easement] vacatur uncertain," the court opinion stated.Biden has not personally weighed in on the Dakota Access Pipeline, although Vice President Kamala Harris has supported its closure and so has Biden's pick for his secretary of the Interior Department, US Rep. Deb Haaland, D-New Mexico, who would be the first Native American cabinet secretary. When she was chairwoman of the New Mexico Democratic Party in 2016, Haaland participated in DAPL blockade protests, cooking food for demonstrators on site.

Biden has made both oil pipelines and climate change concerns a major part of his initial days in office. He's already canceled the permitting for the long-debated Keystone XL Pipeline and issued a de facto, temporary moratorium on new oil and gas permits and leases on federal lands and waters.

As such, James Coleman, an energy law professor at Southern Methodist University, emphasized that this is a bad court ruling for DAPL and pipeline operator Energy Transfer even though the pipeline will remain open for now because it essentially gives Biden free rein to kill the project if he chooses.

"It would now be easy for the Biden administration to get rid of the pipeline if it wanted to. And, If they're going to kill it anyway, why wait for the Environmental Impact Statement?" Coleman said.

"It's also a longer-term issue for the industry if courts are letting existing pipelines get shut down," Coleman said, acknowledging that closing many existing pipelines is an aim of environmental activists.

However, there's also reason to believe Biden may not want to get in the business of closing existing pipeline, and instead focus on preventing new ones, said Sandy Fielden, director of oil research at Morningstar.

"Unless the Biden Administration is willing to shut down existing infrastructure in search of environmental benefit, I would imagine they prefer to apply the brakes to new investment and infrastructure instead," Fielden said.

If the administration punts in favor of waiting for the EIS review, Fielden said, then Energy Transfer could always make modest routing changes or other mitigation efforts in order to satisfy and easement requirements and keep the pipeline flowing crude oil, albeit at a hefty price tag.

Energy Transfer and the Army Corps did not immediately respond to requests for comment.

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 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. One month later, the shutdown order was halted on appeal.

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

During Energy Transfer's most recent earnings call, Mackie McCrea, who became co-CEO in January, said he didn't envision any realistic scenario where the pipeline is permanently closed.

The pipeline is on track to move about 750,000 b/d of crude capacity by the end of September as part of a 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.