US pipelines blocked by the courts
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Battles over pipelines in the US are very nearly as old as the country’s oil industry itself. When the first pipelines were built in Pennsylvania in the 1860s, they were repeatedly attacked by teamsters angered by the threat to their incomes. Carrying oil in wagons from the well-head to storage tanks at the railroad yard a few miles away could cost $3 a barrel, at a time when crude was selling for about $5.
Armed guards put a stop to the sabotage, and the pipeline industry took off. The US now has by far the world’s most extensive network of oil and gas pipelines. Over the past decade, however, opposition to new pipeline construction has been growing. Climate campaigners have sought to prevent investment in long-lived infrastructure that will support the production and consumption of oil and gas for decades to come. Campaigners at first focused on oil pipelines, particularly the long-delayed Keystone XL from Alberta into the US, but they have been increasingly targeting new gas infrastructure as well.
The effort to block natural gas pipelines has been effective in the north-eastern US, stopping projects including the Constitution Pipeline and the Northeast Supply Enhancement, without having a large impact on the total amount of new capacity being added across the country. But the challenges are growing.
This week, campaigners against pipelines have been celebrating a couple of banner days, with three notable successes. Their victories affected both oil and gas infrastructure, and both new and existing pipelines, but there were some common legal issues underlying all three. The message for the industry was that pipeline opponents have become increasingly effective in using the courts to delay and block projects.
The three defeats for pipelines were:
- On Sunday, Dominion Energy and Duke Energy announced that they had abandoned their plan to build the Atlantic Coast Pipeline, intended to carry Appalachian gas from West Virginia to Virginia and North Carolina. The companies cited “the potential for additional incremental delays associated with continued legal challenges” as one of the key reasons for the cancellation.
- Then on Monday, a US district court for the District of Columbia ruled that the Dakota Access Pipeline, which has been in operation since 2017, should be shut down by 5 August. The judge ruled that the US Army Corps of Engineers had violated the National Environmental Policy Act when it granted a permit for the pipeline to be run under Lake Oahe.
- Also on Monday, the US Supreme Court upheld earlier rulings from a district court in Montana and the Ninth Circuit appeals court that mean critical steps in the construction of Keystone XL are blocked. The decision means that TC Energy is not allowed to work on the water crossings that the pipeline will need until the courts have reached a final decision on the project.
The common thread in all of these decisions is the authority of the Corps of Engineers over pipelines that cross streams, rivers and other bodies of water. The Corps grants permission for those crossings on standard terms under nationwide permits. These are renewed every five years, most recently in January 2017, in the last days of the Obama administration. The key nationwide permit for pipelines is NWP 12, which also covers power cables and telephone and broadband lines.
In the case of Keystone XL, the original district court ruling, not overturned by the appeal court or the Supreme Court, was that the Corps of Engineers had violated the Endangered Species Act when renewing NWP 12. The court found that the Corps had a duty “to ensure that its actions are not likely to jeopardise the continued existence of endangered and threatened species or result in the destruction or adverse modification of critical habitat,” and in the reissue of NWP 12 it had failed to fulfill that duty. As a result, it ruled that NWP 12 was no longer valid.
On Monday, the Supreme Court ruled that the block on NWP 12 applied only to Keystone XL. Other projects can continue to use it for the time being, while its status is argued out in the courts. But the ongoing dispute leaves every other pipeline project facing profound uncertainty.
In their statement on cancelling the Atlantic Coast Pipeline, issued a day before the Supreme Court ruling, Duke and Dominion said the earlier rulings over Keystone XL created “new and serious challenges”. They added that the uncertainty over the courts’ final decisions would remain, whatever the Supreme Court decided this week.
The Dakota Access case did not revolve around NWP 12, but similarly related to an issue with the Corps of Engineers’ permit for the pipeline to cross a body of water. Before granting permission for the pipeline to run under Lake Oahe in North Dakota, the Corps conducted only a more limited Environmental Assessment, rather than a more extensive Environmental Impact Statement (EIS). The court this week ruled that an EIS had been needed, and said precedent “overwhelmingly dictates” that the pipeline should be shut down while a statement is prepared. The Corps has said that could take 13 months.
The battle continues. Energy Transfer, the project owner, said on Wednesday that it intended to keep the pipeline open, because the judge had exceeded his authority in ordering the closure.
Legal uncertainties are not the only issues facing US pipeline projects. The Atlantic Coast pipeline faced sharply increased costs, up from a 2014 estimate of $4.5 billion-$5 billion, to $8 billion today. The economic downturn caused by the coronavirus pandemic has also meant that demand for gas in the pipeline’s target markets is likely to be weaker than previously expected.
The possibility that Joe Biden will be US president next year is another factor to take into consideration. His climate plan pledges to “require any federal permitting decision to consider the effects of greenhouse gas emissions and climate change”, reversing the Trump administration’s policy of trying to ignore potential climate impacts.
In spite of all of these headwinds, in general it looks like being a strong couple of years for construction of new gas pipelines in the US. Several projects, mainly in southern states that are more friendly to oil and gas, have entered service in recent months, including the Midship Pipeline and Phase II of Sabal Trail Pipeline. However, the absence of the Atlantic Coast Pipeline will make a significant difference to the total for 2022.
One consequence of a sharp slowdown in gas pipeline construction could be that the assets already in the ground become more valuable. At the same time as it was pulling the plug on the Atlantic Coast Pipeline, Dominion Energy announced that it was selling its gas transmission and storage assets to Warren Buffett’s Berkshire Hathaway for $9.7 billion, including debt. Dominion will focus on its state-regulated utility businesses, and is aiming for “net zero” carbon emissions by 2050. Its investment programme over the next 15 years will include spending up to $55 billion on “emissions reduction technologies including zero-carbon generation and energy storage, gas distribution line replacement, and renewable natural gas”.
Buffett’s previous big investment in the energy industry was buying $10 billion of preferred shares in Occidental Petroleum. The company has come under pressure as a result of the plunge in oil prices, and Berkshire is being paid the dividends in shares rather than cash. Buffett told Berkshire investors in May that he had “made a mistake so far in terms of where oil prices went”.
However, a bet on gas infrastructure could pay off, with US natural gas demand set to grow until the late 2030s in Wood Mackenzie’s forecasts. Dulles Wang, Wood Mackenzie’s research director for North American gas, said: “We may be coming to the end of new greenfield gas pipeline construction in the US, and whatever you have in the ground is money. At least for the next ten years, Buffett has a good investment.”
Coronavirus cases continue to rise in the US
The daily number of reported coronavirus cases in the US has continued to rise to new highs, hitting 62,179 on Wednesday, according to the Covid Tracking Project. A continued increase in testing is one factor behind the increase: the US has been running more than 640,000 tests a day on average for the past week. But the proportion of test results coming back positive has also been rising. It was just 4.4% in the first half of June, but has risen to a little over 8% in the past seven days.
Evidence from real-time indicators of economic activity, such as restaurant visits, suggest that the upsurge in coronavirus infections, and the impact on states’ plans to reopen, has meant that the recovery of the US economy is stalling.
Gasoline demand had been steadily recovering towards last year’s levels. But for the past couple of weeks, it has been stuck at about 90% of what it was in the same period of 2019. Jet fuel consumption in the week to 26 June was just 32% of its level in the equivalent month of last year.
Eni cuts price expectations and asset valuations
Eni of Italy has followed BP and Royal Dutch Shell in announcing a non-cash hit to its earnings in the second quarter for writing down the value of some of its assets, as it adopts lower price assumptions for oil and gas. Its charge is smaller than theirs both in absolute terms and relative to market capitalisation, however.
The impact is estimated at €3.5 billion after tax, plus or minus 20%, with most of that coming from the upstream operations. Eni has cut its long-term real Brent oil price assumption from $70 a barrel to $60, and its long-term real Italian gas price from $7.80 per million British Thermal Units (mmbtu) to $5.50/mmbtu. Its new real oil price assumption puts it in line with Shell, and a little above BP, which last month announced a switch to using $55 a barrel.
Eni also confirmed it is sticking to its goal of reducing the emissions from its products by 80% by 2050. Claudio Descalzi, chief executive, said in a statement: “We confirm our strategy to become a leader in the decarbonisation process, notwithstanding the enduring impacts of the COVID-19 pandemic on the global economy and the Company. We are assessing how to speed up our plans.”
One of the reasons for this ongoing evolution, he said, would be allow Eni “to achieve a better balanced portfolio, reducing the exposure to the volatility of hydrocarbon prices, while progressing towards our targets of sustainability and profitability”.
Democrats set out a wish-list for a Biden administration
After it became clear that Joe Biden had defeated Bernie Sanders in the race to be the Democratic party’s presidential nominee, leading champions of the two men got together in what were called “unity task forces”, to come up with policy proposals that supporters of both of them could endorse.
The ideas from those task forces have now been published, and the climate and energy section is well worth a look for indications about what we might expect should Biden enter the White House next year. The proposals for fossil fuels do not really go beyond what he has set out already in his climate plan: the recommendations include tighter regulation of methane leakage and flaring from oil and gas facilities, and a plan for climate impacts to be considered in any decision on federal permits for new infrastructure.
There is one nuance, however, that would add an important detail to Biden’s platform, if adopted. His existing platform says his administration would aim for “a 100% clean energy economy and net-zero emissions no later than 2050”. The task force paper adds an intermediate target for the electricity sector, a proposed commitment to “eliminating carbon pollution from power plants by 2035 through technology-neutral standards for clean energy and energy efficiency”.
The European Commission this week launched the EU’s hydrogen strategy, intended to help build a low-carbon hydrogen industry, particularly using technology based on renewable energy.
Meanwhile, the project to build the world’s largest green hydrogen plant, a $5 billion facility that would use wind and solar power, has been launched in Saudi Arabia. It is intended to start production in 2025.
Sunrun, the largest US residential solar company, has agreed a deal to buy rival Vivint Solar, the second-largest, for $3.2 billion including debt. Ravi Manghani, Wood Mackenzie research director for solar power, commented: “With the impending Investment Tax Credit stepdown, the next frontier of residential solar market plays will have to be on the cost side. Sunrun has made a move to gain a cost advantage through this acquisition.”
The Grain Belt Express, one of the largest proposed power transmission projects in the US, has taken important steps forward after winning a court battle in Missouri. An attempt in the state legislature to change the law to obstruct the project has also faltered.
Christine Lagarde, president of the European Central Bank, wants to explore ways to use the bank’s €2.8 trillion asset purchase programme to fight climate change.
The Netherlands want to repurpose its North Sea oil and gas industry to provide low-carbon energy.
And finally: the widely-shared conspiracy theories about how 5G mobile phone signals give you Covid-19 have been reminding people of the suspicion and fear that surrounded the first commercial uses of electricity in the 19th century. This dramatic cartoon, titled “An Unrestrained Demon” and dated to 1889, shows an alarming depiction of the perils of power lines. But as the website ThatsNonsense.com points out, the comparison is somewhat unfair to the people of the 19th century. The electricity industry in its early days was genuinely hazardous, and the threat from power lines was real.
Quote of the week
“There used to be a part of the Democratic party that believed in the value of fossil fuels, that believed in what it does in terms of economic growth, that believed in the huge changes that the industry has made to be environmentally responsible. And then almost all of the Republicans believed that way. But there has been a huge shift just in the past couple of years on that.” — Congressman Bill Flores, a Republican representing the 17th district of Texas, argued that political opinion on oil and gas had been changing, with very few Democrats now supporting the industry and even some Republicans backing a carbon tax to curb greenhouse gas emissions.
Speaking to Maynard Holt, chief executive of Tudor Pickering Holt, the energy investment and merchant banking firm, Congressman Flores added: “It’s going to be a tough sled for the fossil fuel industry for the foreseeable future. And then if there is change in the Senate and a change in the White House, it’s going to be really tough sledding after that.”
Chart of the week
An energy transition to cut carbon emissions and limit global warming will require a big increase in supplies of the metals needed to produce renewable power, battery storage and electric vehicles. But the operations that provide those metals are themselves significant contributors to greenhouse gas emissions. This graphic gives a sense of the potential impact on aluminium, steel and copper of a carbon price of US$110 per tonne of CO2 equivalent, the level that we think is needed to put the world on track for no more than 2°C or warming.
The chart shows the percentages of the 2019 prices that would be payable with US$110/t carbon tax. The circles on the right show that for aluminium and finished steel, the impact could be very significant.