By Bradley Kramer
Finding the Way Forward After a Series of Setbacks
A series of successful court challenges have created uncertainty about the future of oil and gas pipeline development in the United States. While industry experts have ranging viewpoints on the severity of the problem, they all agree that changes are needed to allow projects to move forward.
Amid the COVID-19 pandemic, three major pipeline projects made national headlines this summer for all the wrong reasons, and one company sold off all its transmission assets signaling a major shift in pipeline investment. And it all happened in the span of two days.
On July 5, Dominion Energy and Duke Energy announced that they were canceling the Atlantic Coast Pipeline. The $5 billion, 600-mile project was aimed at supplying natural gas to Virginia and North Carolina from the Marcellus and Utica shale basins in West Virginia, Pennsylvania and Ohio. Despite a key U.S. Supreme Court decision on June 15 that upheld a permit for the pipeline to cross the Appalachian trail, the project owners cited continued delays and cost uncertainties associated with legal challenges as the reason for calling it quits.
That same day, Dominion Energy announced an agreement to sell its gas transmission and storage assets — including more than 7,700 miles of natural gas pipelines — to financier Warren Buffet’s Berkshire Hathaway Inc. The transaction was valued at about $9.7 billion, but included about $4 billion paid in cash to Dominion and Berkshire Hathaway assuming about $5.7 billion in debt.
On July 6, the U.S. Supreme Court upheld a lower court ruling that the Keystone XL pipeline could not use the U.S. Army Corps of Engineers Nationwide Permit 12, which streamlines the pipeline permitting process for projects involving water crossings. However, the Supreme Court ruled that the Nationwide Permit 12 was still valid for other projects.
Also that day, U.S. District Judge James Boasberg ordered that the Dakota Access Pipeline had to be shut down within 30 days for additional environmental review more than three years after it began operations. Energy Transfer disputed the ruling, and the U.S. Court of Appeals ruled on Aug. 5 that the pipeline could remain in operation, but it still must endure further environmental review.
All these developments added up to what pipeline industry veteran John Fluharty, a consultant for Mears Group, calls “a huge inflection point.” Mainstream news outlets echoed The New York Times, which published an article on July 8 titled, “Is This the End of New Pipelines?”
In many respects, Fluharty’s response to that question is “yes.” When it comes to large-diameter, long-distance pipeline projects, opposition groups have seemingly found the magic bullet by going after the Nationwide Permit 12.
“What happened with Keystone is they got the Nationwide Permit 12 invalidated, and now TC Energy has to permit every single water crossing,” Fluharty says. “What the environmental community has learned is they don’t have to cancel the whole pipeline, they just have to cancel a foot.”
By challenging the Nationwide Permit 12 in multiple jurisdictions, opposition groups are able to tie up pipeline projects indefinitely. To effectively get a project blocked, they only have to win one case.
“They aren’t winning. They’ve won,” Fluharty says. “I don’t see a Hail Mary pass in this game. There’s a sympathetic court everywhere. In the next year, the shift will be apparent.”
In addition to the opposition challenges to pipeline permitting, Fluharty sees the sale of Dominion’s pipeline assets to Berkshire Hathaway as another signal that the era of multi-million-dollar investment in major projects is over.
“This was not a $10 billion sale,” he says. “It was $4 billion in cash and they assume all the debt. That’s buying a top 10 transmission company for $4 billion.”
While Fluharty believes that low-profile projects under 100 miles and pipe replacement efforts will be able to continue, it’s a “whole new ballgame” for the major expansion initiatives to “reline America.”
“I’m not trying to be all doom and gloom, but when you play the timeline out and see what happened, this is the biggest bellwether moment we’ve had in this industry,” Fluharty says. “Early on, I had some discussion with people in the industry, before Dominion sold off their assets, and they would say they would just permit crossings individually, and it would be no big deal. After that, though, they saw that this is a big problem.”
Of all the experts interviewed for this article, Fluharty was perhaps the most pessimistic about the outlook for the future of oil and gas pipeline development, but he was not alone in thinking that the industry needs to find a solution.
“This is not the end of pipelines, but it’s definitely a change,” says Taylor Dacus, president of Troy Construction LLC and vice president of the American Pipeline Contractors Association (APCA). “Regardless of how green energy goes, there’s always going to be a need for pipelines and natural gas.”
Mike Castle Jr., president and CEO of Progressive Pipeline and president of the APCA, calls these recent developments a “setback for sure,” especially considering the Nationwide Permit 12.
“We’re seeing a paradigm shift in the approach special interest groups are taking to stop pipelines,” Castle says. “Before they could go through the individual states to hold up pipelines. The current administration put requirements on states to act within 90 days. The opposition has found a new way to work around that requirement. It’s going to continue to be a cat and mouse game going forward.”
Dacus believes the pipeline industry took its success in recent years for granted.
“We got complacent a little bit, and now we need to get back on track,” he says. “We have to educate the public on what natural gas does for the public good.”
While opposition groups have been successful in a couple recent court cases, Toby Mack, president of the Energy Equipment & Infrastructure Alliance (EEIA), argues that “winning a few battles is not winning a war.”
“Restraining natural gas transport essentially to the system’s current capacity will very soon result in power shortages and blackouts in major population centers,” Mack says. “Let’s see how the politics of that plays out. I predict it will cause a big increase in public support for pipelines.”
Regardless of whether or not the opposition has won the battle against pipelines, Fluharty wonders why the industry didn’t do more to protect itself from these challenges.
“The big question here is why didn’t we as an industry stand up for ourselves? We really made a weak attempt at fighting back against the environmental groups,” Fluharty says. “Natural gas is not a bad thing. How did we get here? Why didn’t we defend ourselves?”
The Way Forward
The oil and gas pipeline industry has always been cyclical, with long periods of booms and busts. Are we overreacting?
“This is more than that,” Fluharty says. “Unless you get the courts to side with you, the states to side with you and the feds to side with you, then the next boom doesn’t exist. If you think you need to build a pipeline from Midland, Texas, to Baton Rouge, Louisiana, then that still has a high probability of success. If you want to go through other states that are not so friendly, it becomes higher profile, and it may open you up to an onslaught of legal challenges.”
If large-diameter, long-distance pipeline projects are no longer possible, then the industry must find a new path forward. One solution may be to focus on building smaller, intrastate pipelines that won’t create as many headlines.
“You have to incrementally use your system to go where you need to go,” Fluharty says. “If you have a pipeline system that goes from one point to another, but not in a direct line, then you have to increase flow on those. You have to become inefficiently efficient. You may not be able to take the straightest line possible, but at least that’s a workable plan.”
Fluharty suggests that expansion projects will need to focus on upgrading compression stations and loop projects, adding, “That’s where the innovation is going to come.”
Castle and Dacus believe that the way forward for the industry is to share the benefits of pipelines.
“We have to be smarter and continue to tell our story and keep telling the truth,” Castle says. “We need to help the public understand what we do and that we’re not bad guys.”
Dacus adds that the industry needs to do a better job of sharing the economic impacts of pipelines.
“We need to educate the public, and a big piece of that is talking about the jobs our industry creates,” Dacus says. “Pipeline projects create around 800 to 1,000 jobs.”
Mack contends that natural gas transmission will be the biggest catalyst for future pipeline expansion.
“It’s wishful thinking on the part of those who mistakenly think we can transition to lower carbon without more natural gas and the pipelines needed to transport it,” he says. “Electricity demand will grow by 35 percent over the next 15 years as we electrify our transportation fleet and buildings. With coal and nuclear on the decline, renewables can’t possibly fill the gap. More natural gas generation will be needed, and that means more pipelines.”
Dominion Energy agrees to sell its gas transmission and storage business to an affiliate of Berkshire Hathaway Inc., a transaction valued at $9.7 billion, including the assumption of $5.7 billion in debt. The assets involved in the deal include more than 7,700 miles of natural gas storage and transmission pipelines and about 900 billion cubic feet of gas storage. Berkshire Hathaway will pay about $4 billion cash to Dominion upon closing. Berkshire Hathaway chairman Warren Buffett said: “We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business.”
Despite the favorable U.S. Supreme Court decision on June 15, Dominion Energy and Duke Energy announce that the Atlantic Coast Pipeline project was being canceled. The companies cite ongoing delays and increasing cost uncertainty for the decision, as well as legal challenges to the Army Corps of Engineers Nationwide Permit 12.
The U.S. Supreme Court upholds a lower court ruling that the Keystone XL pipeline cannot use the Army Corps of Engineers Nationwide Permit 12, which helps fast-track the permitting process for pipeline projects. However, the Supreme Court ruled that the Nationwide Permit 12 was still valid for other projects.
U.S. District Judge James Boasberg in Washington, D.C., orders that the Dakota Access Pipeline be shut down within 30 days for additional environmental review more than three years after it began operations. Energy Transfer disputed the ruling and requested that Boasberg’s order be halted and an expedited appeal citing the disruption the shutdown would cause.
The U.S. Court of Appeals for the District of Columbia Circuit reverses Judge Boasberg’s ruling from July 6 to shut down the Dakota Access Pipeline. However, the appellate court declined to grant Energy Transfer’s motion to block the environmental review.