August 2017, Vol. 244, No. 8

Features

Dakota Access Pipeline: Industry Retrospective on Lessons Learned

It is more than a little ironic that no one wants to discuss the most talked about U.S. pipeline project in the past two years despite the fact that it is now successfully built and operating.

The $3.78 billion, nearly 1,200-mile Dakota Access Pipeline (DAPL) sparked both controversy and pride in 2016, depending on the respective opposing positions on the mammoth venture, but in mid-2017 industry observers were circumspect about articulating what was learned from the unquestionably large engineering and political accomplishment that DAPL represents.

The consensus is that it will be much more difficult, if not nearly impossible, to build future major pipeline projects because of the lines in the sand drawn by a combination of environmental and Native American tribal activists. While energy infrastructure proponents have cheered, a vocal opposition has established DAPL as a war cry.

At mid-year upward of 300,000 bpd of Bakken sweet light crude oil from North Dakota was flowing through DAPL, and analysts were trying to keep track of it and figure out the ultimate impacts these volumes might have on U.S. crude prices and those exported from the Gulf Coast. Protesters were no longer visible. But in the courts, the Native American tribes and their environmental allies were still busy trying to shut down the project that traverses through four states.

A court challenge in Iowa reached the state Supreme Court in the spring with a request for dismissal of the case by DAPL-backers rejected by the state’s high court, leaving optimism among opponents who were adamant that they would not give up, pending the outcome of  challenges in either the state or federal courts. Bold Iowa, a protest group modeled after a similar one that has dogged the TransCanada Keystone XL pipeline’s northern segment, has made the court developments an incentive to keep fighting, which now seems inevitable.

Iowa’s regulatory board and the pipeline are targeted in the pending legal case, and a former state lawmaker, Ed Fallon, of Des Moines, was managing the Bold Iowa organization’s continuing fight, supported by the Sierra Club’s Iowa chapter. Meanwhile, Native American tribes’ legal action continued in federal court despite the fact that DAPL’s arguments have been consistently upheld by federal judges’ rulings for over a year.

In this environment of continuing litigation and public protests, DAPL’s primary backer, Dallas-based Energy Transfer Partners (ETP), has been adhering to a “no comment” stance in the aftermath of its get-out-of-jail pass from the Trump administration. It has been content to let its project completion and start of operations speak for themselves.

“We have not commented and will pass on speaking about this at this time, beyond the comment that we know that environmental opposition is here to stay and may only increase,” was a response in late April from ETP’s spokesperson. “As an industry we need to work together to manage this [highly organized opposition] as we move forward with important infrastructure projects.”

A few days later, several energy sector analysts who keep close tabs on the industry expressed in different ways their doubts about future infrastructure getting built because of DAPL, while also praising the value it is adding for Bakken producers and Gulf Coast refineries.

“With low shipping rates going to the Gulf, DAPL is economic, and that’s great, but more importantly, it impacted the rest of the country regarding getting another pipeline built,” said Trisha Curtis, an energy economic consultant and co-founder of PetroNerds LLC in Denver. “DAPL puts the Bakken and even Wyoming to a lesser extent on a much more competitive level.”

Both the perceived stigma and euphoria attached to DAPL by detractors and supporters alike has surfaced at a time when an American Petroleum Institute (API) report was released in late spring, outlining the need for 24,000 miles of new pipelines through 2035 just to meet the expected natural gas demand nationally. Midstream operators are faced with the need to build about 1,200 miles of new pipeline every year for the next two decades, according to API. The question is whether current public opinion will allow all of the new infrastructure that ultimately is needed.

On the optimistic side, the aftershock from DAPL and its legal and activist opposition has been buffered in 2017 by the change in the White House and continuing reports and actions in the midstream sector that leave the impression that added infrastructure is going to get built one way or another. During a Trump administration-designated Infrastructure Week in June, the head of the Laborers’ International Union of North America (LiUNA) praised the president for putting “needed focus” on the nation’s need for infrastructure additions and upgrades in all sectors of the economy, including energy.

LiUNA President Terry O’Sullivan observed that “both parties in Congress are calling for major investments in our infrastructure,” meaning that “we have an opportunity to rebuild our nation and create millions of good jobs.”

An official with one of the major midstream companies operating on both sides of the U.S.-Canada border won’t speak for the record because his company, he said, has a long track record of successfully working with indigenous tribes in both the United States and Canada. He draws short of direct criticism of Dakota Access Pipeline’s approach to siting its 30-inch oil pipeline, but leaves the impression that he thinks the relationship with Native Americans should have been more positive.

“We have a unit that deals exclusively with tribal relations so our track record is pretty good in both countries,” the spokesperson said, noting that if his company had led the DAPL project, it would have handled it “much differently.” The inference is that the DAPL project people have not been as forthcoming as maybe they should have been.

On an ongoing basis, this large midstream player deals with in excess of 50,000 landowners, including the Native American tribes and reservations lands. “We’re dealing with fire and police departments and first responders all the time, making a serious effort to get to know them because they need to know what we do in case something goes wrong.”

His company is known to stop construction and bring in archaeological professionals if something is found during construction. Consultations with tribes start very early in the planning process before permitting and eventual construction, the spokesperson said. “We do this sort of thing all the time.”

At an industry conference in March in Houston, Al Monaco, CEO of Enbridge Energy Partners, urged the oil/gas industry to “reach out to communities, all sorts of communities,” emphasizing that he has made that a high priority at Enbridge, specifically calling out Native Americans as one of the key stakeholder groups. Enbridge, of course, owns a 27% interest in DAPL.

“Lots of people in the industry have reviewed the news media coverage over recent months on DAPL and concluded we have to do better,” the midstream spokesperson notes, adding that his opinion may differ from officials involved in DAPL or its specific backers, such as ETP and Enbridge. “In retrospect, everyone in the industry agrees we could have done things differently.”

Similarly, there is agreement that DAPL’s construction process was state-of-the-art. The project’s disputed water crossing was similar to what was done on a portion of the Ozark Pipeline that goes under the Mississippi River between Missouri and Illinois. At that point, Ozark runs about a mile and is the longest boring of that kind in the U.S. This underscores that the industry has been learning all along – pre- and post-DAPL.

On the other hand, DAPL’s water crossing was done in the glare of the national political spotlight, obscuring its success from an industry technical standpoint. DAPL used a horizontal directional drill technology to go under the bottom of a lake [formed by a dammed part of the Missouri River] that was deployed to ensure water quality was not threatened or polluted.

“This is certainly a new era for pipelines, and we’re already starting to see the results of increased competition in the sector,” said PetroNerds’ Curtis, emphasizing that another DAPL out of North Dakota is not needed. “We’re not completely full on pipeline capacity in terms of flows, so for the time being there is plenty of pipeline capacity.”

She is convinced that with the level of opposition that DAPL faced, and other projects are now encountering, it will be difficult to build another major oil pipeline out of the Midwest. The collaboration between environmental and Native American interests seems strong nationally regarding other major energy infrastructure projects, she said.

“Texas I am not worried about,” Curtis said. “There are a couple of large-diameter  pipelines in the Permian that will get built, and I think Keystone XL is another pipeline that bodes well for the Bakken.

“When you think about DAPL and Keystone, there really is no need for another pipeline after that. If you build those two pipelines, the industry is in pretty good position, given what’s happening in terms of prices for production and future production.”

Meanwhile, the social activism in mid-2017 was not dampening Wall Street’s appetite for the midstream sector. In June, analysts at RBN Energy LLC were touting investors’ interest in large midstream operators, such as Enterprise Products Partners.

With a market capitalization of $57 billion, Enterprise has attracted significant investor interest because of what RBN described as “its simplified structure, 51 consecutive quarters of dividend growth and strong distribution coverage – $2.7 billion in retained cash in the last three years. The company has continued to build out its large integrated midstream network despite the plunge in commodity prices, investing almost $18 billion in organic growth projects and acquisitions in 2014-16.”

As a result, RBN points out that Enterprise is now connected to every major U.S. shale basin, every U.S. ethylene cracker and 90% of the refineries east of the Rocky Mountains. Thus, the midstream giant is “well positioned” to benefit from the recovery in crude oil and natural gas production, especially in the Permian and the Eagle Ford; continuing natural gas liquids (NGL) and crude oil exports; and the impending growth of the U.S. petrochemical industry.

RBN’s Tom Biracree painted a positive picture in his analysis, Liquid Love – Integrated NGL Pipelines, Fractionators, Export Facilities Drive Enterprise’s Growth, focusing on the company’s NGL and service units.

At about the same time, DCP Midstream showed the same growth orientation, announcing an additional large-scale expansion of the Sand Hills NGL Pipeline, with plans to initially spend $105 million toward long-lead equipment and right-of-way.

This expansion is designed to initially increase capacity by 85,000 bpd up to 450,000 bpd, with the first phase including partial looping and the addition of seven new pump stations at an estimated cost of $500 million. The expected in-service date is the second half of 2018. Future expansion may include adding a full loop of Sand Hills, which could raise capacity by over 100,000 bpd to a minimum of 550,000 bpd through some aggressive future capital spending plans.

Earlier, DCP indicated it plans to complete in the last quarter of 2017 an expansion of the Sand Hills Pipeline’s capacity to 365,000 bpd, adding three pump stations and a lateral to increase Permian capacity. The expansion is backed by long-term, third-party plant dedications, further demonstrating that pushback from DAPL may not be as strong as some feared. In addition, multiple new supply connectors are in progress and will deliver incremental NGL volumes in 2017 and beyond.

At the time, Wouter van Kempen, DCP Midstream CEO, emphasized that his company’s Sand Hills line was designed to operate with flexibility and optionality through multiple delivery points serving the Gulf Coast. That combination, along with the DCP-phased expansion approach, have allowed the midstream operator to synchronize its capital outlays with supply growth in the region.

Economic momentum, along with renewed bipartisan political support, gives the pipeline sector added direction for the future. And a subtle lesson, or advantage, for the industry may be found in the literal mess left in the wake of the DAPL’s protester encampments in south-central North Dakota. The tab and who pays for it were still being calculated at mid-year, and taxpayer concerns could eventually emerge if similar protest sites spring up in the future.

As this report was being finalized, North Dakota was scheduled to receive $15 million from the federal government to help defray the costs of providing emergency law enforcement services for the protest encampment over a 233-day period. Gov. Doug Burgum sought a presidential disaster declaration, citing overall costs exceeding $37 million. He sent a separate letter to the Trump administration seeking a disaster declaration which could provide more funds.

While pondering the 48 million tons of garbage removed from the three protest sites and calculating the cleanup bill, former federal and state energy regulator from North Dakota, Tony Clark, now a senior advisor with Wilkerson, Barker and Knauer LLP, speculated that “a pressing need for infrastructure remains in growing production regions within the United States – such as the Marcellus, Bakken, and Permian shale regions – to markets within and for export to allies abroad.” His recent tenure (2012-16) on the Federal Energy Regulatory Commission drove this home to Clark.

Among the key factors moving forward post-DAPL, Clark wrote earlier this year are:

“First, for the foreseeable future, residents of the United States will continue to rely on petroleum products such as crude oil, natural gas, and NGLs like butane, ethane and propane to sustain their everyday lives.

“Second, pipelines remain, by far, the safest way to transport those energy goods.

“Third, the United States continues to work steadily toward the diversification of its energy sources, utilizing energy goods produced here at home and lessening our reliance on energy from volatile regions elsewhere.”

While there are still plenty of naysayers, critics and adamant climate change advocates willing to debate the former state regulator who served on the North Dakota Public Service Commission for a dozen years, Clark has many supporters who hope his outline of the nation’s energy future proves to be correct, and DAPL proves to be a footnote for a successful series of infrastructure construction projects.

(Editor’s note: On June 12, U.S. District Judge James Boasberg ruled that the U.S. Army Corps of Engineers did not adequately consider the possible impacts of an oil spill where DAPL passes under the Missouri River, and ordered further environmental analysis in certain sections which could take months to complete. Meanwhile, the pipeline will continue to operate.)

Richard Nemec is a Los Angeles-based correspondent for P&GJ. He can be reached at: rnemec@ca.rr.com.