January 2018, Vol. 245, No. 1

Features

Dakota Access Pipeline: Lessons for the Pipeline Industry

The opening of the Dakota Access Pipeline (“DAPL”) is a cause for industry celebration, but independently provides a useful lesson as to what might be expected moving forward as to further obstruction of pipeline projects; as well as considering emerging counter-strategies for the pipeline industry.

These lessons are perhaps more important than the end result of DAPL because the struggle to have industry pipelines approved will not be made easier in the upcoming years. Agree or disagree, but the opponents of the pipeline industry are very worthy and are not to be underestimated.

Whether DAPL or even the Keystone XL pipeline, the tactics of delay employed by opponents of the energy industry will be repeated. This article attempts to outline the lessons that can be learned from DAPL and suggests a better blueprint for addressing the emerging strategies of delay and confrontation employed by pipeline opponents.

The Current Landscape

The organized opposition to pipeline development pursues the denial of permits and licenses as a response to global warming and the negative impacts of greenhouse gases. Whether one accepts the predictions of the preponderance of the scientific community as to anthropogenic climate change is not the point. The point is that the number of individuals is growing in the United States as well as abroad who do believe in climate change.

Perhaps an appropriate analogy in the eyes of public opinion might be the relationship between cigarettes and cancer. The cigarette industry denied the relationship long after the vast majority of Americans concluded – rightly as it turned out – that there was a direct relationship between smoking and any number of different types of cancer.

Ultimately and inevitably, public opinion is going to increasingly accept the relationship between the use of carbon-based sources of energy and global warming – whether this, as a scientific proposition, is true misses the point. Acceptance of this direction of domestic and international public sentiment is a wise starting point.

Yet, it is undeniable that the demand for energy, whether domestically or internationally, is also growing. No serious participant in the energy industry sees renewables as a viable source of energy that will independently be able to provide adequate future energy supply in the face of growing demand. Hence, the place of oil and natural gas economically, as well as politically, will most likely become more significant, not less.

There is a significant disconnect between a public that enjoys an economy whose foundation includes relatively inexpensive and readily available energy vis-à-vis the real-life environmental implications of an energy sector that requires significant contributions of the oil and natural gas industry. Herein lies the risk, but also the opportunity for the pipeline industry.

Lessons 

What are the lessons learned? It is important to understand the strategy of the environmental opposition. As articulated by Bill McKibben, founder of the far-left anti fossil-fuel group.350.org:

“Every piece of fossil-fuel infrastructure will have to be contested. Since the Keystone fight launched this phase of the battle, campaigners have grown adept using the courts and local government to block and slow pipeline and coal ports, frack wells and natural gas terminals. Every month of delay adds new costs; every layer of uncertainty makes it harder for investors to justify…. the nonviolent discipline of the Standing Rock Sioux has written a dramatic new chapter in the history of political resistance.”

The implications of this statement are quite clear. This position can be summarized by what I will call the “Economics of Delay.” Without a doubt, if the permitting of the DAPL could have been prevented, such would have been a successful result for its opponents. However, the currency of delay is the cornerstone of the latest and, indeed, more sophisticated environmental strategy. Let’s examine the foundation of this position.

Banking decisions are in large part predicated on the time value of money. When banks are unable to reasonably establish the point in time at which a loan will become performing, two things happen: 1) fewer banks are interested in the lending opportunity, and, 2) the banks still willing to will lend, but at a higher interest rate while asking for more security.

Banks do not like risk, they like certainty. But for the election of President Trump, this project would have stalled indefinitely. The chances of DAPL coming to fruition during the time any Democrat was in control of the executive branch was and is still virtually non-existent. This circumstance is important to emphasize as there is no guarantee there will be a second Trump term.

The reality of the economics of delay is that pipeline projects with good economics will still be financed – but they will cost more, and this will be a negative drag on profit. This fact makes these projects less attractive to investors. Certain projects with modest economics and on the margin, will not be built because the increased cost of borrowing will make the rate of return, no matter how such is calculated, unacceptable or will be, in cost-benefit analysis measuring a loss.

However, the strategy of delay is more than economics, it is based on opportunity. Each project protested, and particularly those that receive significant attention, whether through traditional media or social media, becomes a business opportunity to raise awareness along with the ability to raise funds for environmental groups. Just as a small percentage of the DAPL protesters were from North Dakota, so too, was a small percentage of the money donated to organizations orchestrating these protests from North Dakota.

Each protest creates a call for action from environmental groups. Each protest of a pipeline provides to environmental groups a forum to raise exposure and provide a new venue to raise funds. Concerns about climate change are increasing and the notion of global warming is becoming more accepted by the general population. The pipeline industry is wise to anticipate more future opposition, not less.

The Failure to Communicate 

What went wrong? Initially, it does no good to do the “right” thing when not enough people know what you have done. The efforts of Energy Transfer Partners to satisfy tribal concerns as ably set forth by Judge James F. Boasberg (Standing Rock Sioux Tribe, et al. v The United States Corps of Engineers, et al. designated Civil Case No. 16-1534 as lodged in the Federal District Court for the District of Columbia), simply never were communicated effectively in a fashion that was absorbed by the general public.

The general public cannot be counted on to invest its time and energy to investigate facts and come to unbiased conclusions. This is not a function of intelligence, it is a function of time and priority. Most people are not going to invest the effort.

Hence, the message as to pipeline projects needs to be simple, repetitive and positive. The energy industry needs to be seen as “good guys”. Remember – industry supporters are “onboard” and need not be persuaded; industry opponents have no interest in being educated – thus, the key audience to persuade is the middle ground.

It is also a reality that the organizations and individuals in opposition to the pipeline industry are not necessarily constrained by truth. This is not to suggest that there is significant disinformation or outright lies … although this happens. The ability of environmental groups to disseminate information that is far from truthful is easier today than it has ever been as a result of social media. It is important to not overlook the motivation of those that oppose the pipeline industry.

Rightly or otherwise, many feel that the ends justify the means. In a world where many believe that human civilization itself is being jeopardized by a fossil-fuel industry that prioritizes profits over and above humanity, the lengths that can be justified by environmental opponents have no limit. Some say “Never let the truth get in the way of a good story”.

It is also important to appreciate that the middle ground on climate change is reasonably open-minded, concerned about the environment as well as the economy, and want what is best for their children. Persuading this group is imperative to the future success of the energy industry, indeed the viability of the pipeline industry.

No matter the conclusion of anyone as to whether there is anthropogenic climate change, the role and significance of energy will only increase over the next several decades. World population is growing. As third-world nations continue to emerge economically and nations like China, India, and Brazil, (not to mention a host of others) increase their demand for energy, the importance of energy in society needs to be better communicated.

There are very few people willing to move anywhere but forward when it comes to using modern conveniences which are highly dependent on energy. It is all but impossible to identify any sector of a modern economy that is not highly dependent on energy. Many industries do not even exist without energy.

It is also important to emphasize that energy is important to a highly functioning economy. Energy needs to be readily available at a low cost. Energy also provides a multitude of high-dollar jobs; both directly and indirectly. The pipeline industry has employed untold thousands – millions worldwide – providing good-paying jobs.

The same can be said of countless other sectors of the domestic and world economy dependent upon the energy industry. This does not even take into account other industries that contribute to the energy industry – one example out of thousands:  men and women employed by Caterpillar. Without the energy industry Caterpillar would have far fewer employees. The list could go on and on and on.

Gary Cooper

The analogy I use for those of us old enough to remember watching westerns with Gary Cooper – you knew the good guys wore the white hats and the bad guys wore the black hats. The energy industry must not only wear the white hat – it must be aggressively proactive in wearing the white hat. Make no mistake, that message must be repeated every single day, every single minute – more importantly …. at every single opportunity.

The objective of this article is to not craft that positive energy message. There are many capable organizations and individuals that understand marketing. advertising, branding and public relations. The message here is that while the capable, well-funded opposition to the energy and pipeline industry had a plan, Energy Transfer Partners had no communication strategy. Not nearly enough people knew the facts. Even today, it is a story that to most is not known.

Energy Transfer’s DAPL message was not communicated early or often enough. It certainly was not communicated effectively. In turn after turn, Energy Transfer acted responsibly and in a collaborative fashion. Still, it ended up with the exact public relations “black eye” that it sought to avoid, as well as a costly and delaying litigation.

Energy Transfer had, unfair as it may be, the “black hat” slapped on because its environmental opponents shaped an image that it was their anti-pipeline side that was right and moral. One may agree or disagree whether that is an accurate depiction of the pipeline industry – however, that the Dakota Access Pipeline was unfair to the Standing Rock Sioux and bad for the environment was the indelible impression for most.

Conclusions 

The energy and pipeline industry must be much more proactive in communicating and projecting its message. It does no good if the positive industry message is not communicated early, loudly and consistently. These lessons are all the more important as no one knows where or when the next Keystone XL pipeline, or DAPL will occur. However, as surely as Thursday follows Wednesday, the next pipeline conflict is on the immediate horizon.

Just like every project is an opportunity for environmental interests to raise visibility and money, they also provide the industry with an opportunity to communicate a positive energy message that needs to work hand-in-hand with a more cogent and visible pipeline industry-wide message. Neither time nor public sentiment is on the side of the energy industry in general or the pipeline industry in particular. This time needs to be used strategically.

The Author: Ralph A. Cantafio is President/Senior Counsel of Cantafio Hammond, P.C. with offices located in Cheyenne, WY, as well as Denver and Steamboat Springs, CO. He is also a lecturer at the University of Colorado Denver, instructing in the Global Energy Management Program, teaching Environmental, Regulatory, Legal and Political Environment of the Energy Industry and Energy Law: Property, Contracts, and Transactions.

Editor’s Note: A comprehensive history of the complex issues surrounding the Dakota Access Pipeline can be found at www.pgjonline.com.