Bad News For The Bakken As Obama Administration Blocks Pipeline

The Obama administration shocked the oil industry last week, pulling the plug on a major oil pipeline from the Bakken that had become a flashpoint between a pipeline company on the one hand, and a growing coalition of Native American tribes and environmentalists on the other.

Everyone was anxiously waiting a Friday ruling from a U.S. federal judge, who was weighing a request from the Standing Rock Sioux Tribe to stop construction on the Dakota Access Pipeline, a $3.8 billion 1,168-mile oil pipeline that would run from North Dakota to Iowa and Illinois. The pipeline would threaten sacred lands and drinking water resources for the tribe.

Dakota Access exploded into a national controversy in recent weeks, as protests against the project swelled and violence broke out after protesters were attacked by dogs. Environmentalists have been keen on turning the Dakota Access Pipeline into a rerun of the Keystone XL saga, elevating the project to a national symbol around which protestors could be rallied.

But unlike Keystone XL, it did not take eight years to grab the White House’s attention. On Friday, September 9, a federal judge ruled against the Standing Rock Sioux’s request to block construction, handing Dakota Access a victory by allowing construction to proceed. However, an hour later, something really unusual occurred. A joint letter was issued from the U.S. Department of Justice, the U.S. Army Corps of Engineers, and the Department of Interior. The letter asked the pipeline company to “voluntarily pause” construction anyway, even though the court had ruled in the company’s favor.

Energy Transfer Partners, the lead company on the Dakota Access Pipeline, saw its share price sink more than 3 percent on Friday and it was down another 2 percent during early trading on Monday.

“We appreciate the District Court’s opinion on the U.S. Army Corps of Engineers’ compliance with the National Historic Preservation Act,” the three agencies wrote. “However, important issues raised by the Standing Rock Sioux Tribe and other tribal nations and their members regarding the Dakota Access pipeline specifically, and pipeline-related decision-making generally, remain.” The agencies wrote that they will need time to determine whether or not they have to review the permitting decisions again, due to the issues raised by Standing Rock Sioux. “Therefore, construction of the pipeline on Army Corps land bordering or under Lake Oahe will not go forward at this time.”

This may seem like a bit of arcane procedural mumbo jumbo, but the effects could be far-reaching. The Obama administration said that not only would it not allow the pipeline to move forward, at least temporarily, but it also said that the conflict highlighted the potential need for nationwide reform on how infrastructure is sited on Native lands.

Troy Eid, a former U.S. attorney in Colorado and expert in Indian law, told the Associated Press that the Dakota Access Pipeline “is a textbook example of how not to do a project.” The lack of consultation with the tribe blew up in the pipeline company’s face.

Now, the policy landscape could shift against the industry. Up until now, Native Americans have only been consulted on infrastructure projects, Eid said, not making actual decisions on whether or not projects move forward. Ultimately the U.S. federal government made all of the decisions. But with its Sept. 9 letter, the Obama administration could upend that arrangement, perhaps forever. “This could bog down or delay every single infrastructure project moving forward,” Brigham McCown, former acting administrator for the federal Pipeline and Hazardous Materials Safety Administration, told the AP. “I don’t think they even realize the can of worms they’ve opened.”

“There is no question it will be much more difficult and costly for these projects to move forward in the future,” Brian Jorde, a Nebraska lawyer who worked with Keystone XL opponents, told the AP.

The pipeline companies did not expect such a great deal of political risk to Dakota Access ahead of time. Since the pipeline does not cross an international boundary, many industry analysts thought the pipeline would not receive the level of attention – from either activists or the White House – that the Keystone XL project attracted.

Opponents of the pipeline see this as a huge victory. “Our voices have been heard,” said Dave Archambault II, chairman of the Standing Rock Sioux Tribe. “The Obama administration has asked tribes to the table to make sure that we have meaningful consultation on infrastructure projects. Native peoples have suffered generations of broken promises and today the federal government said that national reform is needed to better ensure that tribes have a voice on infrastructure projects like this pipeline.”

Major pipeline projects be forced to clear a much higher bar in the future, but there are near-term effects on the industry as well. Dakota Access was supposed to be completed by the end of the year, with construction already 45 percent completed. It would carry 470,000 to 570,000 barrels of Bakken oil per day when operational, connecting North Dakota oil fields to refineries in the Midwest. From there, the oil would be much better connected to the rest of the country.

Blocking construction of Dakota Access will leave Bakken drillers without a major conduit to get their oil out. That would leave them competing for scarce pipeline space, raising costs and forcing them to discount their crude, or shipping crude by rail, a costlier alternative. “In the absence of a new alternative, (Bakken) crude will have to use the existing infrastructure to move,” said Sandy Fielden, the director of research for commodities and energy at Morningstar, according to Reuters. “Producers will have to take lower prices to compete with imports.”

In short, the Bakken is already seeing oil production decline, and the disruption of Dakota Access will inflict further pain on operators in the region.

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