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The Dakota Access Pipeline: Desperately Needed Or Devastatingly Destructive?

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Includes: EEP, ET, MPC, MPLX, SXL, TRP
by: Alerian

By Karyl Patredis

Why is everyone talking about the Dakota Access Pipeline?

There are two sides to every story and the more I read about the Dakota Access Pipeline, the more I understand why the situation surrounding this project is so complicated. Let's talk about it.

The Dakota Access Pipeline is a 1,172-mile pipeline set to carry crude oil from the Bakken and Three Forks production areas in North Dakota to Illinois. The main purpose of the project is to get the oil to refining markets in a less expensive, safer way. Currently, crude transportation by rail is the primary method of moving oil out of the Bakken. Energy Transfer Partners (ETP) is building the pipeline [1]. ETP boasts the project will create between 8,000-12,000 construction jobs, is backed by numerous long-term binding contracts, and will aid in the goal of moving the US toward energy independence.

Sounds awesome, right?

Unfortunately, like many things in life, it's not that simple. The Standing Rock Sioux Tribe reservation is located near the path of the pipeline. The tribe fears the project could further [2] disturb their ancestral burial grounds and also contaminate their water supply (the Missouri River). Members of the Standing Rock Sioux say they were not appropriately included in decisions regarding the pipeline's route and filed a lawsuit in July of this year. In recent days, floods of protesters have converged on the area to voice their concerns about the project. It's been reported that hundreds of people are living at the demonstration site in teepees, tents, and RVs. The protests have captured headlines as a result of celebrity sightings and sadly, violence.

Last Friday, the Department of Justice (DOJ) and the Department of the Interior (DOI) announced that while construction on other areas of the pipeline could proceed as planned, work near the area of the tribe must be temporarily stopped. The DOJ/DOI also asked that ETP voluntarily halt construction [3] within 20 miles of the area in question [4]. The US Army Corps of Engineers (the group that evaluated the environmental compliance and safety of the pipeline) has been asked to "reconsider" its previous decisions regarding pipeline placement in the area and to make sure that all federal laws (including those in the National Environmental Policy Act) have been followed. This is a small victory for the Standing Rock Sioux Tribe, but still not a complete halt to the project liked they'd hoped.

The Dakota Access Pipeline is not the only project planned in the Bakken. For example, TransCanada (NYSE:TRP) has proposed construction of the Upland Pipeline which would also run through North Dakota, but instead move product north to Canada. The system would transport around 300,000 barrels of crude each day and would be put into service in 2020. However, if anyone understands the reality of the regulatory process, it's TRP. The company's Keystone XL Pipeline which would have run through a corner of the Bakken in South Dakota was shut down by the Obama Administration in late 2015. Enbridge Energy Partners (NYSE:EEP) recently announced that it was pulling the application for its Sandpiper Pipeline which also would have tracked through the Bakken. This decision, however, was primarily a function of the energy cycle, not regulatory issues.

As we've discussed before, while permitting of oil pipeline projects is not subject to FERC regulation, companies wishing to build them must comply with federal laws, obtain applicable federal permits [5], and receive state approvals. It is also a law that the federal agency approving these permits consults with native nations or tribes in the area to ensure that there are not any places of cultural significance that could be harmed in the construction process. In the case of the Dakota Access Pipeline, the tribe claims they weren't properly [6] consulted by the Army Corps of Engineers.

All of the conversation surrounding the Dakota Access Pipeline has raised important questions not only for ETP, but for all infrastructure companies hoping to initiate oil pipeline projects. The issue that goes beyond this specific case is one of the government's involvement in the oil pipeline approval process. As it stands, it's almost as if we have a "changing the rules in the middle of the game" situation. Is this reasonable? ETP followed the permitting laws, received state approvals, started construction, hired crews, and was then stalled. How will companies move forward, both operationally and from a capital commitment standpoint, knowing the risk that they may be subject to additional review in the middle of the construction process? Should the DOJ and the DOI have the right to halt construction of a pipeline? If, so where does it end? Could other parties get involved?

It will be interesting to see how this one shakes out because it may set a precedent of what other infrastructure companies will expect going forward.

Footnotes:

[1] This is an oversimplification. Technically speaking, ETP and SXL jointly own 38.25% through Bakken Holdings Company, of which ETP owns 60% and SXL owns 40%. EEP and MPLX jointly own 36.75% through MarEn Bakken Company, of which EEP owns 75% and MPLX owns 25%. This deal was originally announced with Marathon Petroleum (NYSE:MPC), the parent of MPLX. However, in an 8-k on September 1st, MPC announced that MPLX would take over in the EEP deal. PSX just owns 25% by itself.

[2] Tribal officials say construction has already ruined some burial and cultural sites.

[3] No word on whether or not the company will comply with this request. Although it might be wise for them to do so in the event of a re-route.

[4] Specifically, this is referring to Lake Oahe in Morton and Emmons counties in North Dakota. The lake is a 200-mile-long reservoir on the Missouri River.

[5] The previously mentioned Army Corps of Engineers is involved with this process and giving approval of interstate oil pipeline paths particularly when they will affect surface waters.

[6] They were consulted, but not until too late in the process (according to tribe leaders).

Disclosure: © Alerian 2016. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Karyl Patredis is the Logistics Coordinator at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Patredis leads the firm's ongoing efforts toward greater organizational efficiency. She also oversees Alerian's feedback process for creative output. Ms. Patredis graduated with a Master of Science in Accounting and a Master of Business Administration from the University of Dallas, as well as a Bachelor of Arts in Communication and a minor in Psychology from Texas A&M University.