The US Army Corps of Engineers requested a two-month delay until April 9 to decide whether to shutter the Dakota Access Pipeline, triggering a further strengthening in Bakken crude differentials as traders considered the possibility of the Bakken Shale's primary crude oil artery closing.
Fresh off of canceling the controversial Keystone XL Pipeline, a federal judge agreed to postpone a Feb. 10 court hearing until April 9 in a move that could give the Biden administration an ample timetable to consider how it might take the unprecedented step to close the 4-year-old, 570,000 b/d pipeline, at least temporarily, while a more stringent, court-ordered Environmental Impact Statement, or EIS, review is conducted that could easily extend into 2022.
Bakken crude differentials, which had already strengthened ahead of the hearing, continued moving higher Feb. 9. S&P Global Platts assessed Bakken barrels at Williston, North Dakota, that are injected into DAPL, at WTI CMA minus $1.25/b, up 10 cents from the Feb. 8 assessment and the strongest in eight months.
Bakken crude at Clearbrook, Minnesota, was assessed at WTI CMA minus 35 cents/b, up 15 cents from Feb. 8 and the strongest in six months.
A federal appeals court ruling in January essentially confirmed the Dakota Access Pipeline is operating illegally without the necessary legal permitting, and that it is up to the Biden-led Corps of Engineers to determine whether it will let the Energy Transfer-operated pipeline continue to flow crude oil while the environmental review determines whether the needed easement is deserved.
The plaintiffs, led by the Standing Rock Sioux Tribe, supported the requested delay.
The DAPL case is closely watched by industry and environmental observers alike because it could potentially set a standard for attempting to close existing pipelines and other fossil fuel infrastructure.
Biden has never publicly weighed in on DAPL, but Vice President Kamala Harris and Biden's nominee for Interior secretary, US Rep. Deb Haaland, a Democrat from New Mexico, have both supported shutting the pipeline.
Accord to the motion in court requesting the delay, "Department of Justice personnel require time to brief the new administration officials, and those officials will need sufficient time to learn the background of and familiarize themselves with this lengthy and detailed litigation."
Pipeline operator Energy Transfer did not respond to requests for comment.
PRODUCTION IMPACT
ClearView Energy Partners analysts said they see the delay tactics as a sign that the Biden administration may shift from the Trump administration's strategy of deferring enforcement against the pipeline.
"This shift would be consistent with our expectations that DAPL likely faces a shutdown in operations while the Corps completes the Environmental Impact Statement directed by the courts," ClearView said in a Feb. 9 analyst note.
Such a closure likely would hamper rebounding production volumes in the Bakken and redirect more barrels to ship by costlier rail services.
After holding relatively flat in September and October, production in the Bakken started to decline in November, according to S&P Global Platts Analytics. With rig counts and drilling activity remaining subdued, this downward trend in production is expected to persist through mid-2021 even if DAPL remains open.
The annual average for Bakken production is forecast to be 250,000 b/d lower in 2020 year-on-year and 55,000 b/d lower in 2021 even with DAPL in operation, before rebounding in 2022.
Standing Rock attorney Jan Hasselman of Earthjustice said the pressure is on the Biden administration to act on campaign pledges on climate change and environmental justice.
"The Biden administration has centered climate solutions, environmental justice and tribal sovereignty among its core values, and all three are at stake with the decision on the Dakota Access Pipeline," Hasselman said. "The courts have confirmed that the pipeline's permits were granted illegally and, if the administration wants to follow the rule of law, it will have to shut down the pipeline while an EIS is prepared."
US District Judge James Boasberg approved postponing the court hearing late on Feb. 9. Boasberg previously ordered the pipeline closed last summer before his ruling was undone in the appellate court. But the appeals court has now agreed with Boasberg that the federal easement was granted illegally in early 2017 under the Trump administration, and the court is leaving the interim status of the pipeline's operations up to the Biden-led Army Corps.
HOW DID WE GET HERE?
In 2016, construction of the DAPL temporarily became the epicenter of the US environmental movement against fossil fuels, as climate activists teamed up with Native American tribes that wanted to protect their lands and waterways, specifically at Lake Oahe.
Headline-grabbing protests, security clashes and arrests ensued.
In December 2016, outgoing President Barack Obama blocked the completion of the pipeline in a largely symbolic gesture that was quickly overturned after Trump was sworn in, and the pipeline came online later in 2017.
Behind the scenes, the legal fights continued over the fast-tracked environmental permitting the pipeline received under both Obama and Trump. Judge Boasberg stunned industry observers when he ordered the pipeline shut in July 2020. One month later, the shutdown order was halted on appeal.
Even with the pipeline's fate in question, operator Energy Transfer has still moved forward with expanding the crude pipeline's capacity by the end of 2021. Early construction work, including surveying and concrete pouring to build new pumping stations, began late last year.
During Energy Transfer's most recent earnings call, Mackie McCrea, who became co-CEO in January, said he did not envision any realistic scenario where the pipeline is permanently closed. Energy Transfer's next earnings call is slated for Feb. 17.
The pipeline is on track to move about 750,000 b/d of crude capacity by the end of September as part of a capacity expansion project, according to Energy Transfer. The company has planned to expand Dakota Access to 1.1 million b/d. But, with the ongoing coronavirus pandemic hurting crude demand, the expansion is taking a phased-in approach.
