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The controversy over the Dakota Access Pipeline poses a bigger threat to U.S. oil stocks than most investors realize.
That's because the Dakota Access Pipeline fight has implications far beyond whether a single crude oil pipeline will be built or not. It now threatens current and future pipeline projects as well.
This isn't just bad news for companies that build and operate pipelines, but for the oil producers that need a cheap, reliable way to transport their product to distant refineries.
Given its potential impact on the U.S. oil industry, it's surprising the Dakota Access Pipeline hasn't received more attention.
Here's what's happened so far…
How the Dakota Access Pipeline Became a Flashpoint
Lacking an efficient pipeline system to faraway refiners, the producers in the remote Bakken shale area have relied on shipping by rail and less practical pipelines through the Rocky Mountains already near their maximum carrying capacity.
That's why Energy Transfer Partners (NYSE: ETP) started work on the Dakota Access Pipeline in 2014. The 30-inch, 1,172-mile pipeline would carry an expected 470,000 barrels a day with a maximum capacity of 570,000 barrels. That's just a bit smaller than the similarly controversial 36-inch Keystone XL pipeline that would have had a capacity of 830,000 barrels a day.
The pipeline would carry Bakken oil from the North Dakota fields to terminals in Patoka, Ill.
Despite the project's length, 99% of the Dakota Access Pipeline route crosses private land. But in the instances where the pipeline crosses federally regulated waterways or comes close to Native American lands, federal permits are required.
That's the job the of the Army Corp of Engineers, which is required by law to consult with Native American tribes about activities that might affect sites of historical or cultural significance before granting any permits.
In the course of this process, one tribe, the Standing Rock Sioux, resisted the consultations with the Corps. The tribe said the pipeline would desecrate its ancestral lands and worried its path under the Missouri River threatened its water supply.
Though the two groups never resolved their differences, the Corps eventually concluded that construction of the Dakota Access Pipeline would not harm any Native American sites.
This past July, the Corps granted Energy Transfer Partners the last permits it needed.
That's when the real trouble started…
Tribal Protests Trigger an Unprecedented Move
At that point the tribe began to protest near a construction site. Soon other area tribes, as well as environmental groups, joined the protests.
The Standing Rock Sioux Tribe also filed for an injunction Aug. 4, suing the Corps and seeking a halt to construction.
On Sept. 9, U.S. District Judge James Boasberg denied the tribe's injunction, noting that the Corps had made every effort to accommodate the tribe's concerns.
But then the Obama administration made a surprising intervention, reversing Judge Boasberg's ruling and ordering a temporary halt to the pipeline's construction where it crosses the Missouri River.
This unprecedented action – which happened just minutes after Judge Boasberg's ruling was announced – puts virtually every similar project under a cloud.
"This could bog down or delay every single infrastructure project moving forward," industry consultant Brigham McCown, a former acting administrator for the Pipeline and Hazardous Materials Safety Administration, told the Associated Press. "I don't think they even realize the can of worms they've opened."
Here's what's at stake for the U.S. oil industry – and which oil stocks are in the crosshairs…
Why the Dakota Access Pipeline Fight Will Have a Ripple Effect
The Dakota Access Pipeline isn't some wished-for project. With permits in hand, Energy Transfer Partners began construction in the spring. The project is 60% complete, with $1.6 billion spent to date.
And despite a court ruling in its favor, the Dakota Access Pipeline is now in limbo. The Obama administration memo, issued jointly by the Department of Justice, the Department of the Army, and the Department of the Interior, said the Army would "move expeditiously" to make a decision, but set no timetable.
The memo said the previous decisions by the Corps needed to be reconsidered because issues with the Standing Rock Sioux Tribe remained. More ominously, the memo suggests that existing policy regarding Native American input on infrastructure projects may need to change.
Craig Stevens, a spokesman for the Midwest Alliance for Infrastructure Now (MAIN), an energy-focused coalition of business interests, called the memo "deeply troubling" and warned of its long-term implications.
"Should the administration ultimately stop this construction, it would set a horrific precedent," Steven said in a statement. "No sane American company would dare expend years of effort and billions of dollars weaving through an onerous regulatory process receiving all necessary permits and agreements, only to be faced with additional regulatory impediments and be shutdown halfway through completion of its project."
The immediate impact of this decision is to make it harder to get shale oil out of the Bakken. The Dakota Access Pipeline was expected to start transporting oil in January, and it already had eager customers lined up.
That will affect the leading oil producers in the Bakken, which include Whiting Petroleum Corp. (NYSE: WLL), Continental Resources Inc. (NYSE: CLR), EOG Resources (NYSE: EOG), Hess Corp. (NYSE: HES), and Marathon Oil Corp. (NYSE: MRO).
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The broader impact will affect companies that build oil and natural gas pipelines, starting with Energy Transfer Partners stock, which fell as much as 11.7% in the days following the news. Other top U.S. pipeline companies include Kinder Morgan Inc. (NYSE: KMI), Enterprise Products Partners LP (NYSE: EPD), and Williams Companies Inc. (NYSE: WMB).
With almost every business related to fossil fuels coming under fire these days, the threat to these oil stocks is only likely to grow.
Oil Stocks Are on the Wrong Side of the Climate Change Issue
In recent years, climate change has become a much more prominent political issue. Liberal elected officials, including President Barack Obama, have mostly sought to fight climate change by beefing up regulations that govern the fossil fuel industries.
It's why President Obama rejected the Keystone pipeline, which would have brought Canadian tar sands oil to U.S. refineries.
Finding ways to block pipeline projects is simply one more way to undermine the fossil fuel industry. The Keystone pipeline crossed an international boundary, an issue that won't apply to a lot of new pipeline projects.
But with the Dakota Access Pipeline, the issue is whether the project disturbs sites on ancestral Native American lands. Remember, we're not talking about sites on reservation lands, but ancestral lands.
In their original complaint, the Standing Rock Sioux defined their ancestral lands as "wherever the buffalo roamed."
As that definition includes most of the continental United States, it opens the door to a lot of mischief by liberal politicians dedicated to fighting climate change – and a standing threat to dozens of U.S. oil stocks.
- ABC News: Federal Intervention on Oil Pipeline Project Unprecedented
- Court Opinion: Standing Rock Sioux Tribe v. U.S. Army Corps of Engineers
- MAIN Website: MAIN Coalition Denounces Federal Agency Joint Statement on Dakota Access Project
- Department of Justice: Joint Statement Regarding Standing Rock Sioux Tribe v. U.S. Army Corps of Engineers
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.