Change in North America

The conflict between Russia and Ukraine has altered legal and regulatory affairs in Mexico, Canada, and the US, argues Gordon Cope.

ver the last century, the comprehensive regime that governs the millions of miles of oil, gas and fuel pipelines in North America has evolved, with the primary goals of gathering and delivering fossil fuel energy to consumers in a safe, cost-effective and reliable manner.

For the last several decades, however, the regulatory/ approval environment for new (and refurbished) pipelines in North America has been characterised by adversarial forces. Environmental groups, concerned with climate change, do not want major infrastructure investment in fossil fuels, including pipelines. Various administrations in both Canada and the US have been instrumental in impeding and cancelling projects, and uncertainty within the investment community has made financing more difficult and expensive.

The calculus changed dramatically in early 2022 when Russia invaded the Ukraine. In Europe, the predominant concern over climate change was overridden by energy security as the EU scrambled to replace Russian oil and gas; what would be the inevitable repercussions around the world? Those considerations, of course, are still evolving, but ramifications are beginning to emerge in North America.

Keystone XL For several decades, the free flow of energy between Canada, the US and Mexico has been guaranteed through bilateral agreements. When Joe Biden entered the White House in 2021, however, his first act as President was to unilaterally cancel TC Energy’s Keystone XL pipeline project. Initially proposed in 2008 as a 2000 km express line to deliver 830 000 bpd of Alberta crude to the US Gulf Coast (USGC), the Obama administration refused to approve a cross-border permit. President Trump used an executive order to reverse the decision, but Biden’s move is considered to be the nail in the coffin for the US$8 billion project.

When a post-COVID-19 rebound in demand and the Ukraine war caused gasoline prices in North America to soar, President Biden went hat in hand to Venezuela and Saudi

Arabia, requesting increases in output. He studiously ignored Canada; for its part, TC Energy insisted that the XL project is dead, and is seeking damages through international arbitration.

Enbridge Line 5 Crude exporters in Canada still face further pipeline complications. Enbridge Line 5 transports 540 000 bpd from Canada (and North Dakota) through Michigan to Ontario and Quebec. The line has operated safely for over 60 years, and Enbridge has been doing extensive upgrades. In late 2020, however, Michigan Governor, Gretchen Witmer ordered Line 5 to shut down operations by 13 May 2021, due to the potential for spills (from anchor strikes) where it passes under the Straits of Mackinac in the Great Lakes. Although there have never been any leaks in the Straits, and Enbridge has received approval to replace the pipeline using a tunnel to greatly increase integrity, the issue remains at a standoff. Enbridge has sought legal relief, and the case is being heard in a US federal court.

As an international pipeline between Canada and the US, Line 5 is governed by the 1977 Transit Pipelines Treaty, which contains provisions guaranteeing uninterrupted transit of light crude oil and natural gas liquids between the two countries. In October 2021, the federal government of Canada invoked Article Six of the treaty to instigate bilateral negotiations with the US federal government. The invocation of the treaty (which has never been used before), will oblige the Biden administration to become involved in the dispute. Regardless, if the pipeline were to be even temporarily closed, it would have far-reaching negative effects upon supplies to Michigan, Ontario and Quebec, precisely at a time when the energy sector is under significant stress.

Cyberattacks In May 2021, a ransomware attack forced Colonial Pipeline to shut down much of its network for several days. The 8900 km system delivers millions of barrels of gasoline, diesel and jet fuel every day between refineries in Texas and the Eastern Seaboard. In July 2021, the Department of Homeland Security (DHS), announced requirements for operators to implement “urgently needed protections against cyber intrusions”. The directive required midstream companies to conduct cybersecurity architecture design reviews, instigate specific mitigation measures against ransomware attacks, and implement cybersecurity and recovery plans.

While the attack was a galvanising event for North American midstream assets, the Russian invasion of Ukraine has further spurred action; the US House subcommittee on cybersecurity, infrastructure protection, and innovation subsequently passed cyber legislation and funded US$1 billion in state and local cyber grants. “I definitely think there has been a change in the tone and in the willingness to fully engage in this,” said Brandon Wales, Executive Director at the US Office of Management and Budget’s Cybersecurity and Infrastructure Security Agency (CISA).1

Mountain Valley In early 2022, the US Court of Appeals (4th Circuit), handed the beleaguered Mountain Valley natural gas pipeline its latest setback. The 488 km project was planned to move 2 billion ft3/d from West Virginia to Virginia; the US$3.5 billion pipeline, designed to enter service in 2018, has now seen its budget balloon to US$6.2 billion, and its service date pushed back into 2023. The crux of the dispute rests with a 5.6 km stretch that passes through Jefferson National Forest; the court vacated the US Forest Service and Bureau of Land Management decisions to allow access, and has sent the case back to the agencies. In August 2022, however, West Virginia Senator, Joe Manchin, a Democrat often at odds with the Biden administration, got the White House’s agreement to tack on an amendment to a multi-billion tax and climate bill that would streamline the completion of the pipeline.

LNG In the ensuing scramble to replace Russian gas, Europe is looking to North America to increase LNG exports. US capacity has been climbing rapidly; it exceeded 11.4 billion ft3/d in early 2022, surpassing Australia and Qatar as the world’s largest producer. The Energy Information Administration (EIA), had previously forecast LNG exports would average 9.2 billion ft3/d in 2022, but in June 2022, it noted that exports had surged to 11.5 billion ft3/d for the first four months of the year; almost 75% of that production is now destined for Europe. While a fire at the Freeport LNG facility in Louisiana has dampened output, the Ukraine war is expected to continue an extended time, stiffening European resolve for more North American gas.

In order to deliver more LNG, however, US producers require significant further development of pipelines. According to the Interstate Natural Gas Association (INGAA), there are over 12 billion ft3/d of major pipeline capacity already in advanced stages of approval before the Federal Energy Regulatory Commission (FERC), primarily to deliver unconventional gas from shale basins. Environmental opposition to further fossil fuel investment complicates development, however. “FERC’s approval is the imperative next step for these important projects,” notes INGAA.2

Saguenay LNG For the last 8 years, GNL Quebec had been developing an LNG project in Port Saguenay, Quebec. The US$7.2 billion project would have exported up to 11 million tpy to Europe by 2025. The facility was designed to use gas from western Canada (using a new 500 km gas pipeline), and electricity from existing hydroelectric infrastructure to produce the world’s most climate-friendly, super-chilled gas. In addition, the LNG could then be shipped far more cheaply to Europe than LNG emanating from the Gulf of Mexico. In July 2021, however, the Quebec government rejected the proposal (based on climate change concerns), followed by the federal level in early 2022.

The Ukraine war has altered Canadian focus, however. At the behest of Germany, the federal government is now in talks with two companies in eastern Canada, discussing ways to ship energy to Europe. Spanish company Repsol operates a regasification facility in St. John, New Brunswick, where it imports natural gas for the US Eastern Seaboard. Pieridae, based in Nova Scotia, is proposing a 2.4 million tpy floating

LNG facility in the province. Both projects would take several billion dollars’ worth of investment and multiple years of related infrastructure construction prior to first exports, however.

In addition, Canadian Prime Minister, Justin Trudeau and German Chancellor, Olaf Scholz signed an agreement in August 2022 to promote the development of a hydrogen export facility in Newfoundland. World Energy GH2 plans to build a large scale, zero-emission plant in the deepwater port of Stephenville. The region is renowned for its wind corridor; the plant will rely on 164 land-based wind turbines to power an electrolysis production process.

Supreme Court ruling In June 2021, the US Supreme Court ruled in favour of federal jurisdiction in a landmark test case. New Jersey, supported by 18 other states, had sought the authority to oppose the use of eminent domain to purchase land along a pipeline running through their jurisdictions. The case was ruled in favour of PennEast Pipeline, which had gained authority from the FERC, to obtain land along the ROW of a 116 mile gas line running from Pennsylvania’s Luzerne County to Mercer County in New Jersey. “This decision is about more than just the PennEast Pipeline Project; it protects consumers who rely on infrastructure projects – found to be in the public benefit after thorough scientific and environmental reviews – from being denied access to much-needed energy by narrow State political interests,” said Anthony Cox, Chair of the PennEast Board of Managers.3 While the Supreme Court decision will have profound impact on future projects, it was a pyrrhic victory for PennEast; the company subsequently announced in late 2021 that it was abandoning the project in the face of hurdles regarding wetlands permits in New Jersey.

Positive developments Not all tales end in tears; the much-maligned Trans Mountain Expansion is finally nearing completion. The original 300 000 bpd Trans Mountain pipeline has been transporting crude from Alberta to Vancouver, British Columbia, for almost 70 years. Kinder Morgan launched a project to almost triple capacity on the 1150 km line to 890 000 bpd. The US-based company faced so much opposition from the government of British Columbia, First Nations and environmental groups, however, that it sold the project to the federal government in 2018. The result of delays has been a massive cost escalation, from CAN$7.4 billion to CAN$21.4 billion. While protests continue, construction on the line proceeds apace in both British Columbia and Alberta, and is expected to enter service in late 2023.

Enbridge Line 3 Enbridge’s Line 3 crude pipeline, built half a century ago, was designed to carry 760 000 bpd from Alberta to Superior, Wisconsin, but age and corrosion reduced capacity by 50%. A refurbishment plan has been delayed several years by environmental lawsuits. In February, 2020, the Minnesota Public Utilities Commission finally endorsed a revised environmental impact statement, and allowed the refurbishment to proceed. Environmental and Indigenous groups filed a legal challenge; the Minnesota Court of Appeals ruled in June 2021, that the Commission’s decision was justified. Since then, protestors have periodically occupied ROW sites in an attempt to disrupt construction. In late 2021, Line 3 entered service, offering 620 000 bpd capacity vs 390 000 bpd on the old line.

Regulatory future In 2021, the government of Canada enacted the Canadian Net-Zero Emissions Accountability Act that provides a legallybinding roadmap to achieve net-zero greenhouse gas (GHG) emissions by 2050. The Act also specifies that emissions are to be reduced up to 45% of 2005 levels by 2030. That same year, the Biden administration announced a target to reduce US GHG emissions by 50% of 2005 levels by 2030.

In addition, however, the White House set out an ambitious target of promoting hydrogen as a clean fuel source, ear-marking billions of dollars to subsidise the cost of green hydrogen and develop infrastructure. While pipeline operators are already reducing methane emissions and decreasing operational footprints, the emergence of a hydrogen economy over the next several decades could have a far more profound impact on the sector.

As a fuel source for heating, hydrogen can be mixed with existing natural gas lines up to around 25% without causing undue problems. Over that, however, it tends to make conventional pipeline steel brittle and erode valves. For transportation, a dedicated network similar to diesel and gasoline would eventually be necessary to deliver large volumes of hydrogen to retail points; such a network would require the investment of hundreds of billions of dollars. Governments would need to work hand-in-hand with refineries, pipeline companies, retailers and vehicle developers to enhance viability and reduce risks.

In conclusion, while the environmental pressures directed toward all sectors of the hydrocarbon sector remain dominant, the Ukraine war has elevated energy security back into the fore. The former faction is maintaining businessas-usual by using regulatory frameworks to stifle pipeline development; proponents of the latter have the leverage of having to deal with the turmoil that the conflict has brought to energy worldwide. Potential solutions abound; both environmentalists and fuel providers, for instance, could work toward an eco-friendly hydrogen economy that would reduce carbon emissions and simultaneously liberate many jurisdictions from the kind of threat imposed when energy is weaponised. While such a grand coalition is possible, the likelihood of success under the current adversarial environment permeating North America’s legal and regulatory regime is daunting.

References

1. thehill.com/policy/cybersecurity/3480165-colonial-pipeline-was-cyberwake-up-call-ukraine-war-is-escalator 2. oilprice.com/Energy/Natural-Gas/What-Is-Keeping-America-From-RealizingIts-LNG-Potential.html 3. stateimpact.npr.org/pennsylvania/2021/06/29/u-s-supreme-court-rulespenneast-pipeline-project-can-use-eminent-domain-to-take-n-j-state-land