Enbridge’s Line 5 In Michigan - No Good Deed Goes Unpunished

In October 2018, Enbridge reached an agreement with the state of Michigan to replace a portion of its Line 5 that runs in the Straits of Mackinac with a utility tunnel that is estimated to cost $350 million. However, the Democratic candidates for governor and attorney general campaigned against the continued operation of Line 5 in the state, and both candidates beat their Republican opponents last November. On the Governor’s first day in office she sent a letter to the attorney general asking for her legal opinion on various questions concerning a statute passed by the lame-duck legislature that could protect Line 5 from being decommissioned.
As shown in the map below, Line 5, the northern red line running through Michigan, is one of two critical paths on Enbridge’s Mainline system between Superior, Wisconsin and the refineries in Sarnia, Ontario. The other segment, which takes a more southerly route through Michigan, is Enbridge’s Line 6. Line 5 is the only one of the two that carries natural gas liquids, which are refined into propane. According to Enbridge, Line 5 has a capacity of 550,000 barrels per day and provides almost 55% of Michigan’s entire propane needs.

A critical concern for those interested in the (1) pricing of commodities in Canada; (2) continuing supply for refineries in Ontario; or (3) continuing revenue for Enbridge, is whether the administration changes in Michigan will actually result in a cessation of the operations of Line 5. As we discuss below, while there is certainly a lot of smoke concerning this issue in the state of Michigan, there does not appear to be any substantial risk to the continued operations of Line 5 for the foreseeable future given the legal complexities associated with voiding agreements between Michigan and Enbridge.

Line 5 was first constructed in 1953 and Enbridge’s predecessor, Lakehead Pipe Line Company, Inc., obtained a perpetual easement from the state of Michigan to put two separate 20-inch diameter pipelines of approximately four miles in length across the “bottom lands of the Straits of Mackinac” (Straits Pipelines). The current issues with regard to the Straits Pipelines portion of Line 5 started in 2010 when the more southerly line on the map above, Line 6B, experienced a leak which, according to the state of Michigan, caused the largest inland oil spill in United States history.
As a result of that incident, Michigan’s then Attorney General Bill Schuette, who lost the recent governor’s election to Governor Whitmer, and the director of the Michigan Department of Environmental Quality formed and co-chaired a panel called the Michigan Petroleum Pipeline Task Force (Task Force). The Task Force issued a report in July 2015 that made the following specific recommendations regarding the Straits Pipelines:

Prevent the transportation of heavy crude oil through the Straits Pipelines.
Require an independent risk analysis and adequate financial assurance for the Straits Pipelines.
Require an independent analysis of alternatives to the existing Straits Pipelines.
Obtain additional information from Enbridge relating to the Straits Pipelines.

Getting Caught in the Crosswinds of State Politics

Following issuance of the Task Force’s report, Enbridge began good faith discussions with the state which culminated in a formal agreement executed in November 2017 (First Agreement). Under the First Agreement, Enbridge agreed to a number of operational changes to improve its communications and coordination with the state of Michigan, and also agreed to complete a report by June 15, 2018 that evaluated three different alternatives for replacing the Straits Pipelines.
In that report, Enbridge found there were only two feasible options for replacing the current pipelines. The first, with an estimated cost of between $350 to $500 million, was the construction of a utility tunnel that would include a replacement pipe, but would take approximately six years to plan, permit and construct, including about two years for just the tunnel boring. The second option, with an estimated cost of between $250 to $300 million, would be to open cut a trench on each shore for a distance and then lay the pipeline on the bottom of the Straits in the middle. This option was estimated to take from four to five years to plan, permit and construct.
Both Governor Whitmer and AG Nessel promised during their campaigns that they would decommission Line 5 through the Straits without a replacement in place, but neither one articulated a clear legal strategy for achieving that goal. AG Nessel stated that on her first day in office she would seek an injunction prohibiting the continued use of the pipeline.

Outgoing Governor Takes Steps to Protect the Arrangement with Enbridge

Leading up to the election and in the immediate aftermath of the Democratic election wins, the governor and the Michigan Legislature took a number of steps to memorialize the state’s arrangements with Enbridge regarding the replacement of the Straits Pipelines.
First, on October 2, 2018, Governor Snyder, along with the directors of the Michigan Department of Natural Resources and the Department of Environmental Quality signed a “Second Agreement” with Enbridge in which Enbridge agreed to further operational modifications to the Straits Pipelines and which obligated the state and Enbridge to sign additional agreements for the replacement of the Straits Pipelines using the tunnel option called for in Enbridge’s June 2018 report. Enbridge agreed that, following completion of the tunnel as provided in those subsequent agreements, it would permanently deactivate the Straits Pipelines.
Following the election, the Legislature passed a statute referred to as “PA 359” that created a new authority called the Mackinac Straits Corridor Authority (Corridor Authority) within the state’s Department of Transportation. The Corridor Authority was to have three members, all of whom were to be appointed by the governor and would serve six-year terms. The Corridor Authority was directed by PA 359 to enter into an agreement by December 31, 2018 for the construction of a utility tunnel consistent with the plans agreed to with Enbridge.
Governor Snyder appointed the members of the Corridor Authority and, at a meeting on December 19, the Corridor Authority approved the execution of a Tunnel Agreement with Enbridge. On the same day, Enbridge signed a “Third Agreement” with the state of Michigan, the Department of Environmental Quality and the Department of Natural Resources. The Third Agreement bound the state to certain interpretations of the original 1953 Easement, which added clarity to those provisions and reduced Enbridge’s risk of noncompliance with those provisions. From an Enbridge perspective, the key term in the Third Agreement is the state’s agreement that Enbridge may continue to operate the existing Straits Pipelines “until the Tunnel is completed and the Straits Line 5 Replacement segment is placed in service within the Tunnel.”

The Actions of the New Administration

On her first day in office, Governor Whitmer sent a letter to AG Nessel asking for her legal opinion on six questions. Interestingly, on that same day, AG Nessel did not follow through on her campaign promise to file for an injunction to stop the continued use of the Straits Pipelines. AG Nessel responded to the governor’s request for a legal opinion with a statement indicating that there are “serious and significant concerns regarding PA 359, which the previous governor and legislature initiated and passed.” According to AG Nessel, her office would address the request immediately and she asked that any “interested or concerned party to forward a brief or legal memo on the issues raised.” She also cautioned that no one (meaning Enbridge) should rely on anything done pursuant to PA 359 until the governor’s requests are resolved. Finally, AG Nessel indicated that there was no specific timeline for issuing the requested opinions, but that it was a top priority for her office.
The six questions on which the governor is seeking an opinion all revolve around the passage of PA 359 and the creation of the Corridor Authority. Interestingly, there is not a single question posed about Governor Snyder’s execution of the Third Agreement. The Third Agreement is conditioned on the existence, continued effectiveness and Enbridge’s compliance with the Tunnel Agreement, which was signed by the Corridor Authority pursuant to PA 359. However, an action to void the Tunnel Agreement would not necessarily eliminate the contractual benefit to Enbridge under the Third Agreement of a continuing right to operate the Straits Pipelines until the tunnel is built or the tunnel agreement is invalidated.

The Bottom Line

While the Michigan governor and attorney general have publicly stated their opposition to the continued operation of the Straits Pipelines, their actions, to date, have not directly addressed that issue. Based on our review of the agreements, and particularly the Third Agreement signed by the outgoing governor and the director of the Department of Natural Resources, there appears to be no easy path for the current administration to achieve that goal.
We would expect that the attorney general will issue her opinions on the governor’s questions by the end of this month. The attorney general or the governor may then seek to have the Tunnel Agreement signed by the Corridor Authority voided and may also seek to have the Third Agreement between Enbridge and the state of Michigan ruled invalid. Either lawsuit to void an agreement signed by Enbridge, although initially filed in state court, would most likely be removed to federal court by Enbridge. While there are substantial questions concerning the passage of PA 359, the Third Agreement would seem to be a proper use of the statute first passed in 1953 that allowed the Conservation Commission (the predecessor of the current Department of Natural Resources) to grant easements for the placement of pipelines across state-owned lands, including lake bottomlands, “upon terms and conditions the department determines just and reasonable.”

It may take years for this process to work itself out in the courts if Michigan’s new administration does not reach a revised agreement with Enbridge. In the meantime, we believe it is very unlikely that Enbridge would be required to cease operations prior to a final decision that found all of the following:

The Third Agreement is invalid;
Enbridge has violated the terms of the 1953 Easement;
Enbridge has been informed of how it has violated the 1953 Easement; and
Enbridge did not commence a remedy for that violation within 90 days after being notified of the violation.

This is a substantial burden, and one, at least for now, that we believe the state would be hard pressed to meet.

Insights Coming Soon