Time to Say Goodbye (Elections and Earnings): How Did the Pipeline Industry Fare?
Prognosticators have spilled much ink about the impact of the election. But when we home in on the areas that matter most to the oil and gas pipeline industry, how did the industry, generally, and projects, specifically, fare? Today, we wade into the murky waters of the midterm elections and earnings calls to offer our viewpoints on the issues that matter most.
Judicial Juggernaut
Litigation liabilities are driving the project development ecosystem mad. And rightly so. Over the past year, delays initiated by the courts -- especially the Fourth Circuit -- during construction have become commonplace. As shown in the chart below, of completed pipeline projects during the past decade, only a handful have led to stays, with all but one being an administrative stay. While the House of Representatives has flipped, the Senate has a power the House lacks: control over the judiciary, or at least control over the nominees that President Trump will appoint to the bench. So, one would expect an emboldened Republican Senate to continue its push for business-friendly judges. In the near term, there are a total of seven nominees to the influential circuit courts, including one to the Fourth Circuit, and 50 district court nominees who should be ready for a Senate vote in December. This should bode well for pipeline and LNG developers.
The Fourth Circuit, which has been known for years as being pro business, has become a hotbed for late stage project development litigation risk. The Fourth Circuit, in fact, just yesterday issued yet another stay of construction regarding the Atlantic Coast Pipeline, this time tied to the use of the Nationwide Permit 12 on grounds similar to the stay that the court issued against Mountain Valley Pipeline (MVP). (As a sign of MVP’s commitment to the project, this week it filed for its expansion, the Southgate Expansion Project.) Unlike other stays noted in the in the chart below, this one could remain in place at least until the oral argument is held in January or February.
Major Project Stays of Construction
Laboratories of Democracy
The pipeline industry has been plagued by delegated state permitting issues for years, and the industry is looking to contain what it sees as an abuse of the process. Many lobbying dollars have been spent seeking to ensure this abuse does not spread further. While various gubernatorial elections may impact the pipeline industry on the periphery, the races in New York and Michigan appear to be direct hits as well as the election of two Public Service Commissioners (PSC) in Nebraska.
In New York , Governor Cuomo, whose administration has been at the forefront of using the Clean Water Act to thwart pipeline projects, (See, Marcellus/Utica Pipeline Projects - Coming Now and Later) , was elected to a third term as governor. More importantly, the Democratic party was able to wrest control of the New York State Senate from a coalition of conservative Democrats and Republicans. This means the Democrats will now control both houses of the legislature, which may lead Governor Cuomo to move further left on many issues as he positions himself as a bulwark against President Trump’s policies. In addition, the newly elected New York Attorney General, Letitia James, who was backed by Governor Cuomo, promised during her own campaign to aggressively enforce environmental laws to protect the state’s waterways. None of these developments are positive for projects, including Williams’ Northeast Supply Enhancement, or National Fuel’s Northern Access 2016 project.
And, to the chagrin of Enbridge, as well as crude refineries and petrochemical plants, Michigan elected Democrat Gretchen Whitmer, who has vowed to challenge current Governor Snyder’s agreement with Enbridge to build a tunnel underneath the Straits of Mackinac to replace the 65-year old Enbridge Line 5 pipeline. Line 5 is a critically important conduit for moving crude and NGLs east across Michigan into Ontario, where the pipeline feeds refineries and petrochemical plants. Equally troubling for the project, given the likely legal sparring that will occur if Governor-elect Whitmer proceeds with trying to break the current agreement with Enbridge, is the election of Dana Nessel as Attorney General. Nessel has said “Every day that [Line 5] continues to operate is a day that we’re in peril.” The likely first step will be for Nessel and the governor to attack the easement that Michigan granted Lakehead Pipe Line company -- now Enbridge -- permission to use. If this fight is initiated, it could be mired in legal sparring for years.
And continuing the theme of elections that may impact specific projects, this time positively: TransCanada's Keystone XL pipeline likely applauded the election of two supporters to the Nebraska PSC. One of the newly elected commissioners supports the project and defeated one of the two project opponents on the commission, and the other new commissioner is one of the three original supporters of the pipeline. While the approval vote passed in 2017, these developments could become material if the Nebraska Supreme Court rules to send the project back to the PSC, which would now, based on PSC commissioner pronouncements about the project, provide 4-1 support. On its earnings call this week, TransCanada reported that the Supreme Court heard those oral arguments this week and it is expecting a decision in Q1 2019. This positive news was considerably dampened by yesterday’s action by a Montana federal district court, which ruled that the pipeline’s 2014 environmental impact assessment failed to meet the requirements of the National Environmental Policy Act.
The Federal Stage
While there were a number of Democrats on the Senate Energy Committee who were running for re-election, they all won their races and there was no change among the key membership of the committee, including the Ranking Member, Maria Cantwell, and the Chair, Lisa Murkowski. Before the election, Senator Murkowski issued a statement expressing her support for Chairman Chatterjee and for the speedy recovery of Commissioner McIntyre (See Back to the Future – FERC Chairman Chatterjee and the Risks of a Four-Member Commission ). In her statement, she indicated that she would be working with her colleagues on the committee “to restore a full complement of commissioners as quickly as possible.” Given the limited changes on the Committee, we expect Mr. McNamee’s nomination to move quickly and that it will likely be acted on before Congress adjourns for this year.
The change in control in the House may mean there is one last chance to pass the LNG Permitting and Transparency Act, which had previously passed the House, but was recently re-introduced in the Senate. For those not familiar with the issue, for projects that require FERC and DOE authorization, the Act provides that the DOE must issue a decision on an application for authorization to export natural gas within 30 days after the later of: (1) the conclusion of the review to site, construct, expand, or operate the LNG facilities required by NEPA; or (2) the date of enactment of the Act. And, among other provisions, it requires a reviewing court, if it finds in a civil action that DOE has failed to issue a final decision on an application, to order DOE to issue one within 30 days. The bill was referred to the Committee on Energy and Natural Resources in September but may have its best chance of passing between now and the end of the year.
Earnings Calls - Meh
Earnings reports were largely uneventful. As a cross-cutting theme, pipeline transportation appears to be turning the page. The days of “cowboy” projects have receded, for the time being, while the industry gears up for LNG terminal feeder pipelines, including major development efforts in the Permian. In its place, company management teams appear to be more focused on execution, capacity efficiency, and incremental expansion. (Although some appear optimistic that opportunities will present themselves in the Northeast if and when shippers abandon currently beleaguered projects.)
As evidence of the industry conservatism, filtering in the LawIQ web platform highlights the trends emerging for small to medium-scale activity. For example, three “major” projects (>$500MM, >500 MMcf) have submitted applications for FERC review in 2017-2018, compared to fourteen in the prior two-year period of 2015-2016, a significant drop-off. The story shifts for smaller projects (<500 MMcf) serving specific markets by expanding existing footprints. Among this cohort, 26 projects were filed in 2017 and 2018, as compared to 49 applications for the prior two year period (2015-2016).
The slowdown is significant - down almost 50% - but less so than the reduction in major projects over the same period, and applying LawIQ modeled time frames for ISDs can offer fundamental insights as to when these projects may impact market dynamics. The chart below shows that almost all projects currently under review should be in-service by mid-2020.
Natural Gas Pipeline Projects (<500 MMcf)
With new assets now in service or close to it, priorities shift. Reflecting a potential growing competition and operational focus, company management teams consistently spent a majority of commentary time on these calls discussing commercial issues - asset utilization, joint venture plans, asset sales, and offtake agreements. This is a departure from previous quarters, where heavy focus centered on FERC activity and other permitting issues taking center stage during project development.
Monday is Veteran’s Day. It’s a day that means a great deal to our company, whose members include vets who have served aboard U.S. Navy warships, airplanes, and submarines. After spending time this week in San Diego overlooking the naval base, our team is reminded and inspired by the eloquence of our first president: “The willingness with which our young people are likely to serve in any war, no matter how justified, shall be directly proportional to how they perceive the Veterans of earlier wars were treated and appreciated by their nation.”
Insights Coming Soon
- Payback period on new pipelines
- Top ten contractor analysis