Running on empty

Canadian oil & gas projects in the US are in trouble. For some, President Biden’s decision to cancel the permit for TC Energy’s Keystone XL pipeline on his first day in office was a wake-up call on the pro-climate priorities of the new administration. But they are just one of the challenges facing Alberta’s oil & gas sector in the U.S. There are competing federal and state law barriers to new and existing energy projects linking the oil sands with markets across North America, and Keystone XL and Enbridge Line 5 in particular.

In the U.S., the Federal Energy Regulatory Commission (FERC) does not regulate the siting of oil or natural gas pipelines, nor does it conduct environmental reviews. Where the projects cross the border, the State Department conducts an environmental review under the National Environmental Policy Act (NEPA), a process that can take years, and makes a recommendation.

Until recently, presidents generally accepted the conclusions of the State Department and granted or withheld permits accordingly. The Obama Administration initially rejected Keystone XL’s initial permit application to cross the border, a decision former President Donald Trump promised as a candidate to reverse. Upon assuming office, however, Trump discovered that reversing a regulatory process conducted by the State Department was difficult because of the requirements of U.S. administrative law. Frustrated, he opted to issue the permit via executive order, circumventing the NEPA process altogether. Doing this put the permit in a precarious position, since executive orders are subject to presidential discretion. The permit could thus be withdrawn at any time, either by Trump himself or his successor.

That is precisely what happened. Trump may have seen himself as doing TC Energy a favour by fast-tracking the approval of Keystone XL through the executive order process. In reality, issuing the pipeline’s permit in this manner made it extraordinarily vulnerable. It seems unlikely that permits for future cross-border projects will be issued this way, since growing politicization in the U.S make it foreseeable that presidents will be motivated to undo the actions of their predecessor. While the exact fate of Keystone XL’s cross-border permit is not likely to happen to another project, there are other dangers ahead.

As head of the executive branch, President Joe Biden can instruct those executive agencies that conduct NEPA reviews of energy projects, to give additional weight to climate change considerations.  We may also see the Biden Administration issue broader guidelines, as then-president Barack Obama did, when he directed the Environmental Protection Agency to create the Clean Power Plan. Depending on what the directives are, it may be difficult for projects which move Western Canadian crude to successfully obtain permits after a NEPA review. This potential layer of uncertainty could chill any plans for major cross-border projects.

Complicating matters, some states are beginning to assert their own siting authority to revoke legal permissions for pipelines within their borders. Such is the case with Enbridge Line 5, part of the company’s mainline U.S. pipeline system that delivers more than half of all oil imports to Ontario and Quebec. Built in 1953, Line 5 begins in Wisconsin and crosses through Michigan before entering Sarnia. Part of the pipeline’s route through Michigan includes a twinned segment that passes under the Straits of Mackinac, a busy navigation channel linking Lakes Michigan and Huron.

In 2018, a tugboat anchor struck one of the twinned segments of Line 5 in the Straits. Though there was no damage, as Line 5 has been in place under the Straits since 1965, concerns about the impacts of a potential spill from the aging line began to gain traction. Enbridge has proposed building a new single segment of Line 5 under the Straits, to be constructed inside a tunnel to prevent future collisions. Although the company has obtained some of the permits from Michigan to build the tunnel, the state has contemporaneously sought to have the Mackinac segment of Line 5 removed.

In June 2019, the state filed a lawsuit to compel Enbridge to remove the Mackinac segment of Line 5, and in November 2020, Michigan Governor Gretchen Whitmer moved to revoke Line 5’s easement to cross the strait. Enbridge is relying on constitutional arguments and the 1977 Pipeline Transit Treaty between Canada and the U.S. to fight both moves.  This treaty states that no American “public authority” would “institute any measures” that “would have the effect of, impeding, diverting, redirecting or interfering with in any way the transmission of hydrocarbon in transit” unless there was a “natural disaster, an operating emergency, or other demonstrable need temporarily to reduce or stop for safety or technical reasons the normal operation of a pipeline.”

The lack of case law on the treaty makes it difficult to predict Enbridge’s chances of success in raising it as a bar to Michigan’s attempts to remove the Mackinac segment. Still, the entire struggle is emblematic of the shifting political landscape in the U.S. There is little risk to opposing Canadian pipelines on environmental grounds, regardless of whether concerns are valid. Even if these legal moves are ultimately unsuccessful, the cost and delays they bring may discourage Canadian companies from proposing new or replacement projects through the U.S.

The lesson here is that energy politics in the U.S. are changing, and Canadian projects may be easy targets for state and federal politicians keen to prove their environmental bona fides, even as similar U.S.-based projects may go ahead. This could signal a renewed focus on domestic pipeline projects here in Canada, such as the Trans Mountain Expansion, as well as industry soul-searching on how much future pipeline capacity is truly needed.