Difficult and complex decisions are being made to reject the buildout of oil and gas pipelines in the United States and Canada. Long-term debates have finally come to a head, and three major pipeline projects have been halted as a result.
The companies that planned to build the Atlantic Coast Pipeline recently threw in the towel in the face of powerful public opposition and the skepticism of elected leaders. The Williams Pipeline tunneled through the Federal Energy Regulatory Commission (FERC) but was forced to a hard stop at the doors of state agencies in New York and New Jersey. Promoters of the Dakota Access Pipeline pushed their project through the Army Corps of Engineers and rushed to get it built, believing the court wouldn’t dare shut it down for dodging an environmental impact statement — but the court proved them wrong.
More such decisions may soon emerge. The Keystone XL Pipeline remains tied up in the courts of law and public opinion. The Trans Mountain Pipeline, Canada’s fiscal folly, has yet to see its day of reckoning but the possibility of its being scrapped cannot be ruled out.
In the wake of these developments, the fossil fuel industry would have us believe that egregious injustices are taking place that will undermine our country’s ability to meet basic energy needs. But these dire warnings ring hollow when profitable alternatives exist that can be put into immediate effect by utility companies.
THE REAL ISSUE FOR PIPELINE DEVELOPERS IS THE LOSS IN PROFITABILITY OF THE OIL AND GAS SECTOR, and the simultaneous improved competitiveness of renewable energy and energy-efficient technologies. Industry pleas to streamline or eliminate environmental regulation will not reverse these trends. Eviscerating these laws would, in fact, cause great harm by locking society into outdated energy systems that are detrimental to the environment and climate.
Industry complaints about the law and environmentalists are really about democracy
Each pipeline project has a long back story. These stories reveal that the law and well-informed, organized voices can put a brake on misguided policies and demonstrate that profitable alternatives exist.
- We still have laws in the U.S. Environmental regulations must be followed, just like every other law. If a pipeline company cannot meet legal standards, then the agency or court responsible for enforcing those standards has the authority to determine that the answer to the question, “Should this project go forward?” is most definitely “no.”
COMPANIES BELIEVE THAT REGULATION MEANS THEY RECEIVE A CHECKLIST OF COMPLIANCE ITEMS that, once met, should allow them to simply pass the dollar costs onto consumers and the environmental risks onto the public. The environmental and climate movement has changed this concept of regulatory and political risk. It is not a fundamental change since the denial of regulatory approvals has always been on the books, but it has seldom been used. Industry complaints about the law and environmentalists are really complaints about democracy.
- The industry argument that the law is being manipulated by a group of environmentalists is laughable. While industry voices like the U.S. Chamber of Commerce say that environmental regulation should be weakened to allow more projects to go forward, the law actually does allow the vast majority of projects to proceed. Only a few pipelines have been halted by opposition. The law is applied to specific cases based on the facts and hopefully, the merits of each case.
- Utilities tend to be poor investment partners for desperate pipeline developers seeking financial stability. States give utilities substantial authority to deliver energy — a basic necessity. Utilities are good at their core mission, and their business model is designed for these investments. The returns on their investments are all but guaranteed, which is why the utility sector is a mainstay of the U.S. stock market, but their profits are regulated. The purpose of utility regulation is to shield the electricity system and its stakeholders from the volatility of commodity markets. Using the stability of this system as a platform to jump headlong into commodity investing — seeking enhanced profitability above their regulated rates of return — is unlikely to succeed. They are not experts in those markets and often suffer adverse consequences. Duke Energy has a history of such forays, including methanol production, transportation, and energy in other countries. When the company has hit a bump, it typically has chosen to unwind the investments and retreat to its core operations.
Companies believe they can pass the dollar costs onto consumers and the environmental risks onto the public
AS END USERS, UTILITY EXECUTIVES HAVE MORE OPTIONS and are not as likely to march in lockstep with pipeline developers as they have in the past. Duke CEO Lynn Good put it this way: “While we’re disappointed that we’re not able to move forward [with the Atlantic Coast Pipeline], we will continue exploring ways to help our customers and communities, particularly in eastern North Carolina where the need is great.” The company plans to invest in renewable energy, energy efficiency and battery storage. After an at-times stormy exchange between National Grid and New York Gov. Andrew Cuomo, a restless peace has been established that relies on a series of energy resources to replace the rejected Williams Pipeline.
- The tendency of pipeline developers to overbuild is well established. FERC, which could and should require a more rigorous assessment of actual need, instead defers to pipeline developers. This tendency to overbuild also pervades investment thinking in the oil and gas exploration and production sector. The entire industry — from services to drilling to transport to marketing — languishes in last place in the Standard & Poor’s 500 index as the result of an undisciplined business model that cannot compete with changes in global energy markets.
INDUSTRY LEADERS WOULD HAVE US BELIEVE THEIR OMINOUS WARNINGS ABOUT THE PERILS TO THE NATION if their pipelines are not built. But these industry pleas for environmental relief have become little more than self-serving gestures to take the focus off the truth ‒ smokescreens to cover the fact that the oil and gas business model is broken.
Put that in perspective: The industry’s cry to allow destruction of air, land and water, and poisoning of the public is no longer a matter of profit enhancement but rather has become a gratuitous plea to mislead investors so they will keep putting money into losing propositions. The bottom line is, the fossil fuel companies have held the keys to the kingdom in Washington for the last three and a half years — including more or less complete control of the federal regulatory machine — but their profits are in the basement.
Weakening environmental laws is no solution. We don’t need sooty skies, rivers that catch fire or drinking water that explodes. What the oil and gas industry must do is create a new, diversified business model designed for the world of today and tomorrow. If it fails to do this, it is simply going to be left behind.
Tom Sanzillo ([email protected]) is IEEFA’s director of finance.
Suzanne Mattei ([email protected]) is an IEEFA policy analyst.
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