It seems like a long, long time ago in a galaxy far, far away. But barely two years back, permits for new US oil and especially natural gas pipelines were basically a formality.
Back then, the only US pipeline facing significant regulatory hurdles was TC Energy Corp’s (TRP) proposed Keystone XL pipeline to bring Alberta oil sands to US markets. And on the day the Obama Administration rejected that project for the final time, officials actually approved two oil pipelines elsewhere.
Manufacturing of oil and gas refinery industrial
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Everything changed following the November 2016 presidential election. Congress’ failure in 2016 to fill empty seats on the five-member Federal Energy Regulatory Commission led to the lack of quorum in early 2017.
New approvals ground to a halt for nearly six months. That gave “keep it in the ground” advocates precious time to tap into record fundraising, fueled by a groundswell of opposition to Trump Administration policies.
One result has been legal challenges to projects on an unprecedented scale at multiple venues. Work on
Courts, however, have overturned Minnesota regulators’ prior approval of the project’s Environmental Impact Statement. That’s forced officials to go through the process again, delaying completion at least until the second half of 2020.
We’ve also seen a decided shift to more restrictive energy politics in several states, notably Colorado. Others like New York have dug in further in refusing to grant water permits from long-delayed projects like the Constitution Pipeline. That’s triggered warnings of prospective natural gas shortages from New York City’s distribution utility
Time equals money when it comes to multi-year, multi-billion dollar projects. Bloomberg Intelligence estimates a $2.75 million cost increase per mile of planned pipeline for every one-quarter delay in construction. The projected final cost of the Line 3 expansion, for example, is already billions higher than initial estimates.
Consequently, the game being played by pipeline opponents is to delay. That means mounting enough challenges to ramp up costs and ultimately convince developers to walk away. And for the first time, they have the funds to do the job.
Opponents have been particularly successful quashing projects in New England and the Northeast US. To date, they’ve failed in Texas, where several giant pipelines are under construction.
Ground zero now in pipeline politics is the struggle of two projects in the Middle Atlantic/Southeast US to cross the Appalachian Trail: The Atlantic Coast Pipeline and the Mountain Valley Pipeline.
These projects’ ultimate success or failure will have a huge impact on the long-term profitability of Appalachia-based gas and oil producers, which are sitting on huge reserves in the Marcellus and Utica shale. Ironically, the longer they’re delayed, the greater demand will be for Texas energy and by extension new pipelines in the state.
That will benefit Texas developers like Kinder Morgan and Plains All-American Pipeline (PAA), which is focused on oil. And it will hit pipeline companies in the East like EQM Midstream Partners LP (EQM), which faces a massive writeoff if the Mountain Valley Pipeline can’t win through.
To be sure, natural gas development especially still has plenty of support in the US. Replacing older coal-fired facilities with gas, for example, reduces operating costs and electricity rates. New plants increase utilities’ rate base, spurring earnings and dividend growth. And the prospective environmental benefits are enormous, cutting future legal liabilities.
Gas emits none of coal’s particulate matter, which is blamed for a host of respiratory woes. It emits no acid rain gases that have caused billions in property damage and creates no toxic ash.
As for carbon dioxide, equivalent sized gas power plants emit less than half what coal does. In fact, gas adoption is the single biggest reason America is still meeting greenhouse gas commitments under the Paris Accords. Finally, surging US energy production has dramatically shifted global energy politics, demonstrated by the relative lack of reaction in oil prices to elevated tensions in the Persian Gulf.
During the Obama years, those facts were more than enough to hold together a consensus for US natural gas development. And the result was a relatively easy path for pipeline approvals.
These days, that’s not enough for pipelines to succeed. The silver lining is the more difficult it becomes to build, the more valuable existing infrastructure and ultimately successful projects will be.
For investors, the appeal of midstream energy companies is generous dividends that will grow sustainably over time, eventually resulting in capital growth. And the good news is after a five-year, sector-wide slump, there are more than a few bargains among the 70 or so we track in Energy and Income Advisor.
One is TC Energy, formerly TransCanada Corp. The company has been struggling for more than a decade to win permits for the Keystone XL pipeline. And it still hasn’t made a final investment decision on the project. Nonetheless, management has had no problem meeting target annual dividend growth of 8 to 10 percent, fueled by a $20 billion plus backlog of smaller and considerably less controversial projects.
TC is a buy up to 50. Unfortunately, the vast majority of midstream energy stocks we track face risks that merit holds at best.
In the days when pipeline approvals were swift, any company raising funds economically could get projects built. These days, would-be developers need to be financially and operationally strong enough to handle legal challenges wherever they occur.
