Court considered cost of Dakota Access Pipeline shutdown and found other risks ... such as a spill

Dakota Access Pipeline in North Dakota on September 3, 2016. (Photo by Jourdan Bennett-Begaye)

Mark Trahant

The idea of risk is fascinating and complicated. And more significant than just this one case

Mark Trahant
Indian Country Today

The owners of the Dakota Access Pipeline argued that shutting down the project created too much risk.

Even though the National Environmental Policy Act lays out a process, a shutdown now would “have greater disruptive consequences than in the typical NEPA case’ because the pipeline has already been completed.” And, now, “it has been reasonable for Dakota Access, the state of North Dakota, and all the other interested third parties to assume that the ‘risk’ of a shutdown would decrease significantly over time.”

The company’s point: So what if federal rules were violated … now it’s too costly to go back.

In this case the judge wrote: “Dakota Access attempts the same workaround of this principle as was offered last time, and the Court again finds it unavailing.”

The pipeline must be shut down and emptied by August 5.

(Related: Dakota Access Pipeline: Timeline)

The court’s ruling also raises another risk … “there is no doubt that allowing oil to flow through the pipeline during remand risks the potentially disruptive effect about which the Tribes are most concerned — a spill under Lake Oahe.”

A spill could impact the tribe’s rights because “systems may not be in place to prevent that spill from becoming disastrous,” the court said. “DAPL’s leak-detection system was incapable of detecting leaks of less than 1% of its flow rate, meaning that ‘6,000 barrels per day’ could leak without triggering an alarm. … Even assuming the risk of a spill remains small, “pausing the operation of the pipeline would mitigate even this small risk.”

The idea of risk is fascinating and complicated. And more significant than just this one case. There is risk to the tribes. To the general public (especially the 17 million people that rely on the Missouri River), to the companies building and operating the pipeline, and to the investors and banks that funded (and continue to fund) the pipeline.

Indeed there have been numerous predictions involving the very risks cited in U.S. District Judge James Boasberg’s ruling. He wrote that the court “readily acknowledges that, even with the currently low demand for oil, shutting down the pipeline will cause significant disruption to DAPL, the North Dakota oil industry, and potentially other states.”

Risks from a spill

The Standing Rock Sioux Tribe published a report, Impacts of an Oil Spill from the Dakota Access Pipeline on the Standing Rock Sioux Tribe, that made the case for a full Environmental Impact Statement. That report documented the impact of an oil spill on fish and game and timeline for an emergency response. It said the company and the Corps of Engineers used “unrealistic assumptions about the environmental impacts of an oil spill and that the effects of a worst case oil discharge would be far worse than currently documented …”

“The Standing Rock Sioux Tribe communicated their opposition to DAPL for three years and they were frustrated by the lack of meaningful consultation from Energy Transfer Partners (ETP), DAPL’s parent company, and the U.S. Army Corps of Engineers (USACE). In fact, those opportunities for early engagement were ETP’s, the USACE’s and other investors’ missed opportunities to understand the developing social risks that subsequently manifested into intense social conflict and ultimately resulted in material loss,” wrote Carla R. Fredericks, Mark Meaney, Nicholas Pelosi and Kate R. Finn in a 2018 paper for the First Peoples Worldwide and the University of Colorado.

The paper calculated economic risk for companies that don’t account for the social risk.

The Fredericks' paper found social risk to be far more expensive than the company reported to investors. “The costs of protests speak for themselves. The delay in placing the pipeline into operation can be directly attributed to the protests, social unrest, and legal challenges,” Fredericks wrote. “These estimates represent minimums and still, the total cost of DAPL was likely much greater than $7.5 billion.”

One metric that reflects that risk is the price of Energy Transfer Partnership’s stock. In August of 2016 that stock was trading for $30.15 … a year later it was trading at $19 (and a revised partnership is trading at about that price today.)

An additional risk to the project is the bankruptcy of Chesapeake Electric. That company is looking to cut costs -- including the $293 million agreement for Energy Transfer’s Tiger Pipeline in Texas and Louisiana. A bankruptcy court will make that call -- and if the contract is cancelled it could significantly cut into the cash flow of the pipeline company.

Energy Transfer is moving quickly to try and keep its customers. The International Business Daily reported this week that the company is invoking “force majeure, which normally is used only for natural disasters or in times of war. Some companies have been saying expansion of the pipeline no longer is necessary because of the coronavirus pandemic, which has reduced oil production in North Dakota by about a third compared with last year.”

Indeed, market forces may complicate any challenge to the Boasberg ruling.

One of the tools that Fredericks said companies should be using is Free, Informed Prior Consent, the standard set out in the United Nations Declaration on the Rights of Indigenous Peoples. Companies, and investors, should measure that cost and negotiate a solution up front.

“At the very least the controversy surrounding DAPL made one thing clear,” Fredericks paper concluded, investors must integrate human and Indigenous rights into a comprehensive social risk analysis.

The founder of First Peoples Worldwide, Rebecca Adamson, recently wrote a paper for the Women’s Resource Center. “Social license and social risk are the terms the financial markets use to describe the social conflicts – protests, demonstrations, boycotts and civil disobedience – that occur when people organize to get their voices heard,” she wrote. “Social risk is what a company incurs when people no longer see a benefit or actually see harm in what the company does. Material risk whether it is legal, technical, social or environmental means the risk is so significant it will damage profits or the financial viability of the company.”

That is a significant threshold because once a risk becomes material it must be reported to

Securities and Exchange Commission and disclosed to investors as part of the cost of capital.

“No other event in the 21st Century has done more to demonstrate how Social Risk can become Material Risk than DAPL,” Adams wrote. She said the failure was widespread, Energy Transfer, some 17 banks financing the $4.4 billion project (after the risks were exposed, three banks pulled out.)

Then even now that’s not a risk that the Dakota Access Pipeline recognizes. In its most recent filing with the Securities and Exchange Commission there are several risks cited, including the reduction of capacity, transportation and loss of customers.

As Adamson wrote there is a need for more data about social risks. “However there is growing evidence of the materiality of Social Risk. From the hundreds or thousands of local protests to the sites of major social conflict the aggregate impact of social risk is becoming material.”

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Mark Trahant, Shoshone-Bannock, is editor of Indian Country Today. Follow him on Twitter - @TrahantReports

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