U.S. power suppliers — Duke Energy DUK and Dominion Energy D — declared over the weekend their plan to terminate the Atlantic Coast Pipeline (ACP) project. This came as yet another setback for the U.S. energy industry, which has already been reeling under coronavirus-induced poor power demand.
The natural gas pipeline project, initially announced in 2014, has been going through a series of delays amid intense criticism and legal challenges from environmental groups.
What Led to the Cancellation?
The cancellation of the ACP project, which represented one of the three biggest U.S. pipelines, came as quite a surprise after a favorable ruling by the United States Supreme Court in June that had granted the federal government authority to allow the natural gas pipeline to cross under the popular Appalachian Trail in rural Virginia.
However, this was a solution for only one of the several hurdles facing the project. Specifically, a series of legal challenges related to the project’s federal and state permits in the past caused significant project cost increases and timing delays. Cumulatively, these pushed up the project cost to $8 billion from the original estimate of $4.5 to $5.0 billion. In addition, the most recent public estimate of commercial in-service in early 2022 represents a nearly three-and-a-half year delay with uncertainty still looming large.
Resultantly, Duke Energy and Dominion Energy decided to cancel the ACP project, citing the increased cost burden and consecutive delays threatening the economic viability of the project.
Roadblocks for Other Pipelines
Steadily declining oil and gas prices along with major upheaval on the demand side, courtesy of the COVID-19 pandemic has hit the global oil and gas industry hard, and the pipelines segment is no exception. Amid the virus-related challenges, pipeline operators are taking measures such as reducing capital expenditures, suspending work or reducing staff at project construction sites. This in turn is forcing midstream operators to delay and in some cases, stall their pipeline projects.
Notably, Phillips 66’s PSX Liberty Oil and Red Oak pipelines’ construction in the United States have been postponed, in response to the company’s decision of reducing expenses across its business line amid the ongoing market conditions. It has also deferred its ACE Pipeline in Louisiana, which it is constructing jointly withHarvest Midstream.
Pembina Pipeline (NYSE:PBA) Corp. PBA has delayed expansion of its Peace Pipeline system, citing the COVID-19 pandemic and the resultant economic slowdown as the primary inhibitor. Enterprise Products Partners (NYSE:EPD) EPD deferred its 450,000 bpd Midland-to-Echo 4 crude pipeline, as part of a $1.1billion capital expenditure reduction plan in 2020.
Is There Any Road to Recovery?
Adding to the aforementioned hurdles that the U.S. midstream operators are already facing came a disappointing ruling by a U.S. district judge in Montana in the last week of May. The ruling turned down the Trump administration's request to revive a permit program for new oil and gas pipelines. Notably, the court case originated with environmentalists challenging TC Energy (NYSE:TRP) Corp.’s TRP Keystone XL crude oil pipeline from the oil sands region of Canada to the United States.
However the ruling is now going to affect oil and gas pipeline proposals across the nation. In the absence of the nationwide permit, companies will have to apply for numerous individual construction permits on lines that sometimes cross hundreds of water bodies. Per Paul Afonso, chief legal officer of the American Petroleum Institute, this may cause delays of a year or more for more than 70 pending pipelines, increasing their combined costs by $2 billion.
So unless there comes a reversal of this ruling, with the COVID-19 impact expected to hover around the global economy for the time being, the chances of the U.S. midstream operators to take a rebound remain slim.
(We are reissuing this article to correct a mistake. The original article, issued on July 6, 2020, should no longer be relied upon.)
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