By Devika Krishna Kumar and Valerie Volcovici
NEW YORK/WASHINGTON (Reuters) - A U.S. court ordered the shutdown of the Dakota Access oil pipeline on Monday over concerns about its potential environmental impact, a big win for the Native American tribes and green groups who fought the major pipeline's route across a crucial water supply for years.
The decision by U.S. District Court for the District of Columbia followed the cancellation of another high-profile U.S. pipeline project on Sunday and came as a blow to the Trump administration's efforts to lift the domestic fossil fuels industry by rolling back environmental red tape.
According to the ruling, the U.S. Army Corps of Engineers violated the National Environmental Policy Act (NEPA) when it granted an easement to Energy Transfer LP (N:ET) to construct and operate a segment of the oil pipeline beneath Lake Oahe in South Dakota, because they failed to produce an adequate Environmental Impact Statement (EIS).
The court ordered Energy Transfer to shut and empty the 570,000 barrel-per-day (bpd) line within 30 days, closing off the biggest artery transporting crude oil out of North Dakota's Bakken shale basin to Midwest and Gulf Coast regions.
"Given the seriousness of the Corps' NEPA error, the impossibility of a simple fix, the fact that Dakota Access did assume much of its economic risk knowingly, and the potential harm each day the pipeline operates, the Court is forced to conclude that the flow of oil must cease," it said.
It is rare for regulators or officials to force an oil pipeline to be drained, unless it is in the aftermath of a spill, oil market sources said.
Energy Transfer said it is looking at legal and administrative measures to avoid a shutdown, and was considering an appeal if those efforts fail.
Preparing a thorough EIS could take about thirteen months, according to an estimate by the Army Corp.
Consultancy Rapidan Energy Group said the ruling casts long-term doubts over the future of the pipeline, which has only been operating for about three years.
"With odds of a temporary stay on appeal only 30%, the court-ordered DAPL shutdown on Aug. 5 should last at least 10-12 months if Donald Trump wins re-election and permanently if not," said in a note.
The ruling comes a day after Dominion Energy Inc (N:D) and Duke Energy Corp (N:DUK) decided to abandon the $8 billion Atlantic Coast Pipeline, meant to move West Virginia natural gas to East Coast markets, after a long delay to clear legal roadblocks almost doubled its estimated cost.
Native American and environmental groups cheered the court ruling.
"Today is a historic day for the Standing Rock Sioux Tribe and the many people who have supported us in the fight against the pipeline," said Chairman Mike Faith of the Standing Rock Sioux Tribe, which had led protests and legal efforts against the project.
"This pipeline should have never been built here. We told them that from the beginning."
Greenpeace USA Climate Director Janet Redman called the pipeline setbacks a victory in the fight against climate change.
The Trump administration, Republican lawmakers and industry groups, meanwhile, blamed activists and said the pipeline setbacks would cost the U.S. economy.
"I'm not quite sure what they're cheering except for perhaps the loss of jobs all throughout America," U.S. Energy Secretary Dan Brouillette said during an interview on Fox Business Network.
"Shutting down the Dakota Access Pipeline would have devastating consequences to North Dakota and to America's energy security. This terrible ruling should be promptly appealed," said Kevin Cramer, North Dakota Senator and Trump ally.
Democratic presidential candidate Joe Biden's campaign declined to comment.
The American Petroleum Institute, the nation's main oil and gas industry lobby group, called for urgent reform of the permitting system and the Association of Oil Pipe Lines (AOPL) said that if this decision is not reversed on appeal, American people will be deprived of affordable energy.
Energy Transfer shares dropped on Monday by about 8%.
Large investors in the pipeline could also be on the hook for hundreds of millions in payments, according to a Reuters review of company disclosures.
Refiner Phillips 66 (N:PSX), an investor in the project, said shutting down the pipeline would throw the country's crude supply system out of balance and jeopardize national security.
MARKET IMPACT
Oil prices (LCOc1) (CLc1) have plunged this year as the coronavirus pandemic eroded global demand by nearly 30% in April and restricted travel across the world.
The collapse forced oil producers across the United States to shut in production and curtail new drilling. North Dakota is one of the costliest spots in the United States to produce crude, and its output has dropped by about one-third from last year, more than most other oil-producing states.
Bakken crude prices in Clearbrook, Minnesota,
The court did not specify the method DAPL must use to empty the line.
Market sources in the Bakken said the ruling will likely divert some oil flows onto railcars but that a long-term closure of the pipeline would force producers to shut in more output.
"There's going to be a scramble for rail cars," said one person familiar with rail operations out of the Bakken.
The loss of DAPL shipments will result in more Bakken crude traveling by rail to the U.S. West and East coasts for refining instead of down to the Gulf Coast for exports, the source said.