A key Enbridge Inc. oil pipeline in the United States faces a heightened risk of getting shut down after Michigan’s Attorney-General made good on a threat to take legal action against the company.
It is not known how long the lawsuit will take to play out, but a court order stopping the flow of crude through Enbridge’s Line 5 on environmental grounds would hurt Canadian oil producers just as they seek to build more capacity to boost access to markets.
Michigan Attorney-General Dana Nessel says she wants the line shut off “as soon as possible.” She alleges the twinned pipeline, built in the 1950s, that runs underwater in the Straits of Mackinac is a risk because it’s likely to pollute the Great Lakes if it were to rupture.
The Calgary-based company has been in negotiations with the state, hoping to run the line for five more years while it digs a tunnel under the Straits of Mackinac to house a replacement pipeline. Those talks broke down this month.
“The location of the pipelines – which carry millions of gallons of oil each day and lie exposed in open water at the bottom of the Straits – combines great ecological sensitivity with exceptional vulnerability to anchor strikes,” Ms. Nessel said in a statement.
"I have consistently stated that Enbridge’s pipelines in the Straits need to be shut down as soon as possible because they present an unacceptable risk to the Great Lakes,” she said.
Line 5 delivers 540,000 barrels a day of Alberta crude to refineries in Southwestern Ontario. It also takes petroleum products such as diesel and propane back to Michigan.
Enbridge said it will operate the pipeline as the legal process plays out, but does not have an indication yet how long that will be. The company is disappointed the state government declined its offer to continue discussions with a moderator instead of using litigation, spokesman Ryan Duffy said.
The situation represents another threat to the oil patch’s export hopes after producers and their investors were heartened by this month’s reapproval by Ottawa of the Trans Mountain pipeline expansion between Alberta and the West Coast.
Alberta Premier Jason Kenney, who was attending the western premiers’ meeting in Edmonton Thursday, said he hadn’t yet been briefed on the latest Line 5 developments, but that he “would absolutely be concerned about any impairments of that project.”
Canadian oil prices had tumbled to unprofitable levels in 2018 due partly to chronically tight pipeline capacity. They rebounded this year after the Alberta government’s decision to limit the industry’s production. Late last year, Western Canada Select (WCS) heavy crude blend sold for more than US$40 a barrel less than U.S. benchmark West Texas Intermediate (WTI) as supplies backed up within the province. Currently, WCS is selling for US$13 less than WTI, according to Net Energy Exchange.
A shutdown of Line 5 would almost certainly widen the price differentials on Canadian crude again as the capacity network – which the industry has struggled to expand – contracts. “Every incremental outlet for Canadian crude is paramount,” said Michael Tran, managing director, global energy strategy, at RBC Capital Markets. “During a period in which Canada is desperately in need for egress expansion, shutting Line 5 would be highly detrimental, not only to the Canadian oil patch, but also to the pocketbooks of Michigan residents. A shutting of the line would leave Canadian crude [differentials] subject to significant blow out risk.”
Refineries in Ontario would also be forced to seek crude supplies from other sources, likely driving up pump prices for motorists.
Enbridge’s plan to tunnel underneath the Straits of Mackinac was approved by the previous state government before a new Democratic governor and attorney-general took office in January.
At issue was how soon the existing pipeline could be shut down. Enbridge said it could complete the replacement project by 2024, but Michigan Governor Gretchen Whitmer wants the existing line out of the water within two years.
Earlier this month, Enbridge filed an application to have a court declare its agreements with the previous state government valid.
Ms. Nessel also filed a motion Thursday to have Enbridge’s request dismissed. It’s a move her office is calling a “one-two legal punch.”
Michigan-based environmental agencies praised Ms. Nessel’s move. “It’s about time Michigan’s government is standing up for our public waters – waters located in arguably the worst possible place in the Great Lakes for an oil spill to happen,” Liz Kirkwood, executive director of For Love of Water, said in a statement.
In a research note, RBC said it is difficult to assess the legal arguments, partly because the process is highly politicized. Still, the escalating court battle has created uncertainty about the future of Line 5, and RBC said it could cap Enbridge’s share price in the short term.
“From a financial perspective, we estimate the impact could be in the roughly $0.20-0.25/share of distributable cash flow range,” should the entire pipeline be shut with no shipping alternatives, it said.
Enbridge has until around mid-July to respond to Michigan’s lawsuit.
Jeffrey Jones