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Crude by Rail

Regulatory Developments and Litigation – July 2015 Overview

Various regulatory developments occurred throughout the month of July: the American Petroleum Institute released its recommendations for the safe operation of liquid and gas pipelines (RP 1173), the Michigan Department of Environmental Quality and the Attorney General’s office released the Michigan Petroleum Pipeline Task Force report, and Canada’s provincial premiers signed the Canadian Energy Strategy, the document is considered a master plan for the future of the energy industry in the country and one of the most important pieces of policy ever crafted by provincial and territorial leaders. Two sections of the plan are committed respectively to providing support to move ahead pipeline projects and to speeding up regulatory decisions.

As part of the Michigan Petroleum Pipeline Task Force report, Enbridge’s Line 5 pipeline is banned from carrying heavy crude because of the alleged risk this crude poses to the Lake Huron and Lake Michigan waterway. The line currently carries nearly 500,000 bpd of crude and related products. Michigan officials have also proposed that Enbridge fund an unbiased assessment of the effects of a worst-case scenario spill and ensure that the company has adequate insurance to compensate for such a worst-case scenario spill. Additionally, Enbridge is requested to provide a study of pipeline alternatives that include building new pipelines that do not cross open waters of the Great lakes, replacing or decommissioning existing ones, or maintaining the status quo. Enbridge has stated that it fully understands how important the Great Lakes are for the state, USA and Canada and has assured its full cooperation with the on-going regulatory proceedings.

Union Pacific is facing several lawsuits regarding royalties and land ownership rights pertaining to who should receive the $14+ million in annual royalty payments from a pipeline running alongside its tracks in six states. This contentious debate focuses on whether, as part of various federal land grants dating back to the 1800’s, rail companies own the land outright (as the courts have traditionally upheld) or whether individual landowners are entitled to every part of the land except for the track itself (as the courts have recently indicated in some instances). In the case of the latter, rail companies may not be entitled to royalty payments for pipelines that run alongside their tracks. The fact that this legal battle is taking place highlights a broader issue that could potentially spread across the county. It seems that landowners are becoming more aware of their rights and savvy about the law. Railroad land ownership is a complex matter which falls into different categories depending on the year that the land was granted to the railroads. These class-action lawsuits appear to be partly inspired by a California appeals court decision last year which found that Union Pacific did not have the legal authority to allow the pipeline to be built in the first place.

On the East Coast, another legal battle is heating up as Global Partners plans to install a heating facility at its Albany, New York terminal in order to receive heavy Canadian bitumen by rail. Previously, the New York State Department of Environmental Conservation (DEC) ruled that it would allow the company to install heating equipment at its Albany rail terminal. However, DEC is now requesting a comprehensive environmental study and has raised issues over potential dilbit spills into the Hudson River. Global Partners lawyers argue that the topic of spills and clean ups does not belong to the DEC jurisdiction but that those are federal matters.

Crude production

U.S. production will continue declining through mid-2016 but growth will resume in late 2016, the EIA asserts in its latest Short-Term Energy Outlook (STEO). The forecast indicates an average of 9.4 mbpd of production in 2015 and 9.0 mbpd in 2016.

Similar to this forecast, the International Energy Agency (IEA) forecasts that oil markets will tighten in 2016 and that, with the exception of OPEC member countries, there will be no production growth. The agency forecasts US crude production growth of 0.3 mbpd in 2016, a marked slowdown from the 0.9 mbpd of expected additions in 2015. The IEA emphasizes that while cost savings, efficiency gains and producer hedging have been instrumental in the continued growth of U.S. production, the U.S. oil boom will continue to be limited by severely depressed oil prices.

Recent articles discuss the prospect of “refracking”—fracking previously tapped shale oil wells in an attempt to re-invigorate new producing zones. Although refracking is not a new concept, it has recently garnered significant attention as several sources have attested to its positive effects. For example, according to analysts William Files and Peter Pulikkan, 80 wells in the Bakken produced more than 30 percent more oil in the months after the refrack than they did after the original completions made six years prior. However, some industry analysts say that the procedure only accelerates the flow and does not necessarily increase the ultimate recovery from the wells. IHS calls refracking a niche market and believes that returns will always be better in drilling a new well. Nevertheless, the industry has witnessed how technological advances have dramatically reshaped the U.S. oil industry in the past ten years so refracking could be a story worth the wait to see how it unfolds.

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