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Huge Energy Projects Suffer Crushing Legal Setbacks

The Supreme Court just decided not to hear a case involving an Environmental Protection Agency (EPA) decision to halt the construction of an Arch Coal (NYSE: ACI  ) mine in West Virginia. That's another blow for Arch Coal to absorb in what has been a difficult couple of years for coal. However, the implications of the Supreme Court decision reach much further than either Arch or coal.

Not happy...
Boiling the case down to the bare facts: The Army Corps of Engineers approved a mine site in 2007. As a result, Arch Coal began working on the site, assuming it was fine to do so. The EPA invalidated the approval in 2013, citing the Clean Water Act. By declining to hear the case, the Supreme Court is effectively saying that the EPA can retroactively invalidate a permit.

(Source: Wikiwopbop at en.wikipedia, via Wikimedia Commons)

Speaking to the Supreme Court decision, Hal Quinn, CEO of the National Mining Association, summed the concerns up nicely: "...companies will lack the assurance required to make investments and create US jobs." Clearly, the mining industry isn't happy about the Supreme Court's choice not to hear Arch's case.

A problem for Arch and more
Right now this is a problem for Arch Coal, since it no longer has permission to build the West Virginia mine. You could argue that this isn't such a bad thing since coal is out of favor today. However, the bigger picture is the overarching concern.

For example, Cloud Peak Energy (NYSE: CLD  ) is looking to the export market to support its long-term growth. Case in point, it recently sent test coal to Japan, but according to CEO Colin Marshall, "The test runs went well and could turn into long-term contracts when West Coast terminal capacity is built." Specifically, it's waiting on the Pacific Gateway Terminal.

That facility still needs to be approved and built. However, the Arch Coal case suggests that the terminal could be approved and yet still never get built. That would be a serious blow for Cloud Peak. But this isn't the only industry to watch.

Although the drama continues, if the U.S. government ever approves TransCanada's (NYSE: TRP  ) Keystone XL pipeline, the EPA could simply come in and squash the project. TransCanada has spent years fighting for approval, hitting what appears to be an ever increasing wall of red tape. Now, all that work could be blown away by the EPA days, weeks, months, or even years after State Department approval.

TransCanada wouldn't be hurt nearly as badly by such an action as Cloud Peak, but as the National Mining Association's Quinn said, companies working on big projects will, "...lack the assurance..." that a project is worth investing in if approvals can retroactively be negated by the EPA.

Keep the logic going
So how far can this go? How about putting a halt to projects using hydraulic fracturing to drill for oil and natural gas... That drilling method pumps sand, water, and chemicals under ground and critics argue that it can contaminate ground water. The EPA could easily invoke the Clean Water Act in this case.

(Source: Bill de Blasio, via Wikimedia Commons)

If it did so, the energy revolution taking place in the United States would come to a screeching halt. ExxonMobil (NYSE: XOM  ) , for one, paid over $30 billion to buy XTO Energy to get a piece of this revolution. Although XTO's reserve base was one of the main draws, another was its technology. ExxonMobil's CEO at the time of the deal, Rex Tillerson, said, "We're going to be able to bring their expertise to bear on many of these new plays that we've acquired." Not if the EPA decides fracking is a no go—such a move could turn XTO into a $30 billion write off for Exxon.

An unclear future
It would be nice if you could take this Supreme Court ruling and make solid decisions based on it, but you can't. There's no way for you to tell which projects the EPA will decide to squash. What you can take away from this news is that the risks associated with big projects just went up.

Risk vs reward, smaller natural gas pipelines are probably safe...

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  • Report this Comment On April 01, 2014, at 12:39 PM, Peter405 wrote:

    Hollande ( OB's socialist buddy) has lost big in France and we should see a shift in the composition of the Senate and the House in Nov.

    ACI chart has recently shown the Golden Cross . A BUY SIGNAL. We need negative artciles like this one to continue to build the wall of worry on which the coal stocks will climb over the next few years. Keep up the good work !

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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9/1/2015 4:00 PM
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