Protestors won a pivotal victory this week after the U.S. Army Corp of Engineers said they would not issue the permits needed for the Dakota Access Pipeline to proceed with its planned route underneath Lake Oahe in North Dakota. The ruling is a blow for pipeline giant Energy Transfer Partners (ETP) and its partners Sunoco Logistics Partners (NYSE: SXL) and Phillips 66 (PSX 0.11%), which had hoped to finish the pipeline early next year. While the partners have vowed to fight the decision and complete the project as planned, it is a growing possibility that they will need to find a new path for the crucial Bakken shale oil pipeline.

The problem and the problems with the problem

The Energy Transfer-led project initially received permission to cross the Missouri River at Lake Oahe this past July. However, the Army backtracked on this decision in September saying that it needed time to complete an additional review of the pipeline in light of growing protests from environmental activists and the neighboring Standing Rock Sioux tribe. That led to a further delay last month after the Army had said it needed more time to review the objections to the project.

Pipeline leading to a refinery with sun in the background

Image source: Getty Images.

There are two primary objections to the project. First, some of the pipeline's route would cross territory that had been awarded to the Standing Rock Sioux tribe in the 1851 Treaty of Fort Laramie but subsequently taken away. The tribe holds this land sacred and is concerned that the pipeline's construction could damage culturally significant sites. The second concern is that the pipeline would go underneath the Missouri River, which is a primary water source for the tribe. As such, there is a worry that a spill could impact drinking water as well as damage the surrounding environment.

That said, the pipeline would sit nearly 92 feet beneath the river bed, with increased pipe thickness and control values at both ends of the crossing. These properties significantly reduce the risk of a spill. Furthermore, there are already 10 other pipelines that cross the Missouri River further upstream, which would pose a similar threat. Meanwhile, the Standing Rock Sioux Tribe will soon have a new water intake that is much farther downstream, further mitigating the impact of a potential spill from this pipeline. Finally, the rest of the pipeline route passes nearly 2 miles north of the reservation in an area that has yet to unearth any native historical sites despite years of archeological study. In other words, from the perspective of the pipeline developers, the project poses no threat to the tribe or the surrounding environment. 

Seeking out alternatives

Despite the lack of evidence that the pipeline poses a problem to the Standing Rock Sioux tribe, the Army has decided that it needs to review alternative routes. To do so, it intends to undertake an environmental impact study with full public input and analysis as it seeks out the best alternative path. That could prove tough to do considering that one alternative route, which would have taken the pipeline north of Bismarck, North Dakota, and away from the disputed Standing Rock Sioux territory and Lake Oahe, has already been ruled out because of its proximity to Bismarck's water supply. That leaves the Army with one less option as it seeks to find the perfect route for the pipeline.

That said, at this late stage in the game, Energy Transfer, Sunoco Logistics Partners, and Phillips 66 are not willing to consider alternative routes. The developers have already spent roughly $3.7 billion to complete more than 85% of the pipeline's 1,172-mile route, and a new path would not only likely cost more money but add to the project's delayed timeline. That is why they have taken their case to court to "end this political interference and remove whatever legal cloud that may exist over the right-of-way beneath federal land at Lake Oahe," according to comments by Energy Transfer CEO Kelsey Warren. His hope is that the court either rules in their favor or the new administration steps in and grants the required permits early next year. That said, if the court does not rule in their favor and the Trump administration has more pressing matters to address, the developers might need to find an alternative route to complete the project.

Investor takeaway

Energy Transfer and its partners thought they had cleared their last major hurdle to finish the Dakota Access Pipeline earlier this year when the Army initially granted the required permits. Unfortunately, those approvals proved to be fleeting, with the developers now faced with the daunting possibility that the project might need to take a significant detour.

That is the last thing Energy Transfer and Sunoco need right now. Not only are the companies in the process of merging, but they are working to close the sale of a minority stake in the project for some much-needed cash to bolster their financial situation, which has been under pressure from the oil market downturn and these delays. That's why they hope the courts or the new administration will step in and save them from having to invest additional time and money in this project.