$1 Trillion in Oil and Gas Pipelines Worldwide Could Become Stranded Assets, New Report Warns

onFeb 4, 2021 @ 13:38 PST

On January 7, 2021, Energy Transfer was notified by its insurer, Westchester Fire Insurance Co. of Philadelphia, Pennsylvania, that it had lost a $250,000 surety bond for the Dakota Access pipeline (DAPL) — a bond that Iowa, one of the four states it passes through, required the pipeline to maintain.

That loss of insurance coverage comes as the Biden administration and a federal court each must confront a decision about whether to order DAPL to shut down, after a federal appeals court last week upheld a lower court’s finding that the oil pipeline still lacks a completed environmental review. Financial observers have been watching DAPL closely — and a new report warns that DAPL is hardly alone in the oil and gas pipeline industry in facing major financial risks linked to projects’ environmental impacts.

“Dakota Access Pipeline has no federal easement. It’s now losing insurance coverage on the state-level which is a requirement for Iowa’s state permit,” the Indigenous Environmental Network said in a January 29 statement. “It’s time to end this saga and do what’s right.”

Environmentalists predicted that the lost insurance coverage could be difficult for Energy Transfer to replace, particularly given DAPL’s incomplete federal review. “It will be difficult because the bond holder will require the pipeline to comply with all legal requirements,” attorney Carolyn Raffensperger, director of the Science and Health Network, told DeSmog. “If it is operating without a permit, any spill would be a big, big legal problem.”

But as consequential as the DAPL fight — which has raged for roughly a half-decade — might be, Dakota Access is just one of hundreds of pipelines worldwide that a new report finds are at risk of early abandonment because they’re “on a collision course” with climate agreements.

The report, titled “Pipeline Bubble 2021” and published by the climate data nonprofit Global Energy Monitor, warns that pipeline construction projects worldwide have put $1 trillion worth of pipeline investment at risk of being rendered obsolete by the energy transition away from fossil fuels.

The risky projects include over 131,000 miles of pipe, both oil pipelines like DAPL and — to an even higher degree — new natural gas pipelines. “18 of the 20 longest pipelines in development and 82.7% of all pipelines in development globally will carry gas,” the report finds, “reflecting the fossil fuel industry’s success in perpetuating the myth that gas can be a ‘bridge fuel’ to a clean energy future.”

Permian ‘Carbon Bomb’

When it comes to the U.S. oil and gas industry, Global Energy Monitor’s report zeroes in on the productive Permian Basin straddling Texas and New Mexico, an oil and gas play which it calls a potential “carbon bomb,” adding that by 2050, Permian gas “would consume ten percent of the world’s allowable carbon budget if we are to have a 50/50 chance of limiting global warming to 1.5°C.”

The report adds that there are over 100 institutions providing financial support for the industry in the U.S. Permian Basin alone, including major backers based in Japan, France, the Netherlands, Canada, and the UK, as well as U.S. banks like Goldman Sachs, JPMorgan Chase, and Morgan Stanley. The authors tallied $102.3 billion in debt financing for the Permian Basin’s pipelines and gas export facilities alone since 2014.

“The ability of the oil and gas industry to overcome near-term challenges to its Permian Basin expansion plans, such as the COVID-19 pandemic and the collapse of prices, will depend in part on the appetite of banks and governments to continue funding midstream infrastructure,” they wrote. “Should they decide to do so, it will be in spite of the industry’s long-term decline and growing concerns over the global climate emergency.”

The investment risks are compounded by fossil fuel divestment pressure from investors and financial institutions, which are increasingly wary of projects that fail to take climate risks into account — a wariness the report predicts may grow beyond coal, Arctic drilling, and tar sands projects.

Just four major financial institutions (BNP Paribas, Rabobank, UniCredit, and US Bancorp) have restricted pipeline finance, the report finds — so far. “For the first time, exclusions affecting the entire spectrum of oil and gas extraction activities appeared in 2020, announced by Suncorp Group and Government Pension Fund Global (GPFG),” Pipeline Bubble 2021 said. “But examination of the policies of other institutions suggests that the scope is likely soon to widen to include pipelines and other infrastructure.”

In January, the world’s largest investment fund manager, BlackRock, warned corporate executives that it would ditch investments in companies that fail to disclose plans to reach “net zero” carbon emissions by 2050 — though The Guardian reported that announcement only covers BlackRock’s “actively managed” investments, representing about $616 billion of the firm’s $8.7 trillion under management, allowing the firm to retain major oil, gas, and coal investments.

Toll Booth on a Closing Highway

The U.S. pipeline industry, often referred to as the “midstream” oil and gas industry, was once marketed to investors as a safe bet, like running the “toll booth” on the shale rush’s highway. This past year, it’s been temporarily rocked by the impacts of the COVID-19 pandemic, which has led to pipeline construction deferrals and delayed start-ups.

“During 2020, developers completed 3,600 km [2,236 miles] of oil pipelines and 9,619 km [5,977 miles] of gas pipelines, or an overall average of 1,102 km [684 miles] per month for oil and gas pipelines combined,” the report found. “The decline in pipeline completions parallels a general financial decline in private-sector oil company balance sheets and market value” since 2008.

The pandemic has also forced U.S. drillers to slow their activities. “The rig count is less than half of what it was,” RBN analyst Jason Ferguson told trade publication Natural Gas Intelligence in January. “Producers are not out spending, and the historical relationship of how many wells will be drilled at this price has changed.”

The pandemic’s impacts, Global Energy Monitor said, are expected to be temporary and may create little long-lasting deterrence to pipeline construction. “Overall, however, the expansion curve has been bent rather than broken, with pipelines continuing to enjoy both policy support and financial support by governments and major financial institutions,” the Pipeline Bubble 2021 report said.

But the pipeline industry has also faced a political backlash that has created upheaval for the industry. “Intense opposition from landowners, [I]ndigenous groups, and climate activists is causing the cancellation or delay of high-profile pipelines, and is changing perceptions of pipelines as a ‘safe’ investment,” Global Energy Monitor found. But worldwide, the report adds, many pipelines are owned by state-owned enterprises, the report adds, leading them to be “somewhat insulated” from market forces, at least in the short run.

And the looming energy transition should reduce overall demand for the products carried by pipelines, the report warns. “For oil, the main threat in the coming decade is the prospect of vehicle electrification, as more governments announce transitions away from internal combustion sales and manufacturers respond by shifting investments toward electric vehicles,” Global Energy Monitor wrote. “For gas, change is arriving most rapidly in the power sector, where combinations of renewables, batteries, and demand management now offer equivalent reliability at lower cost than gas-fired power plants.

It adds that worldwide, “gas supply chains are lengthening, which means larger investments in infrastructure and greater stranded assets if and when projects stall or are prematurely retired.”

Boom And Bust And …

Some energy analysts have been warning for years that the pipeline industry, especially in the Permian Basin, was on track to over-build.

“If we don’t overbuild this time, it will be the first time in the history of the industry,” Wouter van Kempen, Chairman, President, and CEO of DCP Midstream, said at an April 2018 pipeline indusry conference, as DeSmog has previously reported. “There’s absolutely, we will overbuild, there’s no doubt about it.”

That excessive building is already creating financial difficulties, East Daley Capital Advisors reported this year. Those difficulties aren’t primarily from the sprawling network of small “gathering” pipelines that connect individual oil and gas wells to the large interstate pipes that form the backbone of the oil and gas transportation network, RBN Energy analyst Housley Carr said as he summarized a January 2021 East Daley report, instead “it’s volume and rate declines on large-diameter, long-haul crude oil and natural gas pipelines owned by midstream giants that present the main challenge to sustainable cash flow health in aggregate.”

Other forecasters predict that 2021 could bring higher oil prices and a turnaround for the financially struggling U.S. oil and gas industry — which in turn could revitalize interest in new pipeline projects in the short term. For its part, the U.S. Energy Information Administration predicts that U.S. oil production in 2021 will be 11.1 million barrels a day in 2021, down from 11.3 million per day in 2020, with an average 2021 West Texas Intermediate spot price of $49.70 a barrel — roughly $10 a barrel higher than the 2020 average.

But while oil and gas prices might fluctuate in the short run, over the long run, the pipeline industry faces growing questions about whether it’s wise to build a massive network of pipelines that could become obsolete well within their projected 50-year-plus lifespans.

The report’s authors called on the Biden administration to carefully consider the ways that the U.S. energy industry has changed since Obama was in office, particularly with regards to natural gas, which is predominantly made up of the powerful greenhouse gas methane.

“The policy landscape facing the new administration in 2021 is radically different from the one that Biden left in 2017,” James Browning, lead author of the report, said. “Fossil gas is now recognized as a climate buster, not a climate solution. That means Biden faces the tough decision to rein in gas infrastructure, which is the most effective way to limit emissions.”

Main image: Pipeline, April 22, 2010. Credit: Ripperda, CC BY 2.0

Energy

By Sharon Kelly

Sharon Kelly is an attorney and investigative reporter based in Pennsylvania. She was previously a senior correspondent at The Capitol Forum and, prior to that, she reported for The New York Times, The Guardian, The Nation, Earth Island Journal, and a variety of other print and online publications.