Litigation Update: Dakota Access and Water Quality Certificate

What’s the issue?

Two oral arguments were held this past week in cases challenging an easement granted to Dakota Access and a FERC decision finding that the Northern Access project no longer needs a water quality certificate from the state of New York.

Why does it matter?

The decision in the first case could lead to a shutdown of the Dakota Access pipeline for a substantial period of time in 2021, and the decision in the second case could lead to substantial delays in pipeline projects that need to obtain a water quality certificate from a state before commencing construction.

What’s our view?

We think there is a substantial risk that Dakota Access may eventually be shut down for a lengthy period in 2021 as a result of the challenge to its easement. We also think FERC’s finding of waiver may be upheld, but in a way that still allows states to substantially delay the issuance of a water quality certificate beyond FERC’s supposed “bright-line” limit of one year.

Within the last week, there were oral arguments before the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) and the U.S. Court of Appeals for the Second Circuit (Second Circuit) that could impact the flow of crude out of North Dakota, as well as the review of every pipeline project that requires a water quality certificate from a state. The first oral argument was in a case challenging the easement granted to Dakota Access Pipeline to allow it to cross the Missouri River at Lake Oahe that we previewed in Will the Court Force DAPL to Shut Down? The second case concerns a challenge to FERC’s determination that the New York State Department of Environmental Conservation (DEC) had waived its right to issue a water quality certificate (WQC) for National Fuel Gas Supply’s Northern Access 2016 project when the DEC failed to issue a decision within one year after the application was filed.

As we discuss more fully below, we believe that there is a substantial chance that the DC Circuit will uphold the lower court’s decision to void the DAPL easement, which could lead to the eventual shut down of the pipeline for a substantial period of time sometime in 2021. The Second Circuit appears likely to uphold FERC’s finding of a waiver by the DEC, but as we discuss below, there remains a good chance that the court issues a decision that would substantially blur FERC’s supposed “bright-line” limit of one year for a state to act on an application for a WQC, which could lead to substantial delays for pipeline projects across the country, which typically require a WQC before commencing construction.

DAPL and its Easement

In Will the Court Force DAPL to Shut Down?, we stated that we did not expect the DC Circuit decision will result in an order that requires the pipeline to immediately shut down, and we still firmly believe that to be true. However, after listening to the oral argument, we believe that there is a substantial likelihood that the DC Circuit will uphold the lower court’s determination that the U.S. Army Corps of Engineers (USACE) must prepare an environmental impact statement (EIS) to justify granting an easement to DAPL for its crossing of the Missouri River at Lake Oahe.

However, following the argument, the decision we view as most likely will include: First, that the lower court was correct in its determination that the USACE has failed to adequately address the “substantive” issues raised by the Tribes, and therefore, it was appropriate for the lower court to direct that an EIS be prepared. Second, the court will find that voiding the easement is the appropriate remedy. Third, the court will not uphold the decision to order the pipeline shut down. Instead, the DC Circuit will order the lower court to determine whether an injunction should issue under the traditional four-factor test for injunctions, and only then, if appropriate, to order a shutdown of the pipeline.

If we are correct, the focus will quickly be back on the lower court, which has already ordered the parties to file their briefs by mid-December, addressing whether an injunction should be issued that requires the pipeline to shut down while the USACE prepares the EIS. In an update to the lower court filed on November 2, the USACE stated that it has had several discussions regarding DAPL’s proposed expansion of the pipeline and how that might impact the EIS the USACE is currently preparing in response to the court’s order that is being appealed to the DC Circuit. The USACE stated that it intends to consider the proposed expansion as part of the EIS process. As a result of that and a month-long extension of the public scoping period for the EIS, the USACE no longer expects to be able to complete the EIS within thirteen months (approximately October 2021), but is not sure yet how much longer it will take.

Presuming the lower court listened to the argument, we would expect that the court will be prepared to issue an order on the injunction soon after the DC Circuit issues its decision, which we expect by early March. Therefore, we still think flows on DAPL should be safe through March, but we now think there is an increased chance that the pipeline flows will be imperiled at that point. Given all of these overlapping issues and timelines, we set forth below how various alternatives would impact the flow of oil on DAPL.

As depicted above, we have tried to show the risks to the pipeline’s continuing operations under three different scenarios. The yellow periods are when we expect to be waiting for the DC Circuit’s decision and any order requiring the pipeline to be shut down, but during which the lower court could still issue a shutdown order. The red periods are those during which the pipeline could be shut in, and the green is the period after which the risk to the pipeline is removed.

The first scenario is the best for DAPL and presumes that it wins the appeal that was just argued. We think there is still about a 30% chance for this scenario. We think there is about a 70% chance combined for the last two scenarios, with the only difference being who is the president under the two scenarios.

The reason the election becomes a factor is that we believe that a Trump-run USACE is more likely to complete the EIS more quickly and to conclude that the easement is proper. A Biden-run USACE may take longer to complete the EIS and may actually conclude that the easement should not be granted. In both of these scenarios, we are assuming that the lower court determines that, under the standards for an injunction, the pipeline needs to be shut down while the EIS is prepared. It is possible that the lower court concludes that an injunction is not appropriate, but we think that is an unlikely result given its prior order to shut down the pipeline.

Northern Access and its WQC

Almost every pipeline project will cross a wetland or waterbody that is under the jurisdiction of the USACE. In certain states and for certain types of projects, this will trigger the need for a WQC issued by the state’s environmental regulator. This was the case for National Fuel Gas Supply’s Northern Access 2016 Project and so, on March 2, 2016, National Fuel submitted its initial application for a WQC to the DEC.

The federal statute that requires a project to obtain a WQC also provides that the state waives its authority if it “fails or refuses to act on a request for a certification, within a reasonable period of time (not to exceed one year) after receipt of such request.” As the one-year period for action on National Fuel’s application approached, it was clear that the DEC was not going to be able to finish its work within that time frame, and so the DEC and National Fuel agreed that its application would be “deemed received” on April 8, 2016, rather than March 2. On April 7, 2017, and within one year of the deemed-received date, the DEC denied National Fuel’s application.

National Fuel appealed that denial to the Second Circuit, which found in February 2019 that the DEC had not sufficiently supported the denial and required the DEC to “more clearly articulate its basis for the denial and how that basis is connected to information in the existing administrative record.” In the meantime, on December 5, 2017, National Fuel asked FERC to determine that the state had waived its right to issue a WQC by failing to do so by March 2, 2017. FERC issued an order on August 6, 2018 that found DEC had waived its right by not acting on the application and that an agreement to a “deemed received” date could not alter the one-year bright line in the statute. In that order, FERC acknowledged that there may be other ways to get around the one-year limit, such as the state agency simply denying the request for certification, with or without prejudice, within one year, or asking the applicant to withdraw and refile its application.

It is this order that the DEC appealed to the Second Circuit and, not surprisingly, most of the oral argument questions revolved around why this method of agreeing to a “deemed received” date was any different than simply having the applicant withdraw and refile its application. FERC’s attorney provided no satisfactory answer to that question but simply returned to the fact that a withdrawal and resubmittal had not occurred in this case.

We expect that the court will uphold the FERC determination in this case. However, if in its discussion of the alternatives, the court expresses an opinion that a withdrawal and resubmittal of the same application restarts the one-year clock, or that a denial without prejudice followed by a resubmittal does so, as well, then the only project that may benefit from this case is National Fuel. However, if the court not only affirms the FERC decision but also affirms the “bright-line” nature of the one-year period in the statute, the decision could go a long way in helping speed the process for issuance of a WQC. However, we think this last result is very unlikely and that, instead, the “bright-line” test will become even more blurry as the court endorses other means of extending the deadline, which the states will simply adopt in a modification of their processes and thus continue to ignore the one-year statutory deadline.