Energy Update

rrains@washingtonanalysis.com Tim VandenBerg , 202/756-7714 tvandenber g@washingtonanalysis .com

A pr i l 7 , 2 014

Rob Rains, 202/756-4431

Pipeline Potpourri
We direct investors to contentious state-level approval processes that could materially delay or prevent the construction of both the Constitution [Williams (WMB-$40), Cabot Oil and Gas (COG-$34), Piedmont (PNY-$36), WGL (WGL-$40)] and Bluegrass [Williams and Boardwalk Pipeline Partners (BWP-$14)] pipelines. Conversely, we maintain our outlook for Enbridges (ENB-$46) Sandpiper pipeline in Minnesota. Finally, we wish to stress that approval by the Federal Energy Regulatory Commission (FERC) often entails lighter scrutiny than state-level permits, which is why environmental groups are increasingly targeting state proceedings in these matters when they seek to thwart projects. Consider the following: Constitutional Challenge. FERC approval of the Constitution Pipeline [Williams (WMB), Cabot Oil and Gas (COG), Piedmont (PNY), WGL (WGL)] by the end of 2014 is likely following the close of the Commission's comment period for its draft Environmental Impact Statement (DEIS) today. However state-level headwinds could nonetheless prevent the projects construction. Constitution has not received any of its required permits from the New York State Department of Environmental Conservation (NYSDEC), nor has it provided enough information for the NYSDEC to review its application. NYSDEC has also filed comments criticizing FERCs review of the pipeline, pointing out missing documentation, and urging FERC to consider alternate routes. Opposition groups are urging all residents to refrain from negotiating easements. Such a move would preclude the use of eminent domain, significantly reducing the chances that the project can be completed. When granted, eminent domain allows certain projects to be built, even without all landowners consent, so long as the company can show it has the majority of the necessary easements. If constructed, the 124-mile gas pipeline would travel through upstate New York. Red Flag for Bluegrass. Legislation prohibiting Bluegrass owners [Williams (WMB), Boardwalk Pipeline Partners (BWP)] from exercising state eminent domain failed in the Kentucky Senate, but, judicial headwinds may still prevent the projects construction. A Kentucky state court recently concluded that the sponsors of the $1.5 billion pipeline project may not exercise eminent domain to build the pipeline under the states laws. An appeal is ongoing, but the timing and outcome is uncertain. Both the Governor and Attorney General have said they believe that Bluegrass cannot exercise eminent domain. Absent this authority, the natural gas liquids (NGLs) pipeline (up to 400,000 barrels daily) would be substantially more difficult to build and could allow a small group of landowners to hold the project hostage or block it altogether. If constructed, the pipeline would go into service midto-late 2016. The 200 miles of new pipeline through Kentucky would connect with Boardwalks Texas Gas Transmission in Hardinsburg, Ky.
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April 7, 2014

Smooth Sailing for Sandpiper. We expect Minnesota to approve Enbridges (ENB) $2.7 billion Sandpiper oil pipeline in Q2 2015, several months later than the January 2015 goal set by the Minnesota Public Utility Commission (MPUC). This is mainly because environmental groups are likely to pressure the Commission on the line's proposed route and delay the process by 2-3 months. If approved, Enbridge would construct about 300 miles of new pipe, much of the route along an existing Enbridge line, to eventually transport 375,000 bbl/day of Bakken crude to Superior, WI beginning in 2016. Regulatory Rigmarole Likely Enbridge Line 3. Like Sandpiper, approval for Enbridges $7 billion Line 3 oil pipeline replacement is likely, but regulatory scrutiny could delay implementation beyond the projects proposed service date of 2017. Enbridge is replacing the 34 inch pipeline, from North Dakota to Wisconsin, with a new 36 inch pipeline. Although Enbridge has indicated that it would not need any new permit in order to replace the pipe and boost its daily transport capacity from 390,000 bbl/day to 760,000 bbl/day, environmental groups will challenge this assertion in court and could eventually force Enbridge into a time consuming permitting process. There is recent precedent suggesting a second review is likely despite possessing an existing presidential permit. A similar situation unfolded over Enbridges Clipper (Line 67) expansion, which also had a presidential permit for a smaller throughput volume. Enbridge will also need approval by North Dakota, but that is unlikely to be an obstacle. Federal Pipeline Bill Unlikely. Federal bipartisan legislation to usurp FERCs regulatory authority and approve pipelines automatically after 120 days is unlikely to be enacted into law. The bill, introduced by House Energy and Power Subcommittee Chairman Fred Upton (R-MI) and Rep. Gene Green (DTX), would eliminate key environmental review processes by FERC. If it unexpectedly passed Congress, it would likely be vetoed by President Obama.

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