More than 220,000 million miles of oil pipelines crisscross the United States. The odds are that, if current energy trends continue, a good portion of this infrastructure might no longer be needed in the future.
The global energy transition is the driving consideration among infrastructure investors, particularly in 2020, when pandemic-related economic shocks have increased environmental awareness and shown how volatile the fossil fuel industry can be.
In May, oil production in the US reached a two-and-a-half year low of 10 million barrels per day, following a historic price drop in April that resulted in the price-per-barrel turning negative for the first time.
If natural gas and renewables, which made up a combined 43 percent of the US’s energy mix last year, continue to take over oil’s market share, the network of oil pipelines will eventually become obsolete. For investors in these assets, that means the day to divest is fast approaching – or they will be left trying to figure out how to safely shut down the operation.
With that in mind, Infrastructure Investor has created a walk-through based on conversations with market sources familiar with this topic, to act out what might happen between the four major players – investors, landowners, regulators and environmentalists – when an oil pipeline is no longer of use.
The flow stops
Investor: “…and that’s the very last drop we’ll get out of this pipeline – for a profit, that is. I really thought this one would be making money for another 10 years. I guess it’s a sign of the times. Well, on to the next venture.”
Landowner: “Wait a second: you’re going to clean this up, aren’t you? You can’t just leave this oozing pipeline on my land.”
Regulator: “That’s right. The federal Pipeline and Hazardous Materials Safety Administration requires out-of-use pipelines to be disconnected, cleaned and sealed. Now, in the US, whether that happens above or below ground is not for me to say.”
Environmentalist: “Let’s talk about that. So, here’s what we’re stuck with: a 36-inch oil pipeline running under three miles of Landowner’s land. The entire pipeline that is no longer of use covers nearly 300 miles. This is why we don’t want these built in the first place. No one wants to pay for the clean up.”
Environmentalist: “When it comes to abandonment or deconstruction, there are costs and benefits to both…”
Investor: (interrupts) “Having to do with the earth and money.”
Environmentalist: “…correct. Abandoning a pipeline underground may be like letting a sleeping dog lie. As long as it’s purged of waste materials and properly sealed, leaving a buried pipe in place avoids further land disruptions.”
Investor: “It’s also a lot cheaper. Abandonment costs could be as little as tens of thousands of dollars for your property, Landowner. But the price quickly gets into the millions the more pipe there is. Now with deconstruction, which includes cleaning up waste and land restoration, the proposition could reach $1 billion to $2 billion. That’s billion with a ‘B’. Have you seen oil prices recently? I don’t have that kind of cash.”
Landowner: “I don’t either. Let’s just leave it buried and forget about it.”
Environmentalist: “But the pipeline could also be deconstructed and removed from your property completely. This would avoid potential environmental hazards down the road, if the operator did not seal off the pipeline correctly – or worse, if waste were to seep into local water supplies. That would be a big problem.”
Investor: “Well, the person paying for the pipeline removal wouldn’t be happy either. The act of digging up old pipe, cleaning up the sludge and restoring the land is an expensive proposition. We’re talking $1 billion to $2 billion.”
Regulator: “I can confirm the government would not be happy with that.”
Landowner: “Wait, who has to pay for all of this anyway?”
Regulator: “Well, according to the letter of the law, as long as the pipeline operator meets our criteria for shutting the pipeline down – things like waste removal, pipeline cleaning, sealing it off – ownership and responsibility beyond that depends on the language in the Right-of-Way contract.
Landowner: “You mean the paperwork I filled out 30 years ago when I let the Investor lay the pipe through my land? I haven’t laid eyes on that in years.”
Investor: (dusts off contract) “Here, I found it. The agreement states, ‘When a pipeline is out of use and declared abandoned, legal ownership shall revert back to Landowner.’ Well that’s that. I hereby declare this pipeline abandoned. We’ll seal it up tomorrow, and then on to the next venture.”
Landowner: “It sounds like I only have one option. Let the Investor seal it up and walk away scot-free.”
Investor: “Deal. Pleasure doing business with you. I’ll get my cement guys out there call it a day.”
Regulator: “Looks like my work here is done. Call me, but only if you need me.”
Environmentalist: “I’m sorry. That’s how the market is set up. But there’s beginning to be more and more people like Landowner with pipelines in their backyard. You may not be stuck holding the bill forever…”
Landowners and environmental groups are increasingly advocating for more protections from the private sector when pipelines are decommissioned. Groups like the Wisconsin Easement Action Team, which began in response to the announced decommissioning of a pipeline owned by Canadian company Enbridge, are calling for stronger regulations to govern who pays for abandonment and land reformation costs.
Some stakeholders are suggesting the US look north to how Canadian provinces are managing the retirement of old pipelines. The Alberta Energy Regulator, for example, levies an annual fee on energy companies operating in the province, which covers abandonment and environmental costs of decommissioned pipelines, particularly in cases where the operating company goes bankrupt.
As future oil demand is poised to be chipped away by newer and cleaner energy sources, the laws about what happens next may soon be in flux, and that could mean an impact to an investor’s return comes next.