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Dakota Access Pipeline Work Halted: Is It the Next Keystone?

Nilanjan Choudhury

On Friday, the Obama administration temporarily stopped work on the 1,172-mile Dakota Access Pipeline ("DAPL"). The joint announcement by three federal agencies – the U.S. Department of Justice, the Department of the Interior and the Department of the Army – came shortly after a federal judge denied the Native American tribes’ efforts to block the pipeline and ruled in favor of construction for the $3.7 billion project to continue.

Dakota Access Pipeline

Primarily owned by Dallas-based pipeline operator Energy Transfer Partners L.P. ETP, the project has been designed to shuttle over 470,000 barrels of crude daily from North Dakota's prolific Bakken formation through South Dakota and Iowa to an existing pipeline in Patoka, Illinois. From there, shippers could access markets and refineries across the Midwest and Gulf Coast.

Announced in 2014, DAPL was originally expected to start up later this year. The developer claimed that the project would contribute an estimated $156 million in sales and income taxes to state and local governments, apart from providing employment to 8,000-12,000 construction workers.

As of now, the conduit is 75%-owned by a venture called Bakken Holdings – formed by Energy Transfer Partners and another pipeline operator Sunoco Logistics Partners L.P. SXL. Downstream operator Phillips 66 PSX controls the remaining 25%.

As per a deal announced last month, Enbridge Energy Partners L.P. EEP and Marathon Petroleum Corp. MPC would also go on to own a minority interest in DAPL.

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Protests from Indigenous Activists

All along, a group of indigenous people, climate activists and landowners have been protesting the oil pipeline.

In particular, the Standing Rock Sioux – a tribe living close to the proposed pipeline – and environmentalists have argued that the project could pose a threat to the local water supply. The DAPL route crosses under a section of the nearby Missouri River, which is the major source of natural water supply for the tribe. Tribal leaders are skeptical that an accident or a spill could potentially contaminate farmland and drinking water for millions. They say the project would also destroy a sacred burial site.

The tribes and their representatives believe that they weren’t adequately consulted on these issues and filed a federal lawsuit in July against the U.S. Army Corps of Engineers.

Current Status

Friday’s twin developments – a federal court rejection for an injunction and then the U.S. government’s decision to stop work – means that sponsors of the controversial DAPL would have to halt operations along a 40-mile stretch in North Dakota though activity on other sections of the pipeline could proceed.

DAPL: Another Keystone?

While Friday’s move by federal agencies does not put an end to the pipeline’s progress, it does pose a major question mark over its future. In fact, some environmental activists believe that the DAPL is going the way of doomed Keystone XL pipeline.

Late last year, pipeline operator TransCanada Corp.'s TRP contentious Canada-to-U.S. Keystone XL pipeline was rejected by the U.S. Senate amid another oil-versus-environment debate. The $5.4 billion project would have connected the oil sands of Alberta to the U.S. Gulf. It was slated to run up to 1,179 miles and carry up to 830,000 barrels of oil per day.

What Next for DAPL?

Units of Energy Transfer Partners closed down around 4% in Friday’s trading session after federal government’s order to halt construction on a particular stretch. It’s unclear as to what the Zacks Rank #3 (Hold) operator would do to move the project forward if building on the current route is not allowed.

One option is to change the path of the pipeline but that entails huge cost overrun and difficulty. Moreover, such a move would require fresh applications/approvals and can peg back the development by years.

The most affected by the turmoil would be the shippers – particularly those that already purchased crude, which they expected to move via the DAPL. Until a way out is found, shippers will have to be contend with costly railroads, or with the crowded existing pipelines. This, in turn, will hit oil producers.

In Conclusion

This issue isn’t likely to get resolved any time soon, with a protracted legal battle in the offing. In the meantime, you could focus on other companies instead of Energy Transfer Partners - that have favorable Zacks ranks and are therefore worth a look. An energy stock worth investing in right now is Murphy USA Inc. MUSA. It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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