David L. Goldwyn
Goldwyn Global Strategies LLC
Washington, DC
Keith J. Benes
Euclid Strategies
Washington, DC
US President Donald Trump has taken new actions intended to expedite approval of energy and infrastructure projects. On Jan. 24 he signed:
• Presidential memoranda to advance construction of the Dakota Access and Keystone XL pipelines.
• An order directing the secretary of commerce to study and report on measures to require US-manufactured steel to be used in all new and replacement pipelines.
• An order directing the Council on Environmental Quality (CEQ) to coordinate and expedite environmental reviews for infrastructure projects.
The actions were hailed by industry groups and decried by environmental groups. In the authors' view, a careful assessment of existing law and regulation suggests that the actions may open both pipelines to new and potentially successful litigation and that domestic-content requirements are highly questionable under trade law and could harm US exports. Even the attempt to expedite federal infrastructure review and permitting may lead to delays because it does not specify how it relates to a more carefully thought-out process Congress established in 2015.
The permitting process can be more efficient, but there are better options to consider. Haste may make waste: If the agencies in charge of reviewing project permits attempt to abandon established administrative procedures, environmental groups opposed to specific projects (particularly the Dakota Access and Keystone XL pipelines) might breathe a sigh of relief, while industry groups that initially cheered the president's actions may ultimately find they were less helpful than they had hoped.
Dakota Access
The Dakota Access Pipeline (DAPL) would carry crude oil from the Williston basin in North Dakota to refineries in the Midwest. The pipeline was nearly complete, but it ran into well-publicized opposition from officials of the Standing Rock Sioux Tribe in South Dakota because it crosses Lake Oahe near their reservation. At the end of 2016, the Army Corps of Engineers determined that it would not grant the last permission DAPL needed to complete construction (an easement to cross under Lake Oahe) but would undertake additional review of an alternate route and conduct additional tribal and public engagement by preparing an environmental impact statement (EIS).
Trump signed a memorandum designed to reverse this decision. He directed the secretary of the Army to instruct relevant subordinates to take actions to "review and approve in an expedited manner, to the extent permitted by law and as warranted" requests for approvals to construct the DAPL. The memo also directed the Army to consider rescinding its decision to conduct further environmental review on an alternate route and to consider concluding that its existing environmental assessment satisfies all National Environmental Policy Act (NEPA) requirements.
The Army Corps has now rescinded the environmental review and granted the easement, citing the president's directive as its basis for action. Thus far, the reviewing court has refused to grant the tribe's request for a preliminary injunction, but there is substantial risk it will invalidate the Army's decision.
An agency can change its mind about a policy decision, but it must provide a reasoned justification for that change. It cannot simply disregard "contrary or inconvenient factual determinations it made in the past."1 The Army needed to explain why just 2 months after concluding it needed to gather more information and 1 month after issuing a notice of intent to prepare an EIS, it now thinks that process is no longer necessary. It provided no explanation for the change, however, other than the president's memorandum. An agency cannot change a factual determination simply because a new administration told it to.2
In short, it's not clear the president's memo and the Army's reversal will accelerate the DAPL process. If the court does find the Army's change in decision to be arbitrary and capricious, it would likely order an EIS to be completed before the pipeline enters operation. In the end, it may have been more efficient to simply move forward on completing the EIS. At the very least, the Army should have waited until the end of the comment period, reviewed the comments, then reviewed whether its December 2016 decision to prepare an EIS should be rescinded. In the rush to move forward immediately after the inauguration, the administration may have slowed DAPL's progress.
Keystone XL
The president signed a memorandum inviting TransCanada PipeLines Ltd. to resubmit its application for the Keystone XL project and directing the departments of State and the Interior and the secretary of the Army to make a permitting decision within 60 days. It also directed the secretary of state to conclude, "to the maximum extent permitted by law," that the 2014 final supplemental EIS (SEIS) satisfies any NEPA requirements or other federal consultation requirements. TransCanada resubmitted its application on Jan. 26, 2017, and indicated its representatives are in discussions with shippers about continued interest in the project.
Keystone XL faces different legal vulnerabilities than DAPL. The Army's authority over DAPL comes from statute; the authority to grant a presidential permit comes from the president's constitutional authority. There is no question that the decision by the Army to approve DAPL, including decisions about how to satisfy NEPA, can be reviewed by a court. In contrast, State Department decisions to issue presidential permits have been challenged three times in court, and twice the reviewing court concluded that State Department decisions were not reviewable. Thus, the State Department would have an additional legal defense in any court case challenging approval of Keystone XL. Despite that additional legal defense, the accelerated course being followed by the administration greatly increases the risk that a court could block any decision to grant Keystone XL a permit.
First, despite the 60-day time limit in the memo, the State Department needs to follow the same considerations that the Army must follow in DAPL to ensure that any change in its decision is supported in the record or it will face legal challenge that its actions are arbitrary and capricious. Rushing to conclusions about the final SEIS just to comply with the president's memo increases the risk that the conclusions won't have adequate justification and, thus, that a permit decision would be blocked by a court.
Second, among the conclusions the State Department will need to make is whether there is a change in circumstances that would alter the environmental impacts of Keystone XL described in the SEIS. One change in circumstances that has been raised by groups opposed to the project is the collapse in oil prices since the SEIS was concluded and whether the different price environment changes the SEIS conclusion that Keystone XL was unlikely to affect greenhouse gas emissions from the Alberta oil sands.
Third, TransCanada still must go through a review of the route in Nebraska before the Nebraska Public Service Commission. This could take up to a year to complete. Because Nebraska has been the state with the most intense, organized opposition to Keystone XL, it is possible the route in Nebraska could change. The State Department has previously stated that it could not adequately evaluate the impacts of the project without a set route in Nebraska. The department will need to justify why it can evaluate the environmental impacts of the pipeline without a settled route in Nebraska in 2017 when it could not do so in 2012.
Fourth, the president has indicated that he might impose additional conditions that could fundamentally impact the economics of the project. He has stated the pipelines in the US should use US pipe produced from US steel and signed a memo directing the Department of Commerce to develop a plan under which US pipelines would be constructed with materials and equipment produced in the United States. He also has stated he may want to negotiate other specific terms in exchange for approving cross-border pipelines.
The requirement to use US steel, if enforced, as well as other possible conditions, could cause TransCanada to determine the project is not economic under the new terms. TransCanada has previously indicated that approximately 50% of the pipe it intended to use on the project was manufactured in the US, and much of even that 50% was likely manufactured from foreign-sourced steel. A requirement to use US steel would substantially increase costs of the project. TransCanada has stated that it is maintaining its $15 billion North America Free Trade Agreement claim against the US for the time being. If it did decide to pursue the $15 billion NAFTA claim instead, it could cite the addition of unexpected conditions by the current administration to buttress its claims that the US has treated it unfairly and arbitrarily.
In short, although TransCanada must certainly prefer the position it is in today versus early January 2017, Keystone XL still faces substantial hurdles. If a court does find that granting a permit is reviewable, then the president's memo increases the risk of a permit being invalidated-particularly the 60-day deadline that will force the State Department to decide before any review in Nebraska is completed.
Domestic content plan
Trump also signed a memo directing the Secretary of Commerce to develop a plan under which pipelines in the US are required to use materials and equipment produced in the US. As with the other memoranda, this one leaves the hard work to the agency in question. The secretary of commerce will have to craft a plan that neither adds legal uncertainty by raising the possibility of a World Trade Organization (WTO) challenge nor harms US industry.
Countries have increasingly imposed such local-content requirements (LCRs) in efforts to foster domestic industries or to insulate domestic producers from international competition from the 2008-09 global recession. Oil and gas companies with international operations are aware of the increased costs and economic distortions that can be caused by LCRs.
The WTO agreements generally prohibit requirements giving preference to domestically sourced goods over imported goods. The US has long been a champion opposing LCRs, having won a landmark pre-WTO proceeding that overturned many Canadian local content requirements in its Foreign Investment Review Act and recently winning a challenge against India's LCRs in its solar industry.
Any plan that supports using US steel and equipment in pipelines will need to be carefully designed to avoid being invalidated at the WTO. A poorly designed plan likely to be invalidated by the WTO would not provide the certainty necessary to support long-term investments in additional US production capacity.
The biggest problem with LCRs is not that they are inconsistent with the WTO; it is that they harm the economy of the country implementing them. LCRs may support one sector of an economy, but they increase costs in the economy and harm international competitiveness. This reduces exports and gross domestic product. LCRs also invite retaliation by trade partners.3
This doesn't mean that the US cannot adopt a plan that would support using US steel and equipment in domestic pipelines. Trying to help US steel production through a hastily designed LCR is likely to backfire and do more harm than good to the US economy.
Expediting permit reviews
The most unusual of the president's memoranda is the one expediting reviews of infrastructure permits. The memorandum is unusual because it makes no reference to recent congressional mandates on infrastructure permitting or existing (parallel) Executive Branch mechanisms.
The memorandum empowers the chair of the CEQ to identify which infrastructure projects are high priority (either under his or her own initiative or in response to requests from a governor or head of a cabinet agency) and to work with agencies to establish a firm deadline for completing environmental reviews and permitting. If the deadlines are not met, the agency head involved must provide a written explanation for the missed deadline. The memorandum does not create any enforcement mechanism and does not purport to alter any laws relating to environmental reviews and permitting.
The memorandum does not acknowledge, or describe how it relates to, previous efforts to streamline infrastructure reviews, most importantly the 2015 Fixing America's Surface Transportation (FAST) Act. The bipartisan FAST Act primarily addresses surface transportation. Building on a series of executive actions taken by former President Barack Obama since 2011, however, it also provides authority to an interagency Federal Infrastructure Improvement Steering Council controlled by the Office of Management and Budget (OMB) and CEQ devoted to streamlining federal permitting reviews. The FAST Act applies to infrastructure projects that require some level of federal permit or NEPA review and that are expected to involve investment of more than $200 million. The infrastructure projects could be in nearly any sector including renewable and conventional energy production, electricity transmission lines, pipelines, ports, etc. The OMB indicated it expects to coordinate 200-300 permit reviews/year under the FAST Act.
In contrast to Trump's order, the FAST Act takes a comprehensive approach to permitting delays. For example, the FAST Act is primarily aimed at aggregating authority to address permitting delays under OMB. OMB's inclusion is important because its mandate and expertise are explicitly about managing the Executive Branch, including the budget. In contrast, CEQ's expertise and mandate are primarily devoted to the implementation of NEPA.
Expediting federal permitting often is not simply a matter of speeding NEPA examination; it often also involves efficiently mediating interagency disputes about other authorities and resources. Those types of disputes are the purview of OMB.
Whether the president's memo was intended to be complementary to the FAST Act and Obama's previous orders on infrastructure review or whether it was simply done without awareness of the current state of the law is unclear. A president cannot undo the requirements of the FAST Act. Trump's memo intended to expedite permit reviews may have the opposite effect by creating confusion about the appropriate process to follow.
Better pathways
The authors believe federal permitting of pipelines should be improved and that improving pipeline safety by replacement of aging pipelines should be encouraged. Their suggestions follow.
The executive order governing the State Department's management of cross-border pipelines should be amended in several respects:
• There should be reasonable deadlines for completing NEPA review with delays or extensions requiring the approval of the secretary. Department bureaus should not be permitted to simply stall or withhold their approvals.
• The order should allow permits to be amended for a change in control of the owner, or a change in the name of the line, without requiring a new permit.
• Pipeline improvements, such as replacement, upgrade, or improvement with collateral equipment should require notice but not issuance of a new permit. To the extent these upgrades involve a change in capacity in the same right-of-way, the State Department should require submission and approval or relevant spill response and safety measure to the Pipeline and Hazardous Materials Safety Administration-but not a new permit. Fear of denial is impeding safety upgrades to pipelines.
• The department should consider whether it is best served by simply granting a national interest determination (as it does with sanctions decisions) and delegating environmental review and monitoring to the Federal Energy Regulatory Commission or another agency that has more resources and stronger technical capacity.
Concerning the Keystone XL and DAPL projects:
• The Department of the Army should be preparing for a possible court order invalidating the DAPL easement and ordering an EIS to be prepared. It is never wise to predict the outcome of court challenges, but the authors would not be surprised if the District Court in District of Columbia ruled in favor of the plaintiffs. At the very least, the Army should be prepared to proceed quickly with an EIS by developing a plan that can be immediately implemented if the court rules against it.
• TransCanada and the State Department should prepare a rapid but thorough SEIS to consider and evaluate if changed circumstances impact the NEPA assessment. NEPA is a disclosure statute; the president can approve a project even if it has material environmental impacts if it is in the national interest. The government is primarily required to assess and disclose environmental impacts. Approval is not in doubt, but the pathway lies through disclosure. Here, too, haste may open the State Department to avoidable litigation risks.
Concerning the domestic-content plan:
• In developing its plan, the Department of Commerce should evaluate alternatives to supporting US steel production other than implementing explicit LCRs for pipelines. There are other forms of support for the domestic steel industry that would not face such obvious risks of violating WTO obligations.
• An assessment of the capacity of the industry to make the necessary gauge of pipe in adequate volumes in a reasonable time frame should precede any decision.
Concerning the executive order on expediting permitting:
• The administration should clarify that it is not creating a new, competing system for expediting infrastructure reviews and clarify how the recent order can be integrated with the existing FAST Act requirements.
• The administration should commit itself to ensure that agencies have sufficient resources to comply with expedited environmental review procedures without sacrificing environmental, safety, or economic concerns that may arise from new infrastructure projects.
References
1. Concurrence by Justice Anthony Kennedy in Federal Communications Commission vs. Fox Television Stations Inc. before the US Supreme Court, 2009.
2. US Supreme Court, Motor Vehicle Manufacturers Association of the United States Inc. v. State Farm Mutual Automobile Insurance Co., 1983.
3. Organization for Economic Cooperation and Development, Trade and Agricultural Directorate, Trade Committee, "Emerging Policy Issue: Localization Barriers to Trade," May 12, 2015.
The authors
David L. Goldwyn is president of Goldwyn Global Strategies, LLC and served as the US State Department's special envoy and coordinator for international energy affairs from 2009 to 2011.
Keith J. Benes is managing director of Euclid Strategies, a boutique energy and environmental consulting firm. He previously served as an attorney-adviser for the US Department of State during 2004-14 focused on energy, the environment, and climate change.
