In the U.S. these days, despite strong bipartisan support for “infrastructure” renewal, developing an oil or natural gas project is a significant multi-year undertaking. Any project is greeted with lengthy regulatory reviews, legal challenges and meticulous construction management needs. Energy transport projects, especially those carrying natural gas, go through a phalanx of federal, state and local regulators, and the rules – given concerns from climate change to cybersecurity – keep changing as well.
On the business side, there’s supply and demand to contend with, raising financing (even big oil companies are seeking independent finance for projects) and – with inflation – the challenge of actually building a project on time and within budget when financial and regulatory hurdles are met. Contract disputes during construction seldom make the news, but a recent dispute during construction of a 700-mile pipeline system to link gas supplies and markets in the Midwest is somewhat instructive to the industry. If there’s any good news, it is not that there was a dispute, but that a Texas court held up the original construction contract – and that its decision is likely to help encourage financing infrastructure in many sectors.
The Rover Pipeline, which has now been in service for more than two and a half years transporting natural gas across the Midwest, recently concluded a multi-year legal battle after contractor U.S. Pipeline walked off the job during its construction. Lawsuits cost time and money, and in this one – after the contractor turned down a $55 million out-of-court settlement offer – the courts sided with the developer. Only $10 million was awarded to the contractor whose dispute with its client caused a pause in a $4.2 billion project.
The situation demonstrates the importance of developers and contractors establishing practical channels to resolve disputes, lest other critical infrastructure projects similarly get held up by litigation. That not only behooves those involved in the project, but it also protects our communities. Starts and stops to construction of a major project like a pipeline open the door to error. No one should want a contractor walking off the job. It also provides a useful case study, especially as pipeline demand grows to keep up with the burgeoning shale energy production happening in North Dakota, Texas and across the country.
In November, Texas’ 333rd District Court issued a judgment in a lawsuit brought by U.S. Pipeline against Rover and its developer and ordered the former to pay the other party’s legal fees in a dispute that arose after U.S. Pipeline walked off the job. The ruling, which resulted in net award of around $10 million to U.S. Pipeline (far less than what was even being held as retainage) came after U.S. Pipeline refused a nearly $55 million out-of-court settlement.
There is also a teachable moment for contractors – they should understand the requirements of a job, make sure their personnel are able to fulfill those duties and know the consequences if not. That might require additional legal counsel on the front end, but it very well could save costs to the contractor, to taxpayers and to communities served by the pipeline’s safe completion.
During the energy crisis of the 1970s, several big pipelines adopted project labor agreements, and “no strike” clauses to keep construction going. Some of these agreements received strong regulatory scrutiny, not only at the time of permitting and construction but also afterwards, as pipelines and customers, energy producing landowners and governments argued about allowable tariffs. Today, given the rigorous nature of energy project permitting and the significant investment required, Rover Pipeline’s “teachable moment” is for developers to get these things tied down. A business lawyer is as vital as a good permitting lawyer.
As someone who has been involved with several major energy infrastructure projects over the years, both in a private and public sector capacity, I cannot emphasize enough the need for contractors and developers to collaborate closely on such projects. This not only helps to better insulate the United States from such supply shocks, but it also helps improve the safety of infrastructure development across the county.
Energy projects already face a number of hurdles today. Environmental impact statements have changing standards, as governments and environmental NGOs push for life-cycle carbon analysis – not only of the project itself, but of what energy product will be carried by a project. Some states in the game have used delegated powers under federal air and water acts to raise additional hurdles – and jurisdiction is changing. Properly, greater consultation with indigenous communities, tribes and First Nations, is becoming an important part of the process in both the U.S. and Canada. Border-crossing permits, created by presidential order rather than an act of Congress, raise additional process uncertainty. Pipeline safety rules and procedures continue to change. And federal land policies, which govern supplies of energy to be carried, are changing quickly as well.
Whether one agrees or disagrees with the need for many of these regulatory initiatives, the end of the game is whether America is a good place to attract investment and strengthen and replenish infrastructure. Business law, as well as regulatory law, plays a big part.
Pipelines are an imperative piece to our country’s energy independence. The United States’ remarkable shale renaissance briefly made our country a net-energy exporter in 2019 for the first time in nearly 70 years, and a title that was reclaimed last year on the shoulders of record oil and natural gas production. That achievement has reduced dependence on foreign suppliers, reduced volatility in consumer markets and given U.S. policymakers a key geopolitical tool to support our allies and isolate our adversaries.
The United States has made great progress toward energy independence, but it is a continual task. Industry leaders and policymakers should be committed to supporting infrastructure development, which is critical to every sector of our economy. The Rover Pipeline dispute offers a learning moment about the importance of collaboration among elected officials, regulators, contractors and developers in achieving this goal.