If there remained any doubt, three major setbacks for oil and gas pipelines in July demonstrated that environmental attorneys have cracked the code for stopping major pipeline projects.

A month that upended billions of dollars in project spending showed the U.S. midstream sector that its path is fraught with legal and political risks. These hurdles are likely to deter major investments in new interstate pipeline projects for the foreseeable future, according to several experts who spoke with S&P Global Market Intelligence.

The new reality for an industry already beset by historical financial distress could be that the Equitrans Midstream Corp.-led Mountain Valley Pipeline LLC will become the last major new natural gas pipeline project to be completed in the U.S. for some time, according to Rob Rains, senior energy analyst with Washington Analysis.

"You have highly sophisticated opposition," Rains said in an interview. "You have adroit navigation of various environmental statutes and ceaseless litigation. You have dramatic amounts of takeaway capacity that have been stood up."

July also illustrated the limited benefits that come with an accommodating presidential administration. The Trump administration has worked to streamline permitting of major infrastructure by rolling back a series regulations governing water quality permits, environmental reviews and methane emissions, among other things. But these efforts were not enough not save Dominion Energy Inc. and Duke Energy Corp.'s Atlantic Coast natural gas pipeline, prevent a court from ordering the shutdown of Energy Transfer LP's Dakota Access LLC oil line or get TC Energy Corp.'s Keystone XL oil pipe across the finish line.

"Part of what happened is that the Trump administration tried to by executive order streamline the process and they did that right away," Amy Myers Jaffe, director of the Council on Foreign Relations' energy security program, said in an interview. "It's very hard to do something by executive order and have it stick. ... You had a federal government that literally sought to remove [regulatory barriers] and was unable to do it."

Many experts expect the challenges facing fossil fuel infrastructure to become more difficult if Democratic candidate Joe Biden wins the U.S. presidential election in November.

But either way the election goes, an increasingly difficult landscape for permitting major energy infrastructure will likely remain challenging absent major action from one of the other two branches of the federal government, according to James Coleman, an energy law professor with Southern Methodist University. That status quo also could have big implications for renewables, because the same legal strategies used in the fight against pipelines can be used against wind and solar projects and infrastructure.

The current permitting environment stems from legal cases in recent years establishing what Coleman described as "more and more veto gates" for pipeline projects.

"These court decisions have created new obstacles to pipelines and power lines — any kind of infrastructure development," Coleman said in an interview. "There are really only two ways that changes. One is with new legislation passed by Congress to reform infrastructure approvals. And the second is with a bunch of Supreme Court cases."

Canceled capacity

In the near-decade since protests started against the Keystone XL pipeline, well-funded environmentalists found natural allies in indigenous groups, landowners and several state governments. Project opponents found ways to require more environmental analyses under the National Environmental Policy Act, which also have the effect of delaying projects and driving up costs. States such as New York began realizing they could stop projects through state permitting reviews under the Clean Water Act, or through eminent domain challenges.

Much of the blocked capacity happened in the last four years. In that time span, around 7 Bcf/d worth of pipeline projects were terminated amid legal or regulatory delays, according to S&P Global Market Intelligence Pipeline data. The Atlantic Coast cancellation brought the total to around 8.5 Bcf/d. But the amount of postponed capacity additions is even greater, around 10 Bcf/d.

That canceled capacity pales in comparison to the pipeline capacity that got built, including major lines such as the Atlantic Sunrise connecting Pennsylvania to markets in mid-Atlantic and southern markets or the Trans-Pecos Pipeline in West Texas.

But a look at projects that made it and projects that failed illustrated how opportunities in midstream development have become increasingly region-specific. In the Gulf of Mexico, where citizens and elected officials have had decades to get comfortable with prevalent oil and gas infrastructure, midstream companies could pursue a pipeline with relatively little trouble. Increasingly in the Northeast — where much of the canceled capacity was — they cannot.

The abrupt cancellation of the Atlantic Coast Pipeline demonstrated that even when a developer wins a rare Supreme Court victory over a challenge to a project, the company can still falter amid ongoing delays, regulatory headaches and massive cost overruns.

The federal court decision that ordered the shutdown of the Dakota Access oil pipeline three years after it started flowing oil, which has since been stayed pending appeal, opened up existing pipelines as a new front in the battle over midstream infrastructure.

The ruling by a federal court in Montana in the Keystone XL pipeline case found that the federal government failed to properly consider impacts on endangered species when it streamlined the approval process for water crossing permits under the Nationwide Permit 12 program. Even though the Supreme Court then cleared several other pipeline projects to advance under the fast-track Nationwide Permit 12 process, the litigation created uncertainty over whether repair and replacement projects could face new obstacles from environmental challenges.

The pipeline industry will face more headwinds on the downstream side. Cities across the country are implementing bans on natural gas in construction of new buildings.

Some midstream companies could shift spending to smaller investments such as gathering lines, and only the most compelling mega-projects will be built as investors demand higher returns from completed the projects, given the risks.

Regulatory risks

Regulatory risks have always been part of equity analysts' calculations for pipeline companies, but the recent events have prompted a reassessment, Jefferies LLC Managing Director Christopher Sighinolfi noted.

"How do the boards of directors decide to move to a final investment decision on something when there's examples out there where whatever this company was intending took twice as long and cost twice as much and damaged the reputation of everybody involved?" Sighinolfi said in an interview. "We sort of haven't had a successful water permit process in New York State since 2016. New Jersey is now questioning federal eminent domain capability on state lands. New England [gas access] in effect is held hostage by New Jersey and New York."

Similar risk calculations led Dominion and Duke to reconsider the Atlantic Coast pipeline as construction stalled and prompted Dominion to unload its natural gas transmission and storage business to Berkshire Hathaway Energy for $9.7 billion.

"To state the obvious, permitting for investment in gas transmission and storage has become increasingly litigious, uncertain and costly," Dominion Chairman, President and CEO Thomas Farrell II told analysts and investors on a July 6 conference call. "This trend, though deeply concerning for our country's economic growth and energy security, is a new reality which threatens the pace at which we intended to grow these assets."

Some analysts saw the Berkshire acquisition as a bet against new pipelines that makes existing infrastructure more valuable, raising the prospect of further consolidation. Only a handful of planned major pipeline projects remain as demand is met and the midstream sector winds down its recent building cycle.

For the beleaguered upstream sector, that means fewer opportunities to add takeaway capacity for gas produced from the Marcellus or Utica shale regions, where drillers are facing persistent low prices and concern over stranded supplies. That, along with a coronavirus-driven demand hit and uncertainty about a recovery from the pandemic, may make it more difficult for them to convince investors they can deliver short-term rewards.

"If we were to go back five years ago, we were talking about pipelines throughout the East Coast. We've had Rover and Nexus built, we've had Sabal Trail constructed, Mountain Valley is almost done — but there are no real big infrastructure projects that remain in the hopper for any of the companies that we cover," Sighinolfi added. "PennEast is one obviously … and that will probably make its way to the Supreme Court around the eminent domain issue."

If there is any silver lining for the midstream industry, it could be the Supreme Court's recent interest in pipeline cases, Coleman said.

He theorized that a Supreme Court decision on the Atlantic Coast Pipeline weeks before developers abruptly canceled the project could spur the high court to take on more or potentially stay decisions of lower courts, a rare step. The high court had decided that lower courts had wrongly blocked the pipeline.

"When the Supreme Court feels like its decisions are not getting to have any impact because of the decisions that lower courts are taking, they might be more willing to step in," Coleman said. "You do wonder if maybe that raised the profile of pipeline issues."