Within the past year, the nearly 60 year-old, twin oil transmission pipelines which lie at the bottom (mostly) of the Straits of Mackinac have gone from being largely unknown to a chief topic of conversation throughout our region. Public awareness of oil and gas transmission lines here in Michigan seemingly received the equivalent of a steroid injection after the 2010 Kalamazoo River oil spill. This event also saw the Calgary-based pipeline owner, Enbridge Inc., move from its subterranean comfort zone to the lead story on local news.
Since the environmental risks associated with two 20″ pipelines originally installed in 1953 have been described by the Great Lakes office of the National Wildlife Federation (NWF) and elsewhere, this discussion is largely focused on the economics of both the existing pipelines, as well as the merits of initiating a plan for its future.
I would like to preface what follows by saying that I’m a fervent capitalist and do not believe in advancing conservation or environmental agendas by unfairly bashing corporations. In spite of anecdotal reports to the contrary made during the Kalamazoo River spill event, Enbridge is known to be a well managed company and a responsible corporate citizen. Yes, they have had and will have spills, but based upon what is publicly known about the Enbridge family of operations, if we have to have hydrocarbon arteries running beneath our land, lakes and streams, we could do far worse than having them owned and operated by Enbridge.
They (Enbridge) are also very good at providing a return on investment for their investors – as they should be. Over the past ten years shares of their NYSE traded stock have risen from $9.75 to roughly $44.00 and dividends have increased at an annualized rate of 12%. Without any consideration to stock splits, this per share increase equates to 16.3% per year. When added to their current dividend yield of 2.9%, these annualized returns approach an industry-enviable 20%.
It is worth noting that in spite of the industry assertion that the physical life of some transmission lines may be “unlimited,” for accounting and income tax purposes this pipeline infrastructure was likely to have been fully depreciated over a period of less than 40 years (page 27 ). For those unfamiliar with such terms, depreciation is an expense which is allowed to provide for the recovery and eventual replacement of the capital investment. Based upon a review of Enbridge 2013 financial statements it appears likely that the cost of the original Straits of Mackinac pipeline investment was entirely “expensed” for accounting and tax purposes nearly 20 years ago.
While some could fairly contend that “physical” life should not be confused with depreciation schedules developed for tax and accounting purposes, that argument is far more valid when the company and its investors are assuming all of the risks. If a company truck dies on the side of the road after 20 years of use, besides the inconvenience posed to its driver and loss of productivity to the business, there is no societal or environmental cost which needs to be borne by others. In the case of the Straits of Mackinac pipelines, this is a risk which is shared by us all.
The issue of the physical life of a pipeline is a relatively new one. Historically, global oil and gas transmission lines were expected to outlive the sources of their production. As a result of new technologies and discoveries, however, we now find ourselves in “uncharted” waters. The difficulties associated with inspection and monitoring of these pipelines are understandably complicated by its lake bottom location.
Beyond the environmental considerations, there would appear to be many sound business reasons to consider more public engagement concerning this issue. It will be far easier to navigate the permitting and approval process for a new or improved transmission system if it were done in advance of a release event. From a community relations standpoint, a proactive plan which includes a more public dialogue would likely be viewed as favorably as Enbridge’s investment in renewable energy.
It is important to recognize that considerable public benefit is derived from the presence of these pipelines which serve as a far better alternative to the Great Lakes shipping of oil. Its continued operational integrity is important for reasons which extend beyond those of an environmental nature. The closure of the pipelines for an indefinite period would have a significant regional economic impact and potentially have national security implications. Although it is unreasonable to expect a zero spill risk, in this instance the issue of what constitutes an acceptable level of risk should be more clearly defined and disseminated.
The point of this discussion is NOT that Enbridge should be forced to initiate a replacement effort because they can afford it. However, what is clear is that by nearly any economic metric the risks associated with the Straits of Mackinac crossing have increasingly shifted from Enbridge stockholders to Great Lakes stakeholders.