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This blog will focus on a report released 10-29-19 by the Michigan Attorney General’s office: An Analysis of The Enbridge Financial Assurances Offered to the State of Michigan On Matters Related To The Operation of The Enbridge Line 5 Pipeline At the Straits of Mackinac.

Used with permission, this report was prepared for the State of Michigan, the Michigan Department of Attorney General, the Michigan Department of Environment, Great Lakes, and Energy, and the Michigan Department of Natural Resources by American Risk Management Resources Network, LLC dated October 29, 2019. 

This is perhaps the best written coverage on the report’s release. And this covers the Enbridge response more recently.

Summary: This report concludes that Enbridge’s financial ability to pay for response costs and property and personal injury damages arising from a rupture of Enbridge Line 5 at the Straits of Mackinac may be inadequate. [I know.  Shocker.]  It also suggests what actions Enbridge can take to reassure Michiganders of their financial capability but concludes that – if not now, then in the future – Enbridge faces a likely inability to secure the needed environmental insurance due to the excessive risks associated with Line 5. 

In 20 short pages, the report clearly expresses the fallacy of Enbridge’s current business model and questions their ability to financially support the full lifetime requirements of their Line 5 pipeline, including removal after decommissioning.

So let’s begin. My goal is to highlight portions of the report (in italics; bold additions are my highlights) to give a condensed version with added explanation (from my perspective at least) of what it implies specifically for our Line 3 opposition here in Minnesota. [My definition of “condensed” may be debatable. Huge kudos to David Dybdahl for this fine work] 

Hint: For a quicker read, skim the italics, reading the bold portions, and then read my commentary in plain text. This should give you the basics. [Dan says that you can also just read the stuff I wrote and get the gist of it all.] Update: Scott Russell covers this concern in regard to Enbridge’s proposed Line 3 project in this Healing Minnesota Stories blog.

Section I Executive Summary

To avoid unfunded response costs and property and personal injury damages arising from a rupture of Enbridge Line 5 at the Straits of Mackinac (Straits), the State of Michigan, the Michigan Department of Attorney General, the Michigan Department of Environment, Great Lakes, and Energy and the Michigan Department of Natural Resources (the State) has commissioned this risk financing analysis to evaluate the ability of Enbridge companies to pay for the costs and damages that a rupture of Line 5 may cause.

This report presents an analysis of the current and future ability of various Enbridge companies to pay up to $1.878 billion in U.S. dollars for costs and damages arising from the potential release of petroleum products from the 66-year-old, Enbridge owned and operated, dual pipelines running under the Straits of Mackinac (Line 5).

In 1953 the State of Michigan granted an easement to a U.S. subsidiary company of Enbridge, Inc. to build and operate two pipelines under the Straits of Mackinac. Enbridge, Inc. is a Canadian company with global operations. Enbridge, Inc. is not a party to the Easement, only the company that was granted the Easement (Grantee) and its successors are obligated by its terms.

This is the same as in Minnesota.  Enbridge, Inc. seems to be the lead for this project but Enbridge Energy, Limited Partnership is the entity that applied to the Minnesota Public Utilities Commission for a Certificate of Need. So Minnesota faces this same risk Michigan would face from Enbridge, Inc. using a subsidiary for the application of Line 3. UPDATE: After a review with PUC and their Orders for the Compliance Filing, Certificate of Need, and Route Permit Orders, there ARE provisions made for Enbridge, Inc. to be a signatory for Line 3 liabilities (though I’m not sure of the exact mechanisms for making this work…). However, I also learned this from a fellow activist:

  • Enbridge’s primary means of funding spill cleanup costs is by passing on the costs of cleanups to its customers, which it is allowed to do under federal tariff law. For example, it appears that little to no amount of the costs of cleaning up the Line 6b Kalamazoo spill came out of Enbridge’s bottom line. About $500 million was recovered through insurance, and most if not all of the rest of the spill cleanup costs were included as operating costs and reimbursed through its customers’ tariff payments.  In a way, Enbridge’s insurance isn’t meant to protect Enbridge’s wealth, but rather to limit the impact of a spill on the tariff rates charged to Enbridge’s customers.  Federal tariff law determines the fee that Enbridge may charge for its services, and this fee is set at its costs of operation plus a guaranteed profit (~10%).  Enbridge’s reports to the Federal Energy Regulatory Commission  (FERC) make clear that it included the costs of the Line 6b spill under the “Casualty and Loss” category of its operating expenses over the course of a number of years following the spill.  Enbridge’s customers (the western Canadian oil industry and US oil industry that imports crude oil on the Mainline System) then pass the costs of transporting oil on the Mainline System to their customers – meaning consumers. 
  • This does not mean there is no risk that a spill might not be cleaned up, because as the oil industry weakens it is possible that it will seek to avoid paying for major spill cleanup costs.  Also, regardless of its ability to pass on oil spill cleanup costs, Enbridge Inc. should be held liable for any harm caused by its subsidiaries.
  • The cost of mitigating abandoned pipelines is an entirely separate matter, and no state or federal law requires that Enbridge set aside funds to pay for abandonment costs.  Since most of Enbridge’s pipelines could be kept in operation until near their end-of-life, it is possible that Enbridge could under existing law avoid liability for most if not all abandonment costs. 
  • The goal of Enbridge’s shareholders will be to strip Enbridge of its assets for their benefit before these assets can be dedicated to remediation of abandoned facilities. 

So basically what this says is, insurance is only to protect Enbridge assets and to give some relief to consumers who truly are left paying the bills for cleanup, regardless. But the insurance stuff is interesting, nonetheless. [For geeks like me anyway.]

The 1953 Easement does not have a provision for using the assets of the Signatories, which is essentially self-insurance, to backup the indemnity requirements. To the contrary, the 1953 Easement makes specific reference to requiring the Grantee and its successors to maintain comprehensive general liability insurance, bonds or surety on the dual pipelines. In 1953 none of these specified financial instruments would have contained pollution exclusions. The effects of pollution exclusions are accounted for in our recommended insurance requirements.

The report include excellent insurance recommendations that Minnesota should consider for our approval for Line 3. We’ll get to the specifics on that later.

Upon analysis of the financial resources of Enbridge, Inc. in August of 2019, we find that Enbridge, Inc. currently has the capability to fund $1.878 billion for the potential damages caused by a petroleum product release from Line 5. However, we do not recommend the acceptance of Enbridge, Inc. assets as evidence of Financial Assurance unless Enbridge Inc. becomes a signatory to The Agreements with the State.

And here’s why…

Due to the corporate structure of Enbridge, Inc., only the assets of the Signatories are obligated by The Agreements. We have reached this conclusion based on the sworn November 9th, 2018 testimony of Mr. Chris Johnston. That testimony was provided in an evidentiary hearing for the Minnesota Public Utilities Commission (PUC). The PUC hearing pertained to the siting of a new Enbridge Line 3 which is not related to Line 5.

However, important insights into the corporate structure of Enbridge that is directly related to Line 5 can be gleaned from this testimony. Mr. Johnston is the Chief Financial Officer of Enbridge Energy Partners, L.P. Enbridge Energy Partners L.P. is the largest U. S. based operation of Enbridge, Inc. and is an actual Signatory to the Agreements. Enbridge Energy Partners L.P. is also the successor company to the Enbridge company that was granted the Easement in 1953. As the CFO of the U.S. operations of Enbridge, Inc. and the lead Signatory to the Agreements, Mr. Johnston is a credible expert on the company structure of Enbridge, Inc. and its U.S. operations.

In the Minnesota PUC hearing, Mr. Johnston testified that Enbridge, Inc. is not contractually obligated to stand behind the indemnity agreements of a subsidiary.

The Signatories and the flow of revenues and liability within the Enbridge corporate structure is detailed in the schematic in Appendix A. What this schematic shows is that while revenues flow up to the parent company of a subsidiary, liabilities stay at the subsidiary level. This is the typical corporate structure of a parent company with operating subsidiaries and is reflective of Enbridge, Inc. and its subsidiaries.

What all this is saying is that, since the agreement with the state of Michigan is with U.S. subsidiaries of Enbridge, Inc. (not Enbridge, Inc. itself), the only thing that would force Enbridge, Inc. to support any failure of Line 5 in Michigan would be the good will of the executives at Enbridge, Inc. deciding to support the cleanup and repair.  (I believe the 2017 closure of the nursing home in Clearbrook, Enbridge’s Minnesota company town – just before Christmas no less, with absolutely no intervention by Enbridge, Inc. and their tremendous piles of money to save it, shows just how little they might care for the state of Minnesota as a whole.)

Based on the last historical publicly available financial information on the Signatories, which is found in the 2018 September 10-Q of Enbridge Energy Partners L.P., the Signatories did not have $1.878 billion in liquid assets, credit facilities and insurance for the damages arising from a rupture of Line 5.

Which means it is unlikely that Enbridge Energy, Limited Partnership will have the financial capability to cover any damages posed by Line 3 either, as they would require much more to cover liabilities for both pipelines.  And this leaves nothing for concerns on any of the other pipelines currently under Enbridge management throughout the Midwest.

The liquid financial resources of the Signatories based on September of 2018 10-Q information are shown in Appendix C. We used September 2018 for this comparison of assets between the Signatories and Enbridge Inc. because it is no longer possible to evaluate the financial resources of Enbridge Energy Partners L.P. using publicly available information.

Enbridge, Inc. financials – basically IRRELEVANT as Enbridge, Inc. carries no liability to the State of Michigan.
Not the unavailable financials of the Line 3 Applicant. This is why we need insurance and additional guarantees of financial capacity to cover the liabilities of Line 3 in case of a spill.

Enbridge Energy Partners, L.P. no longer produces its own financial statements for public review. As described in the Enbridge, Inc. 2018 10-K, an unnamed wholly owned subsidiary of Enbridge, Inc. purchased all of the stock of Enbridge Energy Partners, L.P. at the end of 2018. At that point in time Enbridge Energy Partners, L.P. became a wholly owned subsidiary of Enbridge, Inc. Because there would be no further public trading in the stock of Enbridge Energy Partners, L.P., the subsidiary no longer produces its own 10-K or 10-Q reports for the U.S. Securities and Exchange Commission.

Since Michigan has no visibility to Enbridge Energy Partners, L.P. (EEPLP) financials, it will have to rely on another means to assure continued financial liability coverage for a spill on Line 5.   Minnesota Pollution Control Agency (MPCA) indicates on its webpage for Line 3 that “Enbridge Energy, Limited Partnership” (EELP) has applied.  Every search for this entity brings me back to EEPLP.  I’ve got a call in to see if these are indeed one in the same but later in this report, it notes that all Signatories are U.S. based subsidiaries and both EELP and EEPLP are listed above.

We noted that in October 2019, the assets of Enbridge, Inc. were used in the Financial Assurance Verification Form supplied to the State as required under the Second and Third Agreements. However, Enbridge, Inc. is not a party to the 1953 Easement or a Signatory to the subsequent Agreements. Based on the testimony of Mr. Johnston, the contribution of funds under an indemnity agreement made with a subsidiary would appear to be to be a purely voluntary endeavor for Enbridge, Inc. And THERE IT IS! It would be VOLUNTARY for Enbridge, Inc. to cover costs of a spill, but not legally required.

We did not evaluate the cost recovery provisions in the environmental laws of the United States in the light of foreign corporation status of Enbridge, Inc. for this report. [This may be a future endeavor but would have likely make this document much longer and exponentially more complex.]

Based on our research for this report, we recommend enhancing the indemnity obligations for the operators of Line 5 at the Straits. To accomplish this goal, in summary we recommend:

1. Obtaining an indemnity obligation from Enbridge, Inc., the Canadian based holding company of the Signatories to the Second and Third Agreements.

2. Being more specific on the source of the information to be provided on the Financial Assurance Verification Form, which was agreed to in the Second and Third Agreements.

3. Requiring more specific types and amounts of liability insurance on the dual pipelines, with the State named as an Additional Insured on those policies. 5

4. Develop a pre-agreed upon process to eliminate the loss exposure arising from Line 5 operation if the available prescribed assets of the Signatories dip below $1.878 billion U. S. dollars at any point in the future.

5. Based on more recent third-party projected cost studies, further evaluate the adequacy of the $1.878 billion minimum level of financial assurance.

What this is proposing is to make Enbridge, Inc. legally liable for a Line 5 spill into the Straits of Mackinac, to assure that proper financial verification can be made of the protections offered by those liable to Michigan, and to assure liability coverage even if their assets lose value in the future. The level of need for cleanup is uncertain as estimates were (on the low end, from Enbridge) $300K to as high as $45B (yes, billion, from a Michigan State University study) – quite a range!  More details to follow but we’re through the Summary!!! 🙂

Section II Our Scope of Work

ARMR.Net has been directed to evaluate if Enbridge entities have the resources to pay up to $1.878 billion for the costs and damages caused by a release of petroleum products from the dual pipelines at the Straits of Mackinac.

To this end this report will:

1. Evaluate the risk bearing capacity and financial resources available to respond to, remediate, and pay compensation for all damages that could result from a worst-case release of petroleum products from Line 5 at the Straits of Mackinac and to satisfy the indemnification obligations under the 1953 Easement and subsequent Agreements.

2. Evaluate the adequacy and reliability of the Financial Assurance Verification Form provided by Enbridge business entities to the State of Michigan in 2019 and, to make recommendations to create a reliable and resilient Financial Assurance Verification Form, including detailed insurance specifications.

3. Provide perspective on the scope, adequacy, and dependability of the indemnity obligations assumed by the Grantee of the 1953 Easement.

4. Provide perspective on the projected ability of Enbridge business entities to satisfy the indemnity agreement to the State of Michigan over the next 7 to 10 years.

Basically, this will be a review of all the numbers.  The work will show that Michigan currently lacks an agreement that will financially support a spill and the report will explain exactly how this can be remedied.  I love item 3, which will question whether the original agreement was sufficient to cover a loss.  But my favorite is item 4, where the report shines the light on Enbridge’s business untenable model.

Section III Findings

Our findings are:

1. Estimates on the potential costs arising from a release of petroleum products from Line 5 at the Straits range from an Enbridge supplied estimate of $300 million, to a $1.878 billion estimate from the Independent Risk Analysis for the Straits Pipeline analysis, to a $45 billion estimate from a Michigan State University study on the projected costs.

Our report does not analyze the accuracy or reliability of the various potential cost estimates of a petroleum product release from Line 5. However, the range of possible damage costs arising from a release of petroleum products from Line 5 strikes us as extremely broad, and $1.878 billion is on the low end of the possible range. The higher range cost studies appear to have been prepared after the $1.878 billion financial assurance threshold amount was agreed to in the Second Agreement. In light of the wide range of possible damage costs in the various studies, we question the reliability of the $1.878 billion risk funding target used for this study. But we offer no opinion on the $1.878 billion being the right amount.

2. If Line 5 ruptured today, Enbridge, Inc. has the financial capacity to voluntarily pay up to $1.878 billion to fund an environmental clean-up and to compensate victims. However, based on the historical financial records, the U.S. based Signatories would not have enough resources to fund a loss event of this magnitude; without a voluntary financial bailout from the Canadian parent company.

3. With 275 operating subsidiaries listed in the Enbridge, Inc.’s 2018 10-K report, the Enbridge corporate structure enables the Canadian holding company Enbridge, Inc. to avoid liability for the U.S. based subsidiary’s liabilities. The original Grantee of the 1953 Easement was required to indemnify the State. All of the Signatories to the 1953 Easement and the First, Second and Third Agreements are U.S. companies. The State of Michigan is not contractually indemnified by the Canadian company Enbridge, Inc.

In the absence of a contractual indemnity from Enbridge, Inc. only the assets of the obligated parties (The Signatories) should be used for the completion of the Financial Assurance Verification Form.

The financial resources of the U.S. based Signatories are impossible to verify using publicly available information because after 2018 these companies no longer file 10-K or 10-Q financial statements. The Signatory companies are 100% controlled subsidiaries of Enbridge, Inc. today. Therefore, receiving an indemnity obligation from Enbridge, Inc. is essential to facilitate objective verification of the $1.878 billion of financial resources based on publicly available financial reports.

4. The Financial Assurance parameters agreed to in the Second and Third Agreements lack the specificity to be accurate, reliable and easily verifiable by a third party. Therefore, we recommend modifications to the metrics used in the 2018 Financial Assurance Verification Form as shown in Appendix C.

5. The Enbridge business model is facing new challenges that could affect the ability of the firm overtime to pay for clean-up costs and other damages caused by a release of petroleum products from Line 5 at the Straits.

Even among its peers in the oil and gas business, Enbridge, Inc. and its Subsidiaries face unique risks and challenges in their business model which have the potential to adversely impact the risk bearing ability of the firm over time.

These risks and challenges include:

To earn its profits, Enbridge transports crude oil that is primarily extracted from tar sands in northern Alberta. Crude oil extracted from tar sands (bitumen) has a unique set of environmental issues not associated with other sources of crude oil. The extracted synthetic crude oil is transported through thousands of miles of high-pressure pipelines, some of those lines, like Line 5, are at the end of their useful life cycle and need to be decommissioned or removed and replaced. Although Line 5 does not transport tar sands derived crude oil, the overall business of Enbridge, Inc. is heavily weighted to transporting tar sands derived products. The general financial well-being of Enbridge, Inc. and therefore its ability to pay for the costs and damages caused by petroleum releases through self-insurance is heavily dependent on the market viability of tar sands oil.

• To reach consumer markets, the Enbridge lines run across land in the United States that is subject to American Indian treaty rights. Resistance to the use of tar sands oil by nongovernment organizations including Native Americans, is making maintaining and replacing old lines or creating new routes for existing lines across lands subject to treaty rights increasingly difficult for the company.

• The U.S. demand for tar sands derived crude oil is expected to decrease over time. Most of the historical sales of tar sands derived oil has been to consumers in the United States. However, new forms of extracting oil, including fracking, has created an excess supply of crude oil and natural gas in the United States. Tar sands derived oil competes in a global market for crude oil. Many producers of crude oil have lower production costs, have lower transportation costs to bring crude oil to the market of end users and have a smaller total carbon footprint per barrel than tar sands derived oil.

• With the U.S. market saturated with local supply, the Enbridge, Inc. 2018 10-K references future plans to supply crude oil to India and China. These countries are a long distance from the tar sands of Alberta. The distance to these consumer markets add transportation costs and carbon footprint loading to tar sands derived crude oil that the competitors of Enbridge entities do not have.

These risks and challenges entwined within the Enbridge business model cannot be eliminated through good management of its core business. We expect that over time these operational challenges in the Enbridge business model will have an even greater impact on the financial results of Enbridge entities in a carbon constrained world, which in our opinion is likely. Although Enbridge, Inc. could self-insure a $1.878 billion petroleum product clean-up in the Straits this year that does not mean the company will be able to do so in the foreseeable future. Therefore, it will be necessary for the State of Michigan to monitor the financial condition of the relevant Enbridge business entities annually over the operational life of Line 5 through the Straits.

What all this says is that, while the costs of a spill are not clear, the ability of Enbridge, Inc. to cover these costs, now and over time, is questionable.  In light of the fact that only the subsidiaries are currently legally liable, and their financials are no longer publicly available, revision of the financial reporting must be aligned to capture the proper data. This can be enhanced with insurance underwriting which will be discussed in more detail below.

But the most relevant portion of this to Stopping Line 3 in Minnesota is bullet 5 which questions the viability of Enbridge’s business model in light of our changing socio-economic and environmental situation here on planet Earth. 

1) Enbridge’s overwhelming reliance on Tar Sands shipments will hinder its financial well-being.  This is due to multiple factors including: a) science dictates that Tar Sands must remain in the ground to assure future human habitation on planet Earth, b) the cost structure for this dirtiest of crudes makes it less attractive as oil prices drop, c) the social uprising against fossil fuels in general and Tar Sands in particular are pushing the end for extraction, especially in Alberta’s Tar Sands region. It should be noted that Line 5 is not restricted from carrying synthetics derived from Tar Sands, which carry their own inherent dangers and are allowed to transport on the line.

2)  Enbridge’s current pipelines cross Treaty Territories in the U.S. bringing resistance and opposition from NGOs and Tribes as a) environmental dangers increase (The Line 5 lawsuit by the Bad River Band of Lake Superior Chippewa is a very example and a good read with lots of photos and explanation of the environmental risks of pipelines at river crossings), b) easements expire (Bad River Bad also is a reference for this as their easement expired in 2013, a fact that Enbridge has continued to ignore…), and c) Tribes invoke their sovereignty (Winona LaDuke speaks to a recent White Earth’s cease and desist to Enbridge regarding Line 3 work). 

3) U.S. demand is decreasing while global demand still rises.  However, the insanity of trying to compete against crude with Tar Sands crude is not cost-justified or carbon-justified.  And the prospect of moving oil from Alberta, Canada east to China/India through the U.S. Midwest is just plain nonsensical when the trip to the west is so much shorter.

“No amount of compensation is worth risking Wenji-Bimaadiziyaang – an Ojibwe word that literally means ‘From where we get life.’ It’s time to end the imminent threat the company is presenting to our people, our rivers, and Gichi-Gami [Lake Superior]”, Chairman Mike Wiggins said. Bad River turned down a $24 million offer from Enbridge in October. It appears that if a tribe takes money, (ie: says yes in consultation), Enbridge will bestow gifts. If “consultation” means “no”, Enbridge will sue the tribe. That seems fair, right? At some point No should actually mean No. Consultation is not the same as consent, and the human rights standard internationally is “free, prior and informed consent”. Simply stated, No means No, if you are a woman, or if you are a First Nation. Consent is the standard of this millennium.

Powerful statement regarding the value of money versus the value of water and the importance of consent.

Section IV Background Information on Enbridge Operations and The Obligations To The State of Michigan

Enbridge, Inc. is one of the largest firms in Canada. It has a complex corporate structure listing 275 operating subsidiaries in its 2018 10-K report to the U.S. Securities and Exchange Commission.

Enbridge, Inc. is a profitable company, earning approximately $2.475 billion U.S. in profits and generating $7.877 billion U.S. in cash in 2018. We will be using Canadian dollars to U.S. dollars at a conversion rate of .75 for simplicity in this report.

The core business of Enbridge is highly dependent on the market demand for tar sands derived oil. We did note in conducting the research for this report that the future business forecasts for Enbridge tend to focus on the future supply of tar sands derived oil with little or no mention of the future demand for this source of fossil fuel. If demand for tar sands derived oil decreases over time, the ability of Enbridge to self-insure for damages resulting from a rupture of Line 5 would also decrease, potentially relatively rapidly.

The History Of The Indemnity Obligation In The 1953 Easement and, The First Agreement, Second Agreement and Third Agreement (You can read this section in the report in full but much of it is non-related to Line 3 in Minnesota. I’ve retained the portions that felt most applicable or relevant.)

On April 23, 1953 the State of Michigan and Lakehead Pipeline Company, Inc. (Lakehead) a subsidiary of Enbridge, Inc. in Canada entered into an Easement that allowed Lakehead to construct, lay and maintain pipelines over, through, under and upon certain lake bottom lands for the purpose of transporting petroleum and other products.

Per the 1953 Easement, in paragraph J., Lakehead agrees to indemnify and hold harmless the State of Michigan “from all damage or losses caused to property (including property belonging to or held in trust by the State of Michigan), or persons due to or arising out of the operations or actions of Lakehead, its employees, servants and agents”.

Within Paragraph J. of the 1953 Easement, Lakehead agrees to the following relative items for this report:

1. Maintaining a comprehensive bodily injury and property liability policy, bond or surety in the amount of at $1,000,000, and

2. A surety bond in the sum of $100,000 that is in force for the life of the agreement.

Both of these items must be in place for as long as Lakehead and its successor companies operate the pipelines and until the abandonment of the Dual Pipes installed across the Straits is completed.

There have been multiple name changes, consolidations and mergers in the Enbridge business operations over the years. Appendix A provides a Corporate Organizational Chart showing current and historical Signatories to the Easement and subsequent Agreements. The schematic also shows how profits and liabilities flow through the Enbridge organizational structure. Typical of corporate structures involving a parent company and subsidiaries, profits flow upstream to the parent company and liabilities stay planted at the subsidiary level.

The Second Agreement included a provision addressing Paragraph J. … To address the indemnity requirements in the 1953 Easement the Enbridge Signatories agreed to provide assurances that it had and would maintain $1.878 billion of liquid financial assets to pay for an oil spill from Line 5.

It should be noted that under the 1953 Easement there is no mention of using company self-insurance, in lieu of liability insurance, a bond or surety to back up the indemnity obligations in the lease. The $1.878 billion U.S. dollar threshold amount was the estimated quantifiable damages from a most likely worst-case scenario found by the Independent Risk Analysis for the Straits Pipelines. Enbridge agreed to provide evidence of the minimum of $1.878 billion in liquid assets to the State on a Financial Assurance Verification Form. See Section VI of this report for a discussion on this form.

In the first Financial Assurance Verification Form supplied by Enbridge representatives, the assets of Enbridge, Inc. were used to show that the Signatories to the Agreement had liquid assets to meet the $1.878 billion threshold amount of financial resources as set forth in the Second Agreement. As previously noted, Enbridge, Inc. is not obligated by contract to the State of Michigan to contribute any money to an oil spill in the Straits of Mackinac.

The history of Line 5 in Michigan should be a warning to Minnesota.  The bottom line is that U.S. Subsidiaries of Enbridge, Inc. are largely responsible for the liabilities of the pipelines in the state while all the profits go to the parent company, Enbridge, Inc., which remains legally free-and-clear based on the agreements with the state.  Minnesota would do well to consider some of the recommendations in the remainder of this report, should Line 3 continue to proceed toward approval.  The recommendations from Michigan should be considered as a part of the approval process for Line 3, not an afterthought to be dealt with once construction has started.

Section V Recommendations

1. The State of Michigan needs to obtain an indemnity agreement from Enbridge, Inc. in Canada to pay for all costs and damages associated with a potential rupture of Line 5. It is not insignificant that Enbridge, Inc. is a foreign corporation based in Canada. Money held in Canada may not be as accessible as assets held by a company in the U.S. would be. We have not investigated or evaluated the complications that Enbridge, Inc. being a foreign corporation may create in an indemnity agreement with the State of Michigan.

2. The Financial Assurances Verification Form with our recommended metrics should be evaluated by the State at least annually, and should the Signatories fail to provide the required amount of Financial Assurances at any point in time, a clear path to the elimination of the hazard associated with operating Line 5 should be predetermined and agreed upon. A recommended revised Financial Assurance Verification Form is discussed in Section VI in this report and the evaluation metrics for completing the Form are provided in Appendix C.

3. The recommended amounts and types of Liability Insurance including modern and verifiable insurance requirements are Shown in Section VII.

4. In light of the more recent studies on the projected damages costs resulting from a rupture of Line 5 at the Straits, the $1.878 billion financial assurance threshold requirement should be reevaluated.

In our opinion, $1.878 billion as the threshold amount for financial assurance appears based on the available studies to be on the low end of the range of potential damage costs resulting from a rupture of Line 5 under the Straits. There are economic impact studies from 2018 concluding that the damages incurred from a rupture of Line 5 at the Straits could cost $45 billion including cleanup costs, natural resources damages and economic damages. In sharp contrast, Enbridge representatives estimated the clean-up cost of a Line 5 rupture at only $300 million, which represents a deviation in projected costs of over 1300-fold at the $45 billion cost projection. We have not been tasked with evaluating the reasonableness of the potential damage cost estimates for a breach of Line 5 at the Straits of Mackinac, nor are we qualified to do so. However, a 1300-fold differential between the high and low cost estimates is too much of a range for a reliable risk financing planning report. We have assumed $1.878 billion was the right number for our report but have little confidence that is the right projected cost number given the wide range of projected costs and where $1.878 billion falls within the range.

Again, all of these recommendations should be considered in Minnesota as part of the Line 3 approval process.  If necessary, Minnesota Attorney General Keith Ellison can press for this same financial analysis and insurance review prior to Line 3 approval.

Section VI Financial Assurance Verification Form

Paragraph J. in the 1953 Easement requires that the Enbridge Signatories indemnify the State of Michigan and that the Signatories maintain comprehensive general liability insurance, a bond or surety to back that obligation.

The 1953 Easement does not mention the use of self-insurance to back up the indemnity obligation to the State. The use of self-insurance was agreed upon by the parties to the Second Agreement. In that Agreement, the Signatories agreed to file with the State the Financial Assurance Verification Form on an annual basis.

There is detail to the Enbridge financials provided – and to be provided moving forward – in the appendices and detailed verbiage of the report. What is to be kept in mind for Line 3 is a) what level of insurance Minnesota will need (which should become more clear once the Supplemental Environmental Impact Statement is released December 9, 2019 noting the impacts to the Lake Superior watershed) and b) what legal indemnification Minnesota can secure from Enbridge, Inc. for a potential spill.

Evaluating the Financial Assurance Verification Form Each Year

The financial assurances of the Signatories should be verified annually from the information contained in audited financial statements. If Enbridge, Inc. was a Signatory, the company’s 10-K report should be used to evaluate compliance with the financial assurance requirements.

The evaluated criteria in the Financial Assurance Verification Form are found in these areas of the Enbridge, Inc. 10-K today:

1. Cash or equivalent – Part 1, Section 1, Financial Statements: Consolidated Statement of Financial Positions

2. Credit Facilities (Available credit for the next 12 months) – Part 1, Section 1, Financial Statements: Debt, Credit Facility

3. Accounts receivable and other – Part 1, Section 1, Financial Statements: Consolidated Statement of Financial Positions (accounts receivable and other)

4. Specified Insurance – Specified insurance will be verified by referencing the Certificate of Insurance that must be provided as shown in the recommended insurance requirements in Appendix E.

If the Signatories are not publicly traded in the U.S., an audited Statement of Financial Position for the Signatory Enbridge company or companies could be used to prepare the Financial Assurance Verification form.

The Property Plant and Equipment Assets Are Not Useful Measures for Financial Assurance

Enbridge, Inc. does have assets owned by subsidiary companies in the U.S. in the form of property, plant and equipment. These assets could potentially be attached to satisfy a judgement against the firm. However, for the reasons stated below, we have made no accounting of these fixed assets in our evaluation of the ability of the Signatories to fund $1.878 billion in losses as a result of a rupture of Line 5.

In our evaluation of the financial resources available to the Enbridge Signatories to pay for oil spills, we noted that generally accepted accounting principles tend to overvalue pipeline assets and to undervalue the environmental legacy liabilities of firms in the oil pipeline business. This is especially true when a pipeline is not transporting oil to produce profits.

Pipeline assets like other forms of fixed assets have a book value based on what was paid for the pipeline, minus depreciation. In contrast to most types of fixed assets, a pipeline permanently not pumping oil has no value to anyone. In fact, the cash value of an idle pipeline can be less than zero, if the costs to decommission or remove the idle pipes are taken into account. Those kinds environmental  legacy costs for its U.S. subsidiaries are not being accounted for in the Enbridge financial statements. This creates a situation where the book value of a pipeline company’s assets is not reflective of their actual cash market value. Cash and insurance proceeds are what is needed to pay for an oil spill cleanup and other damages.

The future costs of removing idle pipelines from the ground are not immaterial and may be unavoidable new costs in the Enbridge business model in the near future. For example, in the negotiations over the replacement of Line 3 in Minnesota, the Public Utility Commission made the removal of the old Line 3 at the discretion of the landowners, a condition of the permit for the new Line 3. This is thanks, in part, to all us Water Protectors!!!

In another example of pipeline removal costs, in a lawsuit filed by the Bad River Band of Chippewa in Wisconsin, which is discussed further in Appendix J, the Band seeks the complete removal of the existing Line 5 on their reservation.

The removal of pipes from the ground is expensive. Enbridge testimony in Minnesota on the replacement of Enbridge Line 3 was that it costs on average $855 per foot to remove pipelines from the ground14. At $855 per foot it would cost approximately $23 billion to remove all the Enbridge companies buried pipes in the U.S. alone. The $23 billion in potential environmental legacy costs is not shown as a liability in the firm’s books, nor is the firm required to do so by generally accepted accounting rules, or by the U.S. regulations in effect on pipelines.

For these reasons, the value of property, plant and equipment, as shown in the Consolidated Statements of Financial Position, 15 is not an accurate picture in time of the firm’s ability to pay for environmental damages that it may cause as a result of a rupture in Line 5. Therefore, we have left the fixed assets of Enbridge businesses out of the Financial Assurance Verification form.

Basically, your pipeline assets can’t be used to pay for a pipeline spill.  Additionally, they are more of a liability than an asset as we move to a future that doesn’t include fossil fuels.

Section VII Recommended Insurance

Insurance is an efficient financial mechanism to pay for otherwise unaffordable loss events. One of the benefits of insurance from the State’s perspective is liability insurance coverage survives the bankruptcy of the named insured. In addition, the insurance underwriting process itself produces a benefit for all the stakeholder’s in Line 5 by engaging global knowledge sharing on the risks of pipelines through the international reinsurance marketplace.

Pretty much speaks for itself.  There is further clarification later on the importance of the insurance underwriting process as a way to estimate risk.

Reconciling The Insurance Required In The 1953 Easement to Modern Insurance Coverage

Comprehensive general liability insurance is a key component in the Financial Assurance Verification Form. Ideally, 100% of the worst-case loss exposure of Line 5 could be insured. However, there is likely not enough liability insurance in the world to fund a $1.878 billion pollution loss resulting from a rupture of Line 5.

Previous sworn testimony provided by Enbridge in Wisconsin and Minnesota is that the firm purchases as much comprehensive general liability insurance as it can in the world insurance marketplace. In the 2018 10-K report, that was $940,000,000 in general liability insurance. We find this Enbridge testimony credible. Therefore, liability insurance with coverage for pollution releases from Line 5 can only supplement the other sources of funds available to Enbridge entities to meet the agreed upon $1.878 billion financial assurance amount.

The scope of the recommended liability insurances and the annual verification process of that insurance by the State during the operation of Line 5 is addressed within the insurance recommendations in Appendix E. The recommended insurance requirements in Appendix E take into account the 1953 Easement language requiring comprehensive general liability insurance, and the general liability insurance that Enbridge has testified in recent court proceedings that it carries today.

The recommended insurance requirements also encompass modern methods to verify the types and amounts of liability insurance that Enbridge carries.

Enbridge has provided testimony in Wisconsin and Minnesota that the information contained within the company’s insurance policies is a trade secret. We respect that Enbridge would want to keep its trade secrets out of the public eye and have accommodated Enbridge on this point in the insurance recommendations. In place of an annual review of its actual insurance policies, we recommend that the prescribed Certificate of Insurance as shown in Appendix E be used to evidence the liability insurance carried by Enbridge, Inc. Providing a Certificate of Insurance to interested parties is the customary way that evidence of insurance is provided by businesses. The prescribed Certificate of Insurance is designed to make the compliance with the insurance requirements easy for the State to verify.

The Requirement for Comprehensive General Liability Insurance In The 1953 Easement

The 1953 Easement makes a specific (reference) to comprehensive general liability insurance. In 1953 “comprehensive” general liability insurance in the U. S. and Canada was not referring to a specific insurance industry standard policy form. Also in 1953 there was no reference to coverage for pollution as a cause of loss in the common general liability insurance policies sold to businesses in that time frame. Pollution exclusions and exceptions to pollution exclusions in general liability insurance policies developed decades later in the insurance business.

The title of “comprehensive” general liability insurance and having coverage for pollution liability took on a specific meaning in 1973. In that year the Insurance Services Offices (ISO), the largest standard policy form setting organization in the U.S., created the ISO Comprehensive General Liability insurance policy form as the new industry standard general liability insurance policy.

In addition to a new official name for the policy, there were a number of changes in coverage that were incorporated into Comprehensive General Liability policy form. One the most significant changes to the industry standard Comprehensive General Liability policy was a new exclusion for losses arising from the release or escape of pollutants was added to the policy. The pollution exclusion in the policy had an exception built into it, the exclusion would not apply if the release or escape of pollutants was sudden and accidental.

In 1973 for the first time in history, Comprehensive General Liability insurance with coverage for sudden and accidental pollution liability took on specific meaning in the insurance business.

The scope of Enbridge, Inc.’s general liability insurance coverage for sudden and accidental pollution liability was the subject of legal proceedings in multiple Wisconsin courts for over three years. A core issue in these legal proceedings was does Enbridge carry general liability insurance that meets Wisconsin Statute 59.70 (25). This statute prohibits a county in Wisconsin from requiring additional insurance on an interstate pipeline if the pipeline company carries the requisite insurance as specified in the statute.

The Wisconsin statute reads:

“INTERSTATE HAZARDOUS LIQUID PIPELINES. A county may not require an operator of an interstate hazardous liquid pipeline to obtain insurance if the pipeline operating company carries comprehensive general liability insurance coverage that includes coverage for sudden and accidental pollution liability.” (emphasis added)

The underlined part of this statute is an exact match to the ISO Comprehensive General Liability insurance policy in both name and scope of coverage for sudden and accidental pollution liability. This is the only industry standard general liability insurance policy that provides an exact match to the Wisconsin statute.

After more than three years in multiple Wisconsin courts, on June 27, 2019, based on the sworn testimony of Enbridge representatives that the company carries liability insurance that meets the requirements of this statute, the Wisconsin Supreme Court ruled that Enbridge carries the insurance specified in Wisconsin Statute 59.70 (25).

To avoid years of potential litigation in Michigan courts over the scope of Enbridge’s trade secret comprehensive general liability insurance coverage, the recommended insurance requirements for Line 5 as shown in Appendix E specifically mirror the scope of insurance coverage required in Wisconsin Statute 59.70 (25).

The remainder of this section gives further insight to Comprehensive General Liability insurance and its coverage.  While I retained the detail in the top portion of this section, you can refer to the report for those additional details.  I felt the reference to “trade secret” insurance, which has been a concern regarding Line 3, was critical.  Though I have not researched the MN requirements, there is likely more to be learned from Wisconsin as we proceed with a review of the Line 3 application.

Planning For Contingencies

It is common practice for large companies like Enbridge to purchase insurance policies that cover all of the company’s operations. This practice introduces the possibility that a loss in Canada for example could exhaust the available insurance coverage for a subsequent loss at Line 5. The recommended insurance requirements anticipate this contingency.

We recommend that Enbridge, Inc. must at all times maintain a minimum of $300,000,000 of recoverable insurance limits including coverage for sudden and accidental pollution releases arising from Line 5 at the Straits. Within that $300,000,000 of liability insurance at least $25,000,000 must be in the form of Environmental Impairment Liability insurance. Enbridge, Inc. may use a combination of ISO Comprehensive General Liability with sudden and accidental pollution liability and Environmental Impairment Liability insurance coverage to meet the insurance requirements set forth in Appendix F. The $300,000,000 of recoverable insurance limits can be specific to Line 5 at the Straights.

Ideally, we would require $1.878 billion in Environmental Impairment Liability insurance to cover a rupture in Line 5 and not be dependent upon a General Liability insurance policy that excludes pollution unless the pollution event is sudden and accidental, or relying on self-insurance in any way to back up an indemnity obligation to the State. However, the global insurance marketplace for genuine environmental insurance does not have $1.878 billion in capacity. Our recent survey of the insurance marketplace for genuine Environmental Impairment Liability insurance showed market capacity was just over $400,000,000 in potential limits of liability. Not all of that environmental liability insurance would be available for purchase on a crude oil pipeline. The recommended insurance requirements reflect the practical constraints in the global insurance business and are designed to be achievable.

So what this says is that there is NO WAY for Enbridge to buy liability insurance for the total cost of a spill that would exceed the $400M limit of available liability insurance worldwide.  Thus, the recommendations request a level of insurance that is achievable, not what is truly needed. 😦

Why Environmental Impairment Liability Insurance Is Required in Addition to Comprehensive General Liability Insurance

Environmental Impairment Liability insurance fills the coverage gaps created by pollution exclusions in general liability insurance policies.

[Again, this verbiage is a bit of extra but it is highly informative of the history of this kind of insurance.  And, it is key to understanding how Minnesota will need to work to protect itself from being left holding the bag for an Enbridge spill.]

The general liability insurance policies sold in 1953 did not contain pollution exclusions. Therefore, any general liability insurance policy that has a pollution exclusion of any type would not fulfill the minimum insurance requirements in the 1953 Easement calling for “comprehensive general liability”.

Since the early 1970’s, virtually all general liability insurance policies in North America, including Canada, have contained pollution exclusions. Therefore, to meet an insurance specification written in 1953 for general liability insurance on a pipeline which would have been silent on pollution as a cause of loss, it is necessary to purchase Environmental Impairment Liability (EIL) insurance to fill the coverage gap created by the pollution exclusion in all general liability insurance policies sold today. Even the ISO Comprehensive General Liability insurance policy has a pollution exclusion as previously discussed.

The recommended insurance requirements shown in Appendix E. include a specification for $25,000,000 of Environmental Impairment Liability (EIL) insurance on Line 5. According to the Consumer Price Index, the present value of $1,000,000 in 1953 is $23,000,000 today. We recommended $25,000,000 Environmental Impairment Liability to match the insurance industry custom of increasing insurance limits in $5,000,000 increments.

Since the Comprehensive General Liability insurance that Enbridge carries today has a pollution exclusion, technically the EIL coverage limits should match the general liability policy limits if the exact terms of the 1953 Easement were followed. We have not recommended this approach in the insurance requirements because such a requirement would be impossible to comply with.

It should be noted that the $1,000,000 limit of liability in the 1953 Easement insurance requirement was intended to set the minimum amount of required insurance. The idea behind requiring Comprehensive General Liability insurance in the Easement was to back the indemnity obligations of the Signatories. The stakeholders in the Second Agreement have acknowledged that the loss exposure from Line 5 is much greater than $25,000,000.

Again, this seems highly concerning to me that Enbridge will be unable to secure enough insurance to guarantee that Minnesota taxpayers will not be left with a bill for cleanup should a spill arise on Line 3. 

The Advantages Of Purchased Insurance

The requirement for actual insurance which is not self-insurance in the 1953 Easement should not be overlooked. A requirement for some amount of purchased insurance versus self-insurance insurance, which is allowed for in the Second Agreement, will enable the State to receive real time feed-back on if the global insurance market thinks Line 5 is insurable or not. The insurability of the line will serve as “the canary in the coal mine” risk indicator for the State. [THIS IS CRITICAL.]

The Environmental Impairment Liability insurance requirement acts as a form of expert independent third party risk evaluation. If Line 5 is low risk, Enbridge should have ready access to environmental insurance that is relatively low cost from a insurance market place with over $400 million in limits of liability capacity. If Enbridge is unable to purchase this relatively low amounts of Environmental Impairment Liability insurance, that situation would provide an early warning sign to the State of Michigan that professional risk evaluators (insurance underwriters) feel that Line 5 at the Straits is too risky to insure.

Another early warning is provided by requiring the State to receive 60 days’ Notice of Cancellation or Non-Renewal on the Comprehensive General Liability and Environmental Impairment Liability policies. If an insurance policy is cancelled or nonrenewed in the future, the State will get an early warning that the underwriters have changed their minds about the insurability of Line 5 at the Straits.

By requiring that the State of Michigan be an Additional Insured under the liability insurances on Line 5, the State of Michigan gains the additional benefit of having direct access to very broad and reliable insurance coverage for pollution damages arising from Line 5.

Minnesota would do well to also incorporate similar requirements for Enbridge regarding Line 3, which will pose significantly higher risks than Line 5 in that it would transport Tar Sands (more corrosive to the pipe as evidenced by failure after failure of newer Tar Sands pipelines in the U.S. with Keystone already failing 4 times in less than a decade) through wetlands (the most dangerous place for a Tar Sands pipeline, especially with regard to cleanup).

Section VIII The Long Term View On The Operation of Line 5

 This could be my favorite part of the report… J  And it pretty much speaks for itself.

This section of the report discusses some of the business challenges that Enbridge business entities will face during the foreseeable future of Line 5 at the Straits. These challenges in what could be a relatively short period of time have the potential to undermine the ability of Enbridge to pay through self-insurance the costs associated with a release of petroleum products from Line 5.

Changes in social norms and a heightened awareness of the human impact on the planet is affecting the Enbridge business model in profound ways that the company has not had to deal with in the past. For example, in two permit applications that would have been routine for Enbridge 10 to 20 years ago; one was a building permit to add a pumping station to an existing pipeline, and one was a permit to replace an existing line; Enbridge had to fight local resistance to the Enbridge development plans all the way to the State Supreme Courts in Wisconsin and Minnesota. When routine business maintenance matters require the State Supreme Court to resolve disputes with neighbors, the writing is on the wall that there are fundamental challenges to the old business model of Enbridge company’s underfoot.

The Coal industry’s experience with challenges to its core business value proposition illustrates what the impact of changing environmental awareness and concerns in the general population can do across an entire segment of the energy economy. Coal as a source of fossil fuel is relatively dirty compared to natural gas. Natural gas is in over supply in the U.S., it costs little to produce, and it is relatively cheap to transport and use. Coal does not compete well against natural gas over pollution concerns, its carbon footprint or on cost. After over a 100 years of robust business, furnishing most of the energy needs in the US, “Approximately 44% of U.S. coal now comes from companies that have declared bankruptcy sometime in the last four years.” All fossil fuel-based companies will be subject to the same economic pressures over time as society moves to reduce the greenhouse footprint of energy sources and gravitate to use relatively clean sources of energy.

In the spectrum of potential crude oil supplies, tar sands derived crude oil displays some common traits with coal. The profits of Enbridge are closely tied to the consumption of tar sands derived crude oil which has unusually high environmental impacts relative to other sources of fossil fuels. Therefore, the robust business results of Enbridge in the past and therefore the firm’s ability to self-insure environmental risks may not endure indefinitely into the future.

The Enbridge Business Model Incorporates Systemic Risks Which Cannot Be Avoided

Some of the challenges to the Enbridge business model are detailed below:

1. The risk of a rupture of Line 5 at the Straits is in an extremely high consequence location for an inland oil pipeline with potential damage costs well in excess of all available funding sources for Enbridge entities.

2. The relatively high carbon loading associated with tar sands derived crude oil and the corresponding work of environmentalists to completely eliminate the use of tar sands derived oil as a fossil fuel source is already having impacts on the operations of Enbridge, Inc. As a source of fossil fuel, tar sands derived oil is relatively inefficient on a total carbon footprint basis. This is because it takes a relatively high amount of fossil fuel derived energy to heat the water, to produce the steam needed, to produce a gallon of tar sands derived crude oil, to put into the pipeline. For this reason, people concerned about the greenhouse effect of carbon dioxide are mobilizing in increasing numbers to completely eliminate tar sands oil consumption.

This is the Gichi-Gami Gathering!! Well Done!

Appendix H illustrates an activist group chartering buses to protest the Enbridge pipeline terminal in Duluth, Minnesota. Michigan is mentioned in the announcement. These activities by forward thinking environmentalist will make it more difficult for Enbridge to earn money trading in and transporting tar sands oil in the future.

3. The relative distance to end users of the petroleum products that Enbridge transports is not competitive on a cost basis to other sources of crude oil closer to the end users. The Enbridge, Inc. 2018 10-K mentions that demand from India and China will lead to future demand for the services of Enbridge. We have no expertise in oil markets, but shipping relatively expensive tar sands derived crude oil on ships to India and China does not make sense to us. Both countries are heavily focused on renewable energy sources, they are both a great distance from northern Alberta, and there are ample supplies of crude oil that cost much less to get out of the ground closer to India and China.

The shortest route to China from Alberta is through British Columbia. However, Enbridge lines do not run west, nor is it likely that Enbridge will ever be able to build a new line to the west of Alberta to ship product for the China market.

The existing Trans Mountain Pipeline which does run west from the tar sands was built in 1953, extending 715 miles from Alberta across the Rocky Mountains to Vancouver, British Columbia. It carries 300,000 barrels per day.

The proposed expansion plan for the existing Trans Mountain Pipeline to ship tar sands derived oil to the west was opposed by 59 Canadian tribes and First Nations, and 22 local governments in British Columbia. The First Nations undertook several lawsuits in opposition to the expansion. At the same time the collapse in global oil prices in 2014 made it unlikely that earlier projections of tar sands oil production would any longer come to fruition. Kinder Morgan, the lead investor, confirmed the project may be “untenable”.  In 2018, in efforts to overcome the financial and legal challenges to the expansion, the Canadian government had to step in to finance the expansion project.

Considering the difficulties encountered in expanding an existing pipeline to carry tar sands oil to the west, it does not appear as if Enbridge could build a new pipeline of its own. Without an Enbridge pipeline to the west, the only way Enbridge will be transporting oil for the China market is through U.S. ports to the South and East. Looking at a globe, moving oil to the south and east of Alberta is not the most direct way to move product to China. Transporting oil thousands of additional miles to reach end users adds hard dollar and potential carbon footprint costs to the tar sands oil that the competitors of Enbridge oil supplies would not have. Therefore, the viability of the business expansion plans to ship tar sands derived oil to China are questionable in our opinion.

India as a consumer of tar sands oil from Alberta also does not make a lot of sense to us. Oil from the middle east requires about half the production cost of tar sands oil, and middle east oil has the potential to be in over supply when the producing countries want it to be. Middle east oil is also much closer to the end users in India than the northern Alberta tar sands.

4. Other sources of crude oil have a lower cost of production. Using steam to extract the oil from sand adds costs to produce a barrel of tar sands derived crude oil. As shown in Appendix I, tar sands oil has a relatively high cost of production when compared to alternative sources of crude oil. If the market price of crude oil dips below $44 a barrel for an extended period of time, the supply of tar sands derived oil would be expected to decrease, adversely affecting Enbridge’s revenues and profits.

5. The extractive process for tar sands oil in Alberta is basically surface mining, which has extreme and long lived local environmental impacts on the land. This is another reason that environmentalists thousands of miles away seek to totally eliminate the use of tar sands derived oil products.

6. Indian Treaty Rights including eviction actions for Line 5 at the Bad River Indian Reservation in Wisconsin, as discussed in Appendix J of this report, illustrates how quickly contemporary treaty rights can alter a business plan for Enbridge.

The major feeder pipelines from Canada cross into the United States into lands that are subject to treaties formed in the 1800’s. These treaties give Native Americans certain rights to the lands. In more contemporary times, various Native American Bands in the United States have perfected those rights in court. As a result of the precedent and evolving case law on Treaty Rights, Enbridge faces legal challenges in the U. S. as the firm attempts to replace pipelines that were installed more than 50 years ago across land that is subject to treaties with Native Americans.

The right of ways and easements used by Enbridge to access U.S. markets and international shipping ports are being challenged by Native Americans in yet untested legal theories regarding treaty rights. Treaty rights established in courts over the past 20 years have the potential to severely restrict the ability of Enbridge to move product and therefore earn revenues in a relatively short period of time.

Of particular importance for this report, if Line 5 is shut down at the Bad River Reservation in Wisconsin as further discussed below, unless and until Enbridge is able to re-route Line 5 around the reservation there will be no throughput of oil in Line 5 in Michigan including at the Straits of Mackinac.

In our opinion, the 10-K financial reports of Enbridge, Inc. tend to downplay the potential effects of Treaty Rights on its business model. For example, Enbridge comments on its replacement for Line 3 on page 73 of the 2018 10-K,

“United States Line 3 Replacement Program

The MNPUC approved the Certificate and Route Permit and denied petitions to reconsider the decisions. All related Certificate conditions have been finalized and are being addressed. In addition, agreement was reached with the Fond du Lac Band of Lake Superior Chippewa granting a new 20 year easement for the entire Mainline including the Line 3 Replacement Project through their Reservation. The remaining permit applications have been submitted to the various federal and state agencies, including the United States Army Corps of Engineers (Army Corps), the Minnesota Department of Natural Resources, the Minnesota Pollution Control Agency and other local government agencies in Minnesota.

We anticipate that the agencies will process all of these applications in the coming months, and with timely approvals continue to expect an in-service date for the project before the end of 2019.

From this project update, which was not untrue when it was written just ten months ago, a reader of the 2018 10-K would conclude the replacement of Line 3 would be coming on-line shortly. [BUT IT IS NOT!!!  We have successfully stopped Enbridge’s New Line 3 from becoming a reality in 2019!!!  Whoo-hoo!!!!]

However, the reality is the permit for the replacement Line 3 was appealed at the Minnesota Supreme Court. There were also two other actions opposing Line 3 filed at the Minnesota court of appeals, one of the appeals had been made by the Minnesota Department of Commerce. The emergence of three appeals after the PUC approval paints a different picture of the Line 3 replacement permitting process than what is expressed in the 10-K from just 10 months ago.

In another example of a disclosed risk in the 2018 10-K that does not fully reflect the developing reality 10 months later, the 2018 10-K discusses a dispute between the Bad River Band of Chippewa.

“On January 4, 2017, the Tribal Council of the Bad River Band of Lake Superior Tribe of Chippewa Indians (the Band) issued a press release indicating that the Band had passed a resolution not to renew its interest in certain Line 5 easements through the Bad River Reservation. Line 5 is included within our mainline system. The Band’s resolution calls for decommissioning and removal of the pipeline from all Bad River tribal lands and watershed and could impact our ability to operate the pipeline on the Reservation. Since the Band passed the resolution, the parties have agreed to ongoing discussions with the objective of understanding and resolving the Band’s concerns on a long-term basis.”

In their lawsuit, The Bad River Indian Band in Wisconsin alleges that Enbridge Line 5 since 2013 has been trespassing on its reservation property. If the lawsuit is successful, not only would Enbridge forgo the revenues derived by shipping petroleum products in Line 5, the cost to remove just 10 miles of existing Line 5 pipe within the reservations could cost $855 per foot or $45,000,000.

The 10-month-old Enbridge, Inc. 10-K report does not reflect the potential removal costs or the gravity of the eviction lawsuit at the Bad River Reservation.

In its report to shareholders Enbridge says it may need to reroute Line 5 around the reservation. It does not mention how difficult that can be. Based on the Enbridge experience in permitting a new Line 3 through Indian treaty rights-controlled territories in Minnesota, getting a replacement route for Line 5 will not be as easy as it was 50 years ago.

In general, in case you’re only reading the non-italicized portions… Enbridge operates under a business model that 1) fails to account for the tremendous costs of spills, 2) dismisses the carbon budget of the planet that will allow continued human habitation and the ensuing societal uprising that speaks to this concern, 3) insanely thinks their almost-all-the-way-around-the-world shipment of oil to India and China is going to be more attractive that more local, less energy intensive, and cheaper fossil fuels available, 4) fails to see the high production costs of their product as a liability, 5) ignores the environmental degradation of the Tar Sands which are quick becoming globally recognized, and 6) fails to address the Treaty Rights of Native Peoples and the potential for these rights to shut down their pipelines. 

Along with over-valuing their assets (which are pretty much worthless for anything other than shipping oil) and their ability to secure insurance for spills (especially as the new Tar Sands pipelines are showing new materials, specifications, and technologies DO NOT eliminate them…), Enbridge is facing a recipe for disaster and possible quick bankruptcy in the right circumstances.  And these circumstances seem to become more real every day. 

Indigenous fights for Treaty Rights are on the rise. Societal uprisings in civil disobedience fighting pipelines and fossil fuels in general are in the news on a daily. As the government and corporations seem unable to heed the warnings of science, we see more and more calls for a rapid redress of the climate catastrophe. All this, along with a movement for a clean, green energy future, spells out that Enbridge is in a dying industry.  It’s just a matter of time… and it’s more imminent each day.

Section IX Qualifications of the Author

This for sure gets left in as I am AMAZED by the work David has done in this report. 🙂

This report has been authored by David J. Dybdahl, CIC, CPCU, ARM, MBA with the help of researchers.

Mr. Dybdahl has extensive experience in environmental risk management and insurance. He holds a bachelor’s and a master’s degree in risk management and insurance from the University of Wisconsin Madison, where he has been a guest lecturer on environmental risk management and insurance topics for over 35 consecutive years.

He has authored the chapters on environment insurance and risk management in over 30 insurance text books including the chapter on Environmental Insurance in the Chartered Property and Casualty Underwriter (CPCU) 4, Commercial Liability, Risk Management and Insurance textbook, and authored and edited the chapters “Environmental Loss Control” in the Associate in Risk Management (ARM) textbook and the chapter on environmental claims in the Associate in Claims textbook. His Curriculum Vitae is attached in Appendix D.

Mr. Dybdahl’s past consulting work includes advising and providing technical information on environmental insurance to the U.S. Department of Defense, the U.S. Environmental Protection Agency, the U.S. Department of Justice and the U.S. Department of Energy. Directly related to this work for The State of Michigan, he was the author of An Insurance and Risk Management Report on the Proposed Enbridge Pumping Station which was prepared for The Dane County Zoning and Land Regulation Committee and submitted for review on April 8, 2015 and he prepared in 2018 the Risk Financing and Insurance report on the replacement of Enbridge Line 3 for the Department of Commerce in the State of Minnesota. Many of the risk and insurance topics associated with Enbridge Line 61 in Dane County and Line 3 in Minnesota parallel the risks and insurance topics associated with Line 5 in Michigan.

Mr. Dybdahl has served as an expert witness in both state and federal courts on over two billion dollars in litigated and arbitrated insurance coverage cases involving mostly environmental damage losses. In his profession as an insurance broker, he has placed thousands of environmental insurance policies into the global insurance marketplace. These environmental insurance policies insured risks ranging from mold in a single-family home, to the clean-up operations of the Chernobyl nuclear disaster in the Ukraine for the World Bank in London. He has worked with environmental insurance products on a day to day basis for over 35 years.

Thank you, David!!!  And your find team of researchers as well. 🙂  You have given me added hope that we will yet DEFEAT LINE 3!!!

Note: Updates 11-13-19 include Line 3 requirements for Enbridge, Inc. in the PUC Orders, why insurance is less about protecting us and more about protecting Enbridge (since they can pass on costs to customers), and clarification about what Line 5 can transport (which includes tar sands derivatives).