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Leaky Laws – The Keystone 1 Leak and Oil Spill Liability in South Dakota

Posted on: April 29th, 2016
by David Ganje

Pipelines, even privately owned, are a publically regulated transportation and operating system. The question is not whether pipelines are “essential to our society.”  Pipelines are already integral to the country. The US had over 1,700,000 miles of oil and gas pipelines in 2014. The fairness of pipeline easements to landowners is a separate matter. I have addressed that in blog articles on my website. When a pipeline leak occurs, it only deflects from the problem at hand to discuss a pipeline’s place in modern society. The media puts its attention on the statements of politicians after a pipeline leak has occurred.  Such media attention does address the question of how to manage the risk.  Operating systems will malfunction. The process for legally authorizing operating systems should not. To paraphrase Norman Vincent Peale, the problem with most publically regulated systems is that they would rather be ruined by praise than saved by criticism.

On April 2nd, 2016 TransCanada announced that its Keystone 1 pipeline was leaking crude oil. Whatever leak detection system was in place on the pipeline failed, as the leak was discovered and reported by a local South Dakota landowner. On April 5th the operator shut down the pipeline. TransCanada initially reported that 187 gallons had been spilled. Days later they reported that over 18,600 gallons of oil had already leaked from the pipeline. This leak is one of the largest in the history of the State. The relevant question should be how regulated pipeline leaks will be cleaned up, and who will pay for them.

Under both Federal and state laws, the party responsible for a leak is the one responsible for cleanup. Usually a company like TransCanada prefers to take care of the cleanup itself. Not only does this help soothe public relations problems resulting from a leak, but it helps the operator control the costs. While South Dakota’s Department of Environmental and Natural Resources is supervising of the cleanup, TransCanada is currently managing the cleanup and hiring the contractors for the job. But a pipeline operator causing a spill may not always be willing or able to clean up a spill. The liable operator could be bankrupt, dissolved, or perhaps not have the money. In these cases, clean up cannot wait for years of court cases or bureaucratic lethargy. The money for a cleanup needs to be there, ready to be used.

The state tells us that ‘them what operates a car must financially assure the public against the risk of its operation.’ Thus, the state has mandatory car insurance.  Alas, no such state mandatory insurance law protects the public against the risk of a pipeline spill. The last time a bill was introduced to create financial assurances like this was 2008 (Senate Bill 138 from the 2008 session). This proposed law was a good start. The bill stated in part:

“…financial assurance, in a reasonable and proper amount for the remediation of potential damage to the environment that could be caused by the activity . . . may include insurance, a surety bond, escrow account, letter of credit, trust, guarantee, or cash deposit.”

Of course, special interest killed this bill.

South Dakota has in place a trust fund, created through taxes, which is available to pay for emergency response to spills, and ideally to cover for situations where the operator does not or cannot pay. According to the state, these would be the funds used for cleanup operations if TransCanada was not paying.

The problem is that this fund is not bottomless. DENR’s FY 2015 budget request reports that the 2013 end-of-year balance on the fund was $2.93 million. When a big spill happens, the fund could be strained. For example, the fund spent $1,750,000 in 2008. DENR estimates that the fund may have to manage as many as 200 to 250 spills every year, because this fund doesn’t just cover oil spills – it also has to cover spills of pesticides, fertilizers, and any other hazardous substances and pollutants. Bills have been introduced to create a special fund to cover just pipeline leaks in the SD legislature in 2009, 2010, and 2011. The proposals were shot down every time. It is only a matter of time before there is a large spill that does not have a company around to pay for the cleanup. And the damages from such a spill could be significant, especially if the leaked substance enters groundwater and spreads. When that happens, the remaining funds in the SDRSR are not going to make a dent. The legislature needs to create a modern statute addressing financial assurances for pipeline leaks.

David Ganje practices law in the area of natural resources, environmental and commercial law in South Dakota and North Dakota. His website is Lexenergy.net