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The Minnesota court added that the state regulator that approved the Line 3 project last year acted in a manner that was 'arbitrary, capricious, and unsupported by substantial evidence.'Jim Mone/The Associated Press

A Minnesota court has ruled that an environmental impact statement for Enbridge Inc.’s Line 3 replacement project was inadequate, raising the risk of lengthy delays for a key pipeline to bring more Alberta crude to U.S. refineries.

The impact statement failed to address how a spill from the pipeline would affect Lake Superior and its watershed, the Minnesota Court of Appeals noted in its decision released on Monday.

It added that the state regulator that approved the Line 3 project last year acted in a manner that was “arbitrary, capricious, and unsupported by substantial evidence,” when it accepted an impact statement that did not consider such a potentially significant issue.

After the ruling, Enbridge’s stock price fell nearly 5 per cent, to $47.42 a share, on Monday.

The setback for Enbridge comes as the Calgary-based company faces the threat that one of its pipelines, which runs through Michigan, will be shut down over fear of an oil spill.

Robert Kwan, an analyst with RBC Dominion Securities Inc., said the Minnesota court decision casts uncertainty on the Line 3 timeline. It calls into question whether the upgraded pipeline can be operational by the second half of 2020 as planned. Although Mr. Kwan expects the project will eventually go ahead, he said it’s not clear how long it will take to get an acceptable environmental impact statement.

The $9-billion upgrade to Line 3, which was built in the 1960s, would double its carrying capacity, enabling it to ship 760,000 barrels of Alberta crude east across Minnesota to Wisconsin.

An Enbridge spokesman said the company is “disappointed” by the ruling.

“We are in the process of a detailed analysis of the court’s decision and will consult with the MPUC [Minnesota Public Utilities Commission], and other state agencies about next steps,” Jesse Semko said. He declined to elaborate on what kind of delays the project may face.

The court decision is another strain on investor confidence in Canada’s energy sector, which is in a years-long battle to increase export pipeline capacity. The industry also faces delays in construction to TC Energy’s Keystone XL pipeline, despite the approval of U.S. President Donald Trump. TC Energy Corp., which has sought approval for the line to the Southern United States for more than a decade, is still awaiting green lights at the state level.

Ottawa, meanwhile, is expected to approve the $7.4-billion expansion of the Trans Mountain pipeline to the West Coast from Alberta later this month after the Federal Court of Appeal quashed its initial clearance last year. An approval would almost certainly be challenged in court.

The industry has struggled to deal with insufficient capacity to move production out of the country. Former Alberta premier Rachel Notley instituted curtailments to oil output to help reduce a glut of supply that had crushed prices. United Conservative Party Premier Jason Kenney has maintained that policy, but has pledged to get out of a $3.7-billion contract his predecessor signed for tanker rail cars to move crude.

After the ruling, the S&P/TSX capped energy index fell 1 per cent to its lowest level in five months. Line 3 had initially been expected to start operations in 2019.

“So many of these different pipelines, or egress issues, sit in limbo and this is why Canada has a difficult time attracting capital,” said Michael Tran, managing director, global energy strategy, at RBC Capital Markets. “Investors just have a difficult time handicapping the ability to put money to work in Canada because these are all above-ground issues. This is not an issue having to do with geology or operations with any company.”

For Joe Plumer, general legal counsel for the Red Lake Nation in Minnesota, which was among the Indigenous and environmental groups that appealed the approval, the Line 3 decision is welcome news. The Red Lake band opposes the project, Mr. Plumer said, because of the risk of a spill from it and other pipelines crossing its territory.

“A break in the pipeline would be devastating to the Great Lakes, throughout the whole system,” he said. “We don’t think we should have to take the risk for the oil companies’ profits.”

But Richard Masson, an executive fellow at the University of Calgary School of Public Policy, pointed out the pipeline is more than 50 years old.

“By every measure, [the upgrade] should be better for the environment,” he said. “Yet we can’t get that done.”

He suspects this court decision will put even more pressure on the federal government to get the Trans Mountain expansion approved.

In Michigan, Enbridge also faces the potential shutdown of a pipeline that has operated for more than six decades. The state has said it might decommission Line 5, a major artery that extends through the state to Sarnia, Ont., from Superior, Wisc., due to fear of an oil spill in the Great Lakes. Enbridge has proposed digging a $500-million tunnel under the Straits of Mackinac and building a new line through it to be in service by 2024. Shutting the line would cut off a key supply source for Southern Ontario and Quebec refineries.