Not So Fast: The Case For Delaying Enbridge’s Mainline Open Season

This year is the 70th anniversary of the Enbridge Mainline. Age has not diminished the pipeline’s importance. The system makes up 70 per cent of Western Canada’s oil export capacity. Because it’s a dominant artery, Enbridge’s proposal to drastically change the pipeline’s commercial terms should be concerning to all stakeholders.

Producers that represent half of all Western Canadian production have written letters to the NEB stating their opposition and concerns about the proposed change, including Shell Canada, Suncor, MEG Energy, Canadian Natural Resources, ConocoPhillips and the Explorers and Producers Association of Canada (EPAC). The producers are right to question the deal, because it appears to go against the original spirit of the pipeline — equal access for all shippers.

The first barrel was exported from the Mainline in 1950; the oil was transported from Western Canada to Superior, Wis. To regulate this first interprovincial export pipeline, the Canadian Parliament passed the Pipelines Act in 1949. This legislation had the vision to require pipelines to be open for multiple shippers, large and small, similar to common carrier railways at the time1.

Since then, the Enbridge Mainline’s capacity has been 100 per cent available for uncontracted transportation, often called ‘spot’ capacity that is open to any shipper. However, Enbridge is now proposing a major change to the pipeline’s commercial terms by making the pipeline 90 per cent contracted — like an exclusive club — while leaving only 10 per cent for everyone else (the uncontracted spot shippers).

Enbridge’s open season for the proposed change started on Aug. 2 and is scheduled to close on Oct. 2, 2019. The open season is a process that pipeline companies typically use to determine if they have commercial support for new pipelines and expansions, whereby shippers are asked to sign binding contracts for the proposed firm service offering before the deal is reviewed by the regulator.

However, concerned oil producers from across Western Canada — including Canada’s largest and smallest producers, both integrated and non-integrated — are calling for the NEB to change the process for this special case. They want the NEB to examine if the proposal meets the legislative requirements for a common carrier pipeline before producers are required to enter into binding contracts for up to 20 years in an open season.

They argue that this is a unique situation. First, the proposal is not associated with new capacity. Second, many feel forced into participating in the deal, even though they fundamentally oppose it. If they do not sign on, they could be blocked out of the pipeline all together. Most have expressed concerns that Enbridge is exercising its market power by forcing shippers to agree to contract terms that do not appear to meet the NEB requirements for open access.

Below are some of the issues that should be thoroughly examined before the NEB:

Implications for Western Canadian Oil Price and Market Access. Accounting for 70 per cent of total export capacity, the Enbridge Mainline is large enough to affect western Canadian oil markets. The NEB’s own report from March 2019 titled “Optimizing Oil Pipeline and Rail Capacity out of Western Canada” concluded that the chronic over-nomination of the spot capacity on the Mainline has contributed to lower prices. They also state that some integrated producers and refiners have greater ability to acquire spot pipeline capacity. These conclusions suggest that there is a significant risk in moving to only 10 per cent spot capacity. The change could amplify the known issues, with the potential to weaken Alberta oil price and block some shippers from obtaining uncommitted capacity.

Lack of Optionality. The long-term contracts Enbridge is offering on the Mainline are for the transportation of crude oil from Western Canada to the U.S. Midwest, a region with only a handful of buyers and limited ability to reach downstream markets. In contrast, other western Canadian export pipelines offering firm contracts terminate at liquid trading hubs, such as Cushing in Oklahoma, or Patoka and Wood River in Illinois. These alternative hubs offer access to multiple refining centres, commercial storage facilities, and other egress. The number one rule for optimizing the price of Canada’s resources is to have options. Enbridge’s open season for firm contracting suggests a tightening of optionality.

Current Pipeline Uncertainty. Enbridge’s proposal comes at a time of great uncertainty for western Canadian egress. The future of the Trans Mountain Expansion and Keystone XL is still unknown, and there is uncertainty on the Mainline itself. The State of Michigan wants to shut down Enbridge’s Line 5 and the timing of the Line 3 Replacement is another issue. All this uncertainty creates unknowns and risks for Canadian producers that are being asked to commit to contract terms that extend for as long as two decades.

Limited Debate due to Confidentiality Agreement. The terms of the deal are highly confidential. To see the details, shippers must agree to not share any information outside of their organizations or speak publically without permission from Enbridge. A change of this magnitude warrants a much broader debate. Discussion is even more important considering the possibility of serious consequences (and unintended consequences) and the potential to impact a wide set of stakeholders including the largest and smallest producers, the western provinces and the Canadian government.

Issues with Tolls. There is no public information on the tolls, but producer letters to the NEB indicate that the fee for moving crude oil is above what should be expected and is not transparent. This should concern every stakeholder since higher transportation costs usually translate into lower western Canadian oil prices.

In 1949 the Canadian Parliament had the foresight to recognize the importance of making the Enbridge pipeline open to all shippers. The producers who have spoken up are saying that this proposal does not offer open, equal access for all shippers to Canada’s dominant oil pipeline. Considering all the issues and uncertainty at this time, it’s worth asking why this serious change is being contemplated at all?

[1]  April 18 2019 “A Pipeline Company is Born” from the Pipeline News