Enbridge Inc. has exposed a conflict between U.S. refiners and Canadian producers with its proposal to convert the 3 million b/d oil Mainline into a contract transporter for only a few after 70 years as a common carrier for all.
Of 15 total conversion supporters, 10 are U.S. refiners or their marketing arms, according to a filing opposing the change by the 170-company Explorers and Producers Association of Canada (EPAC) to the Canada Energy Regulator (CER).
Three of the five Canadian firms that support Enbridge’s application to switch 90% of Mainline capacity to years-long pipeline contracts from monthly shipping orders have corporate affiliations with U.S. refineries.
“If approved, it will reduce market optionality for Canadian producers, transfer pricing power to downstream buyers, depress prices for upstream producers and impair the viability of future investment” in the Western Canada Sedimentary Basin (WCSB), EPAC warned.
“At a time when oil and gas producers in the WCSB are struggling with poor commodity prices that have been made worse by the Covid pandemic, a bleak investment outlook and devastating job losses in which chronic lack of pipeline export capacity has played a major role, Enbridge’s application is ill-timed, opportunistic and self-serving,” wrote EPAC.
While small- to medium-sized firms dominate EPAC, corporate heavyweights also oppose the Mainline conversion. Canadian Natural Resources Ltd., Shell Canada Ltd., MEG Energy Corp. and Total E&P Canada Ltd. formed the Canadian Shippers Group (CSG) to fight the Enbridge plan.
If the conversion were to proceed, “There will be negative impacts on netbacks — that is, producers’ realized price per bbl of oil — that will occur when scarce pipeline capacity is concentrated among a small number of large volume shippers,” wrote the CSG.
“The application is the result of an egregious attempt by Enbridge to exert its market power to its own advantage, which would come to the detriment of Canadian-based producers, aggregators and refiners,” the CSG added.
Among the Enbridge supporters, United Refining Co. (URC) described the proposed Mainline conversion as a plus for its plant, service station chain and wholesale fuel terminals in New York, Ohio and Pennsylvania.
“Subscribing to Mainline contracting would not only provide transportation cost certainty, it would…provide long-term, secure access to Canadian crude oil,” URC wrote. “This in turn would serve to underpin the stability, longevity and economic viability of URC’s business.”
Motiva Trading LLC predicted that “firm service would establish greater reliability on the Mainline versus the uncommitted and curtailment-prone system in place today.”
For U.S. buyers of oil delivered by Enbridge as a common carrier, Motiva said “the lack of certainty associated with nonfirm service is a deterrent when it comes to expanding strategic commercial relationships in different geographic regions. Ultimately, firm capacity offers greater predictability that is essential to access production to supply the refinery.”
The Enbridge proposal would be a historic change for the worse for producers, said Roland Priddle, retired chairman of the CER’s predecessor National Energy Board. Priddle discussed it in a report on the oil Mainline’s role in Canadian industry evolution done for the CSG.
“The support that Enbridge has marshaled” for the service conversion application “does not represent the Canadian public interest,” he wrote. “It is biased in favor of U.S. refiners and against Canadian crude oil producing interests.”
A disclosure by an Enbridge expert witness forecast increased Mainline tolls that U.S. oil buyers would subtract from prices for Canadian supplies, Priddle noted. He cited a forecast that the new contract rate would be US$5.40/bbl, 28% more than the traditional cost of service-based shipping charge of US$4.23.
Enbridge attributed its conversion plan to customer demand plus prospects of traffic and revenue losses to emerging rival pipelines that would inflate traditional Mainline cost of service tolls.
Completion of the Trans Mountain and Keystone XL projects as contract services would drain oil off the Mainline and make it seek toll hikes to cover rising expenses per barrel of shrinking delivery volumes, Enbridge said.
The CER has until spring to settle the industry quarrel. Enbridge is seeking approval of its conversion plan in time to complete an open season sale of delivery contracts for 90% of the Mainline’s capacity before the scheduled expiry of its current tariff and toll agreement with shippers on June 30.
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