To: Louise George, Secretary to the Canada Energy Regulator
cc: Sonya Savage, Alberta Minister of Energy
From: Brian Livingston
Date: September 24, 2019
Re: Contracting Enbridge Mainline could reshape Alberta’s oil production
The issues of curtailment, pipeline proposals and pipeline apportionment are related flashpoints in the oil patch. Curtailment has resulted in higher prices for heavy oil, but has also caused an unintended reduction in rail transport. In addition, the lack of new pipelines has caused a scarcity of pipeline capacity. Perhaps as a result, Enbridge has proposed to change its Mainline from a common carrier to a contract carrier.
The Enbridge Mainline starts near Edmonton and by the time it crosses the US border in Manitoba it has collected about 2.8 million barrels per day of hydrocarbons, mostly heavy oil. Enbridge currently operates the Mainline as a common carrier regime and its associated National Energy Board (NEB) approved tolls are set to expire on June 30, 2021.
Last month, the company proposed changing the Mainline from 100 percent common carrier with uncommitted capacity to 90 percent contract carrier, offering committed capacity for periods as long as 20 years. This would reduce the amount being apportioned. Apportionment occurs when nominations for shipment exceed capacity, resulting in each shipper only receiving a pro rata amount of the available capacity. However, yet-undisclosed details of how Enbridge would allocate committed capacity among shippers are a current flashpoint among producers.
Enbridge’s proposal is open for shipper responses until October 2, a process referred to as an open season.
Once it has received long-term commitments from shippers, Enbridge says it will then proceed to apply to the Canadian Energy Regulator (which is replacing the NEB) to have these contracts and associated tolls approved.
The company says it canvassed shippers’ preferences, but the proposal has been opposed by more than 25 parties, mostly Canadian producers. It has received support from five US refiners and terminal operators, as well as from Cenovus and Imperial Oil.
If the 90-percent contract proposal is adopted, there will be several consequences.
Instead of the current apportionment occurring every month, there will be a one-time apportionment allocating the 90 percent committed capacity. By requiring shippers to commit for a long term, it may well weed out the shippers unwilling or unable to do so. If this occurs, it will reduce the number of shippers vying for the 90 percent committed portion, and therefore reduce the one-time apportionment for that capacity. Winning shippers will therefore get a larger proportion of their nominated volumes to be shipped.
The winners are the shippers (mostly US refiners) that reduce their risk of inadequate supply to their operations because the apportionment under the current system reduces their supply significantly (40 percent or more). The losers are the producers not prepared to commit, but wanting to ship. They will be apportioned monthly on the remaining 10 percent, which means apportionment for that 10 percent piece may be much higher than current 40 percent. They would be forced to sell at Hardisty at the WCS price to US refiners who have already obtained committed capacity.
As well, shippers will bear any future risk of a reduction in volumes of heavy oil to be shipped. That may seem unlikely in today’s environment of excess production and restricted pipeline capacity, but the world can change. If this did occur, the risk of any shortfall would not be borne by Enbridge, but rather by the shippers with long-term contracts.
This will create new tiers of producers, based on capacity to export and associated costs. It will also create an incentive for shippers on the committed portion of the Mainline to arbitrage between the price at Hardisty and the price at the Gulf Coast.
Normally, market forces do not permit a shipper to make money merely by shipping. The difference in market price of WCS between Hardisty and the Gulf Coast should equal the cost of shipping between those two points. If there were adequate pipeline capacity, this would occur – the shipping cost of $10 per barrel would mirror the uplift in WCS price of $10 per barrel between Hardisty and the Gulf Coast.
However, since Canada’s export capacity is constrained, some shippers will be forced to use rail, with its cost in the order of $18 per barrel. If market forces mean that this rail transport will be the marginal cost to get the last WCS barrel from Hardisty to the Gulf Coast, the market should set the WCS price discount at $18 per barrel.
This means that shippers with committed capacity will pay a transport cost of $10 per barrel, but gain an increase in value of $18 per barrel, making a profit of $8 per barrel merely by arbitraging the two markets (Hardisty and the Gulf Coast). This provides an additional incentive for shippers to acquire committed capacity on the Mainline.
The resolution of all these issues will play out in the next few months. It will be a challenge for the CER to resolve the competing interests of the many players in the oil industry.
Brian Livingston is Executive Fellow at the School of Public Policy at the University of Calgary.
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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.
