On April 12, the Federal Energy Regulatory Commission or FERC approved a pipeline tariff proposal submitted by Seaway Crude Pipeline Co. LLC which implements a lottery system for new shippers wanting to transport crude on the pipeline, despite protests by Apache Corp., Noble Energy and Suncor Energy.
The Seaway is a 30-inch pipeline that transports crude oil from Cushing, Okla., south some 500 miles to Jones Creek, Texas, and provides a route for Bakken crude oil to Gulf Coast refining markets. The pipeline originally carried crude oil from the Gulf Coast to Cushing, but was reversed in a joint venture between Enterprise Products Partners LP and Enbridge Inc. in an effort to ease the bottleneck of crude oil that often occurs at Cushing. Seaway went into service in May 2012.
Too many new shippers
The reason for moving to a lottery system, according to Seaway, is that the number of “new shippers” nominating allotments for shipment on the pipeline has increased to an unmanageable level. With demand for crude oil on the pipeline increasing, Seaway argued that the only fair way to deal with an overwhelming number of new shippers would be to implement a software-based system that randomly selects new shipper nominations for transport on the pipeline on a monthly basis.
“Speculators and individuals with no apparent access to crude oil are attempting to game the system by signing up as new shippers, presumably in an attempt to broker the space in a secondary market,” Enterprise said in an April 2 filing. “Seaway receives approximately five-to-10 inquiries a week from persons seeking to become new shippers, including most recently from various business students in Toronto, Canada.”
Seaway said that as an industry standard, it allocates 90 percent of the pipeline’s capacity to “regular shippers,” which includes historic and committed shippers, with the remaining 10 percent allocated to “new shippers.”
Seaway added that when the pipeline went into service in May 2012, it received shipper nominations from five new shippers, but in April 2013 that number “increased dramatically” to 275. From March to April 2013 alone, Seaway received nominations from 74 new shippers.
Furthermore, Seaway said 4.4 million barrels were nominated for transport in May 2012 when the pipeline went into service, which represented 1,000 percent of the capacity allotted to new shippers at the time. By April 2013 that volume increased to 2.1 billion barrels.
In addition, Seaway said new shippers are required to ship a minimum of 60,000 barrels per month in order to qualify for regular shipper status, which it said is another industry standard. However, with the increasing number of new shippers, Seaway said volumes allocated to each new shipper have “fallen substantially” below that minimum.
Until recently, Seaway said, it attempted to address this issue by aggregating new shipper allocations of “domestic sweet” crude oil to meet the 60,000 barrel per day minimum. While that worked for a while, Seaway said that practice “has now become unwieldy and created significant burdens and inefficiencies for both Seaway and it shippers.”
Underlying problems
Seaway complained that the demand by new shippers for a limited capacity on the pipeline has created a number of problems. First, Seaway said that increase in new shipper demand has resulted in new shippers creating what it calls “shell companies” that are presumably attempting to “game” the system in order to secure as much capacity as possible. This, Seaway said, “has made it increasingly difficult for Seaway to make capacity available to walk-up shippers in an efficient and fair manner.”
Furthermore, Seaway said that there is substantial speculation and market uncertainty resulting from the current nominations process, which has made it increasingly difficult for Seaway to make capacity available to walk-up shippers.
Another problem with the current nominations process cited by Seaway is in shipping different types of crude oil. Currently the pipeline ships six different types of crude oil, and Seaway said it ultimately expects to transport up to 20 different types of crude. Aggregating numerous individual new shipper tenders into batches of each type of crude oil in time to create a monthly shipment schedule, Seaway contended, coupled with having to make monthly reallocations to account for changes in available capacity, while all the time making sure that all shippers are treated fairly, “is a daunting task that has now simply become unworkable.”
Seaway added that the increasing number of new shippers has “created a time-consuming administrative burden for Seaway with respect to such responsibilities as accepting nominations, tracking changes in ownership and billing shippers for tariff charges.”
The lottery solution
The solution to the problem proposed by Seaway is a lottery system, similar to one used on the Spearhead pipeline. The Spearhead is a crude pipeline that originally shipped crude oil from Cushing to Chicago that was acquired and reversed by Enbridge and went into service in 2006. FERC approved the Spearhead tariff, which included the lottery system, in May 2012.
The Seaway lottery will be used when, in any given month, no new shippers can be allocated the minimum volume of 60,000 barrels on a prorated basis because there are too many new shippers submitting nominations. In that case, a software-based random number generator system will be used to allocate minimum 60,000 barrel volumes to nominees until the 10 percent of available capacity set aside for new shippers is filled. However, new shippers are not eligible for consideration in the lottery if they are affiliated with regular shippers or are affiliated with any other new shipper selected in the lottery.
The complaints
On March 28, Suncor Energy submitted a motion to FERC to intervene and protest Seaway’s proposed lottery approach, as did Apache and Noble in a joint motion. An issue that all three companies have is that in order for a new shipper to achieve regular shipper status, that shipper must ship a minimum of 60,000 barrel volumes per month in a rolling 12-month period.
Suncor argued that the lottery system is discriminatory because in order for a new shipper to reach regular shipper status, the new shipper would have to be successful in Seaway’s lottery for 12 consecutive months, a prospect that Suncor describes as “negligible.” Suncor further argued that it and its affiliates have shipped on Seaway for 10 consecutive months, and assuming Suncor ships on Seaway in April, the company would have to win the May lottery to achieve the last of the 12 consecutive months of shipping. Suncor put the odds of winning the May lottery at less than 10 percent.
Suncor also said that the Spearhead lottery, the lottery after which the Seaway system is patterned, only requires that a new shipper win the lottery six out of 12 months of a base period to qualify for regular shipper status. Another pipeline that uses a lottery system for new shippers, according to Suncor, is Enbridge Pipelines (North Dakota), and that lottery requires a new shipper win the lottery in only nine out of 12 months to quality for regular shipper status. Consequently, Suncor argued that Seaway’s lottery is not consistent with common industry standards and is “unduly discriminatory.”
In their joint motion, Apache and Noble also argued that Seaway’s lottery system discriminates against new shippers. Using information provided to FERC by Seaway stating that Seaway would allocate space to 13 of 200 new shippers in any given month, Apache and Noble calculate that new shippers would have only a 6.5 percent chance of being selected in the lottery for shipping capacity in a particular month.
Seaway’s response
In its April 2 response to the Apache, Noble and Suncor protests, Seaway told FERC that those complainants could have become regular shippers by committing during one of two open seasons that Seaway held for the pipeline.
Seaway added that the 275 new shippers nominated a total of 2.1 billion barrels of oil in April, but the capacity available to new shippers is only 900,000 barrels per month. That would allow less than 3,300 barrels per month for each of the 275 new shippers, which Seaway said is not economical.
In addition, Seaway told FERC that it “remains open to reviewing and modifying the lottery process if it encounters issues when it is put into practice,” but added that any such changes “should await actual experience with the operation of the lottery in order to determine the best means of addressing any practical issues that may arise.”
FERC’s take
After reviewing the situation, FERC sided with Seaway. In its April 12 ruling, FERC said that it recognized the protestor’s concerns but said the protestors did not show that they were the subject of discrimination. FERC said that Seaway’s lottery will not put the protestors in any worse situation than they would be under the status quo. FERC also noted Seaway’s willingness to reevaluate the lottery at some point in the future.
In closing remarks in its April 12 ruling, FERC said “The Commission finds that Seaway has made a good faith attempt to alleviate the apportionment problems with uncommitted capacity on its system in order to protect bona fide shippers who intend to be long term customers on Seaway. Seaway’s proposal is therefore superior to allowing the ongoing apportionment problems under the current procedure to continue unchecked.
“The existing system,” FERC continued, “would allow the unrestrained proliferation of individuals without access to crude oil, to the detriment of new shippers with actual barrels to ship. Since the various grades of oil on the pipeline render informal batching infeasible, the proposed tariff revisions strike a reasonable balance, and appear to allocate reasonably the available ten percent of the pipeline’s capacity reserved for New Shippers.”
Seaway’s new tariff, including the lottery system for new shippers, went into effect on April 15.
Seaway expansions
Although demand has forced Seaway into a lottery system, the Seaway pipeline project is undergoing expansions that will ultimately more than double the capacity from Cushing to the Gulf Coast refineries.
The Seaway pipeline initially had a capacity of 150,000 barrels of oil per day when the reversal was completed in May 2012. Subsequent pump station additions and modifications increased that capacity to 400,000 bopd. However, Seaway told FERC in February that the pipeline is not expected to run at that capacity due to slower movements of heavier crude.
Now a parallel pipeline is under construction and is expected to increase Seaway’s capacity to the Jones Creek terminal at Freeport, Texas, to 850,000 bopd by the first quarter 2014.
And from Freeport, Seaway is installing additional pipelines that will provide transport of crude deliveries northeast to Enterprise Products Partners’ ECHO crude storage facility at Houston, and farther east to the refining complex in the Port Arthur and Beaumont area.
