Locking horns over pipeline subsidies

Enbridge, Terasen at odds entering NEB hearing to collect $50M from existing Enbridge shippers to open up new U.S. markets

Gary Park

Petroleum News Calgary Correspondent

The desire to open up new U.S. markets for Alberta oil sands production is an added source of friction among Canada’s energy pipeline companies as Enbridge and Terasen prepare to argue the pros and cons of subsidizing oil sands pipelines.

A National Energy Board hearing is set to start April 7 into what is called non-routine adjustments, following an agreement between Enbridge and the Canadian Association of Petroleum Producers to impose higher tolls on all shippers on Enbridge’s Canadian mainline crude system to support the extension of pipelines in the United States to Oklahoma and the Gulf Coast.

The Canadian Association of Petroleum Producers, representing all of Canada’s major oil producers, said in a filing with the board that unless Canada can open up new markets, oil sands developments are “likely to be negatively impacted.”

To that end, the association has agreed to collect US$10 million a year over five years from all mainline shippers to support efforts to access new U.S. markets, contending that all shippers should benefit from additional and sustained volumes on the Enbridge pipeline.

CAPP warned that without market expansions, Western Canadian oil prices will be further depressed from the current year-to-date differential of C$21.85 per barrel between heavy and light crudes — a gap that underscores the fast growth in heavy oil volumes without an increase in demand.

The danger of ever widening differential could make heavy oil from the oil sands “no longer economic to develop or produce,” CAPP said.

Terasen, Flint Hills, ready to battle subsidies

Terasen’s intervention argues that “subsidies are not the appropriate mechanism to address” the concern about market penetration.

“The subsidy approach advanced by Enbridge has the potential to distort the market for crude oil, crude oil transportation and potentially crude oil products,” it said.

Terasen said that if the federal regulator approved “some or all of the costs” of Enbridge’s planned C$2.5 million Gateway oil sands pipeline from Alberta to a port in northern British Columbia it would give Enbridge a “significant competitive advantage” over Terasen’s rival plans to spend up to C$3 billion carrying 500,000 barrels per day to the West Coast.

It told the National Energy Board that accepting Enbridge’s negotiated non-routine adjustments should not be the basis for Gateway or other projects.

CAPP defends the Enbridge applications on grounds that Alberta oil sands production is expected to more than double to 2.6 million bpd over the next 10 years, at a time when the U.S. Midwest market shows no signs of needing additional Canadian crude in the foreseeable future, although refiners could add heavy oil conversion capacity within four or five years.

But the best short-term hope is to “expand into new market areas to reach new refiners that could run Canadian crude as their feedstock,” the association said.

NEB considering Spearhead

Spearhead itself involves a reversal of the existing Chicago to Cushing, Okla., line to offer initial capacity of 125,000 bpd, with a varied grade mix of crudes to serve refineries in Oklahoma, Kansas and Texas, and could grow to 160,000 bpd.

The Spearhead plan to offer discounted shipping rates on an idle pipeline was endorsed by the U.S. Federal Energy Regulatory Commission on March 2.

The commission said the US$160 million project would “benefit the public by offsetting dwindling U.S. oil supplies and will increase refiners’ security of supply.”

FERC Chairman Pat Wood said it was “nice to know that our future (foreign) energy supplies don’t have to necessarily come on a boat.”

With a 90 percent stake, Enbridge will be operator, while BP will retain 10 percent of the line it sold to Enbridge in 2003.

Bidders have already pledged to buy 48 percent of the Spearhead capacity for 10 years, ensuring start-up shipments of 60,000 bpd in early 2006 and 75,000 bpd by 2009.

The Mobil line reversal from Illinois to Texas holds out the prospect of “substantial” market access to the Gulf Coast, with its refining capacity of 6.7 million bpd, according to a 2003 study by Texas-based consultant Muse, Stancil and Co.

The parties involved in the reversal have committed to provide 50,000 bpd of supply for shipment at 56.5 cents per barrel for five years on the 65,000 bpd capacity system.

Enbridge said shippers had made it clear they would not pay the traditional cost of service toll of $1.10 per barrel.

Subject to National Energy Board approval, the Mobil system is targeting an in-service date in the fourth quarter of 2005.