Tied in regulatory knots

Enbridge faces battles over Line 5 upgrade plans, probe of fixed shipping contracts

Gary Park

for Petroleum News

Enbridge, the largest combined Canadian based shipper of oil and natural gas, is caught up in tangles on several fronts.

Since mid-August its regulatory agenda has been fully occupied with a constitutional showdown stemming from the new Michigan government’s moves to block Enbridge’s proposal to modernize its 66 year old Line 5.

The line, which carries 540,000 barrels per day of crude from Alberta to refineries in Sarnia, Ontario, is a vital element of the company’s Mainline network to transport 70% of crude leaving Western Canada, much of it destined for the U.S.

But that tussle is now sharing centerstage for the company since Canada’s energy regulator agreed to hear complaints from most of the country’s largest oil producers over Enbridge’s plan to change fixed crude shipping contracts on the Mainline system.

Enbridge has proposed shifting away from a month by month system to allocating 90% of the space on the mainline to committed shippers in contracts lasting up to 20 years, starting in 2021.

The Canadian Energy Regulator, CER, formerly known as the National Energy Board, said it will “expedite” a process to handle comments from producers and Enbridge before the company’s “open season” for shipping contracts ends on Oct. 2.

It asked producers and Enbridge to express their views on whether the regulator had the authority to stop the open season and what harm would result if the process was paused rather than allowed to continue.

This compounds a series of bottlenecks facing Canadian producers, including the Line 5 squabble and delays on starting construction on Keystone XL and the Trans Mountain expansion, that have resulted in heavy rationing.

Canadian Natural opposition

In a letter to the CER, Canadian Natural President Tim McKay said Enbridge’s proposal is “completely inappropriate and is being made at a time when considerable market power imbalance exists because of the shortage of capacity leaving the Western Canadian Sedimentary Basin.”

His company said the CER should direct Enbridge to halt the open season until the regulator can consider the market power issues raised by producers.

It said the CER should also approve the new terms and conditions and tolls before shippers are required to sign any binding contractual commitments for pipeline space.

McKay argued that Enbridge’s plan disadvantages nonintegrated producers (those who do not have access to their own refineries) “in favor of shippers who can supply their own downstream” facilities.

Conoco, Suncor others in opposition

Suncor told the CER that “the terms and conditions of the open season are not fair, just or reasonable,” while Shell said congestion on export pipelines out of Canada meant Enbridge was forcing shippers to sign up for unfair tolls, or risk being left without market access.

Shell Canada President Michael Crothers said the open season offering “may represent an abuse of market power.”

Guy Jarvis, Enbridge’s executive vice president for liquids pipelines, told Bloomberg the “offering that we’ve got in the open season is responding to the needs of our customers and is supported by shippers representing the majority of the volume on our system.”

Calgary-based investment bank GMP First Energy said the CER should extend the open season if it needs more time to make a ruling.

It said in a note that “we fear if the open season is concluded in its current form, this will result in more pricing power being transferred to U.S. Midwest refiners and onerously burdensome long-term commitments on the books for Canadian producers.”

Genscape analyst Mike Walls said producers are concerned that if a relatively “few refiners in the U.S. control a large portion of the Mainline space their access to customers will be limited as well as their ability to get more diverse markets such as the Gulf Coast.

Four companies with their own major refineries in the Midwest - Exxon Mobil, BP, Marathon Oil and Valero - had no comment on the showdown.

Line 5 battle

Bad River Band, a Native American tribe in Wisconsin with 7,000 members, has filed its own federal lawsuit in hopes of forcing Enbridge to remove sections of the pipeline that cross the reservation.

The action contends the threat of a rupture has been growing as earth around a portion of the pipeline has eroded and could soon wash away the soil that covers and supports the line.

Enbridge said it will consider rerouting Line 5 and “remains open to this option as a solution.”

However, the company gained an important ally in Michigan’s Republican majority Legislature, which said in brief filed with the state’s Court of Claims that it acted properly last year when it passed an act that enabled Enbridge to build a tunnel beneath the Straits of Mackinac to replace the underwater section of the existing line.

The document accused Attorney General Dana Nessel of trying to “subvert the democratic process in order to replace a duly-enacted law.”

Last December the Michigan Department of Natural Resources announced that the Mackinac Straits Corridor Authority, in correspondence with outgoing Gov. Rick Snyder, signed an agreement to build a multipurpose tunnel under the straits to house multiple utility lines, while the old Line 5 would be removed and a new link built.

That agreement did not contain a timeline for removing the existing line, which was immediately challenged by the new Democratic Michigan administration.

Nessel’s office said the agreement by the former government “did not provide fair notice to legislators and the public” about the plans to house a new Enbridge oil line in a tunnel.

Line 5 is also involved in a second lawsuit in which Michigan is trying to have the land use agreement in the Straits of Mackinac overturned by arguing the pipeline is a public nuisance.

An Enbridge spokesman said the company is reviewing Michigan’s latest filing but remains focused on preconstruction tunnel work.