June 5, 2021 [Oil Price] – An under-the-radar hearing on the way shippers will contract volumes on Canada’s key crude oil export pipeline began last month in what could turn out to be the most important battle for control of Canadian oil resources.

The more than a month-long hearing at the Canada Energy Regulator (CER)—planned to end on June 25—is expected to end up with the regulator determining how Canadian oil firms and U.S. refiners will pay to ship crude on Enbridge’s Mainline system over the next decade. Mainline, with the capacity to ship nearly 3 million barrels per day (bpd) of oil, is Canada’s biggest transporter of oil, carrying crude from oil-rich Alberta to markets in eastern Canada and the U.S. Midwest.

The current pipeline contracting system expires on June 30, 2021. Mainline’s operator Enbridge has been operating the pipeline for decades under the so-called “common carrier” system, in which all of the huge capacity has been available for short-term shipments of volumes that shippers can change every month. This has given Canadian oil producers the flexibility to contract short-term volumes without having to commit to long-term obligations to ship crude on the pipeline.

Mainline Operator Enbridge Looks To Secure Long-Term Shipments

Now Enbridge wants to change that. Mainline’s operator seeks to convert the contracting terms to ones where 90 percent of the available capacity would be reserved for long-term access to its network. Canada Energy Regulator’s Commission is set to decide, after the hearing ends at end-June, whether the proposal is fair for all parties.

Enbridge’s rationale for the new tolling framework is to ensure certainty for shippers in the long term, it says. But it also has a purely business reason to seek long-term firm contracts for Mainline—to reduce its long-term volume risk, because competing pipelines already offer shippers the ability to contract for firm service on a long-term basis. The new proposed system will “provide Enbridge with the tools to compete on a level playing field,” the company said in its proposal.

For example, the Trans Mountain expansion project already has contracts in place that commit the majority of its capacity to firm service on a long-term basis. In this case, if Enbridge continues as a “common carrier”, it could lose much more than the firm long-term contract pipelines where shippers pay for volumes anyway, regardless of how much they would actually ship one month or next.

While Enbridge’s application to convert Mainline to firm long-term contracting may be just protecting its business in the long term, it could mean that Canada may give control to its most important pipeline to U.S. refiners, which favor the proposed new contracting system, Samir Kayande, an independent energy business strategy consultant, writes in Financial Post.

CER Hearing “is about who effectively controls Canadian resources”

Since refiners typically want low crude oil prices, if they are given their way in the new contracting system, their bargaining power would grow, at the expense of Canada’s exploration and production companies which usually would like to see higher oil prices, Kayande argues.

“The toll hearing at the CER is about who effectively controls Canadian resources,” Kayande notes.

According to Enbridge’s evidence, companies that ship over 75 percent of the volumes on the Mainline have said the proposed terms and tolls are “fair, balanced, and productive.”

“Producers have generally not shipped on the Mainline, with the exception of those that hold capacity on connecting downstream pipelines. It could well be that, if Mainline Contracting is approved, it is primarily parties with refining interests and parties (including producers) that have downstream pipeline capacity that will contract for service on the Mainline,” Enbridge argues.

“But this would not be a “redistribution of the pie”. This would be entirely consistent with the current and past usage of the Mainline under the 100% uncommitted service structure,” the pipeline operator says.

Canadian Oil Producers Vs U.S. Refiners

However, most Canadian oil producers, especially those without downstream capacity in Canada and the United States, beg to differ.

The Explorers and Producers Association of Canada (EPAC), which includes 170 producers, said, “Ensuring that the crude oil and liquids produced and exported from Western Canada realize the highest possible market value is of critical importance to the citizens of the provinces that own the resource, to the oil producers of the WCSB and their investors, to the communities who depend on that investment and to the municipal, provincial and federal governments who rely on the taxes and royalties paid by the upstream oil and gas industry.”

“These public interests also far outweigh the objectives of the small group of mostly US based refining and allied interests that support the Application, that seek to acquire control for the next two decades over 90% of the transportation capacity on the Mainline thus giving them ability to lower the price that WCSB producers receive for their crude oil,” EPAC noted.

The association also slammed Enbridge’s “fear of competing pipelines” as “self-serving and opportunistic.”

The Canadian Shippers Group, consisting of Canadian Natural Resources, MEG Energy Corp, Shell Canada, and Total E&P Canada, said that “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.”

Roland Priddle, the former chair and board member of the National Energy Board between 1986 and 1997, also slammed Enbridge’s proposal in his evidence on behalf of the Canadian Shippers Group.

“The support that Enbridge has marshalled for the Application does not represent the Canadian public interest: it is biased in favour of U.S. refiners and against Canadian crude oil producing interests, which had previously been the only or the dominant counterparty in settlement negotiations,” Priddle said.

The ongoing hearing about the changes to Mainline’s operation has turned into a battle about who will control the future of Canadian oil and its prices.

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