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New Canadian regulator faces immediate test

A flurry of responses to a proposed change in pipeline capacity allocations has compelled the new authority straight into action

The Canadian energy sector got a new oversight body in late August, with the Canadian Energy Regulator (CER) taking over from the National Energy Board (NEB). But it inherited from its predecessor a controversy that has seen it already plunge into the fray.

Since the end of July, Canadian oil producers both large and small, representing over half the country's production, had filed letters with the NEB, complaining that a move by Canadian midstream firm Enbridge Energy to convert 90pc of capacity on its Mainline crude pipeline system to long-term contracts lasting up to two decades, and leaving only 10pc available for spot shippers, represented an abuse of market power.

The Mainline is Canada's largest and most important oil export system, carrying around 2.85mn bl/d mainly to the U.S. Midwest, and accounting for roughly 70pc of the country's pipeline exports. Enbridge had launched a two-month open season, which was due to finish on 2 October, to gauge interest in the offer of long-term capacity.

Normally, a midstream firm would run the open season first, then submit a request to the regulator for any changes to capacity allocation based on the results of the process. But the CER has announced a fast-track procedure to gather comments, even before the open season has finished.

Several major Canadian oil firms, including Canadian Natural Resource Limited (CNRL) and Suncor Energy, requested the open season be delayed until after the CER approves the terms, conditions and tolls Enbridge may set. The competitive tolling system that governs transportation contracts on the 70-year old Mainline is scheduled to expire on 30 June 2021.

The Mainline crude pipeline system accounts for 70pc of Canada's pipeline exports

Contract carrier

Enbridge opened talks with shippers, marketers and refiners in preparation for this deadline, and also in an attempt to address concerns about the present contracting system. Companies regulary request more space than they need on the Mainline on a monthly basis, to try to mitigate the effects of so-called 'apportionment' since western Canadian oil production exceeded the region's available pipeline evacuation capacity in mid-2018.

The NEB concluded in a March report, "Optimising Oil Pipeline and Rail Capacity Out of Western Canada", that chronic over-nomination for Mainline spot capacity was contributing to lower prices for regional producers.

Enbridge has decided the switch from common to fixed contract carrier, i.e. from spot to long-term contracts, is the best way to deal with these issues, according to Guy Jarvis, senior vice-president of liquids pipelines. The switch appears to have the support of refiners in the US Midwest, including some Canadian oil producers with assets in the regions such as Cenovus Energy, and marketers.

Market power?

In contrast, opponents to Enbridge's proposed Mainline changes are openly calling it an abuse of market power. For example, in a 26 August letter to the NEB, Tim McKay, president of Canada's largest oil and gas producer CNRL, 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 pipeline capacity leaving the western Canadian sedimentary basin."

Despite the open season's contract negotiations being confidential, fellow producer Suncor, in its 23 August complaint to the NEB, said the terms and conditions "are unfair, unjust and unreasonable". Michael Crothers, president of Shell Canada, in a letter dated the same day, argued that the present lack of pipeline egress from western Canada is effectively forcing shippers to sign up to unfair tolls on a long-term committed basis or risk being left without the ability to ship their oil from the region.

"Enbridge does not agree with the assertions in the letters filed by these parties to the NEB. We have significant support for the open season offering and we look forward to responding as part of the process outlined by the NEB," says Enbridge's Jarvis in response.

The controversy is a baptism by fire for Canada's new regulator. And the outcomes are far from certain, for either the present open season or the principle of a change from common to fixed contract carrier. It may be worth noting, though, that the regulator in Canada's southern neighbor, the US Federal Energy Regulatory Commission, denied Colonial Pipeline's attempted shift from common to contract carrier in 2014 because the company was not actively expanding its system.

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