Canada ruling on Enbridge Mainline contracting coming Nov. 26

A wide-reaching Canadian regulatory decision on the contracting of Enbridge's Mainline pipeline network into the US is coming on Nov. 26, potentially upending the crude oil and NGL transportation system for the first time in 70 years.

The Canada Energy Regulator is set to decide whether it will approve Enbridge's years-long fight to change the crude pipeline network's monthly nomination system as a "common carrier" to long-term committed contracts with just 10% of capacity set aside for spot shipping, likely impacting the future of Canadian crude pricing, volumes and the finances of several smaller producers.

Enbridge contends the move is necessary for volume certainty and less month-to-month volatility, as well as stronger Canadian crude pricing. Smaller Canadian producers fear higher tolls, or being squeezed out entirely with their barrels stranded in Alberta and sold at deeper discounts.

With the capacity to ship 3.2 million b/d across 8,600 miles, Mainline is by far Canada's largest crude transporter and exporter, moving supplies from the Alberta oil sands to the Ontario and US Midwest refining markets -- and farther to the Cushing, Oklahoma storage and pricing hub, and to the US Gulf Coast through additional pipelines.

The current Mainline tolling system relies on a monthly nomination system that utilizes apportionment when demand exceeds capacity, which has been the case for years with a shortage of Canadian pipelines into the US. Under 50% apportionment, for instance, a producer wanting to move 1,000 barrels would only be allowed to ship 500 barrels.

Enbridge instead wants to shift to the more modern system of longer-term, take-or-pay contracts with minimum volume commitments -- for up to 20 years -- similar to most North American pipelines. The change is preferred by US refiners and some larger producers. Enbridge also wants more certainty before it embarks on further pipeline capacity expansion projects within Mainline and on pipelines further downstream to the USGC.

The last 10-year tolling agreement expired in June and Enbridge is eager to implement the changes in 2022. The Canada Energy Regulator can either outright approve or reject Enbridge's requests, or settle on some sort of compromise that sets aside more than 10% of the capacity for spot shipments and lower the base toll, said Parker Fawcett, North America supply analyst with Platts Analytics.

The regulatory decision will follow the Oct. 1 startup of Enbridge's Line 3 replacement project, increasing capacity on a key Mainline crude artery from 390,000 b/d to 760,000 b/d, and essentially ending the pipeline bottleneck into the US now that Canadian production has largely recovered from the ongoing coronavirus pandemic.

With many months requiring more than 50% apportionment of heavy crude in the past, Enbridge said that apportionment levels on lines carrying heavy crude fell to just 12% for November flowing barrels.

However, Canada's competing Trans Mountain Pipeline expansion project, which is tentatively slated for an end-2022 completion, already has long-term contracts in place that could give it advantages over Mainline's current common carrier status.

Platts Analytics projects a strong possibility for a regulatory compromise, such as requiring Enbridge to set aside 15% or 20% capacity for spot shipping.

The energy research and investment banking firm Tudor, Pickering, Holt & Co. has a base case for a 20% compromise on uncommitted capacity, as opposed to Enbridge's desire for just 10%.