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Market turbulence led to demise of oil pipe 'air barrels' rule, Enbridge says

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Market turbulence led to demise of oil pipe 'air barrels' rule, Enbridge says

Enbridge Inc. said it quickly canceled a plan to eliminate overbooking of capacity on its Canadian oil hauling system after its implementation roiled crude markets.

As the trading period for July-delivered crude got started in early June, "shippers began to provide feedback that behaviors by a number of market participants — such as diverting historical supply to other markets, dramatically increasing/decreasing prices offered for the purchase/sale of crude, and rumored contract cancellations — were causing significant unforeseen and unforeseeable financial harm for many of Enbridge's customers," the company said in a June 11 letter to the National Energy Board. The letter was in response to a complaint from BP PLC about the abrupt cancellation of the Shipper Verification Program, which started May 24 and was shut down June 4.

The start of the program coincided with the beginning of the three-week trading period recognized by most traders in Canadian oil. BP complained to the board that halting the program, which changed the way space is allocated on the pipeline from prorating of customer orders to allocation based on shipper history, threw a wrench into its trading plans. Enbridge said it understood BP's position, but the potential for longer-term financial harm meant it had to act quickly. BP had asked the board to have the pipeline extend the program through August. Enbridge said the verification system would not be reinstated in the near term.

"Enbridge recognized the cancellation of the procedure a full day into the June trading period was not ideal for shippers, but Enbridge could not move forward with the procedure's implementation in good faith knowing the concerns many shippers had expressed," Enbridge Vice President Brian Johnson said in the June 11 letter. "Enbridge recognizes that its June 4 notification did not clarify whether the procedure would apply going forward. Since issuing that notice, Enbridge has determined that it will not apply the procedure for August 2018 nominations and, at present, Enbridge does not have plans to implement the procedure thereafter.

The Calgary, Alberta-based pipeline operator implemented the rules to rein in orders from crude shippers who overestimated the amount of oil they planned to ship on Enbridge's mainline system that connects the oil sands region of Alberta with refiners in the U.S. While shippers must pay tolls for all the barrels they are allotted, the empty space has resulted in scheduling and operating headaches for the pipeline.

"Despite the high apportionment levels, there have been numerous months when many shippers have not filled the space they were allocated, which can result in Enbridge issuing calls for crude, missing opportunities to ship batches and ultimately reduced Mainline throughput," Johnson wrote. "Such behavior indicates that shippers are nominating more than they intend to bring into the Enbridge system; in other words, shippers are nominating what the industry refers to as 'air barrels.'"

BP has until June 20 to forward its comments on the Enbridge response to the National Energy Board. After all the comments are received the board will determine whether it will issue a decision or investigate further.