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MEG Energy asks Canada to delay switch from Enbridge mainline tolling

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MEG Energy asks Canada to delay switch from Enbridge mainline tolling

Canadian oil sands producer MEG Energy Corp. has joined a chorus of smaller companies asking Canada's energy regulator to slow down the process to convert Enbridge Inc.'s mainline system to long-term contracting from common carrier status.

The Calgary, Alberta-based producer asked the National Energy Board to order Enbridge to delay its open season for long-term commitments to the approximately 2.85 million-barrel-per-day network. In a letter, MEG said conversion of the line to contracted volumes should wait at least until after the existing tolling agreement expires in 2021. The company said the switch to contracted carriage would raise undue risks for producers while export pipeline capacity from Canada is severely constrained.

"It is MEG's position that Enbridge's contract carriage proposal should be abandoned, as it is not in the overall public interest," MEG President and CEO Derek Evans said in the Aug. 16 letter. "However, as an interim measure, MEG supports a delay of the open season until such time as the uncertainty regarding future takeaway capacity from Western Canada has been resolved."

Enbridge's mainline system is the largest crude export conduit in the country. Under the existing structure, the company takes orders for capacity on the system a month in advance. Since the network has been consistently oversubscribed for the past several years, Enbridge prorates space based on the size of shipper orders. Enbridge claims this arrangement has led to shippers over-ordering space in order to receive a higher allocation. These so-called air barrels can reduce actual shipments on the system if the space is not resold. Enbridge receives the tolls for committed barrels regardless.

SNL Image

Construction on Enbridge's Line 3 replacement in Canada. While the Canadian portion of the project is complete, regulatory headaches in the U.S. have prevented it from going into service.
Source: Enbridge Inc.

Enbridge attempted to address the air barrels situation in 2018 with a shipper verification program. That proposal was shot down by shippers, including BP PLC, which uses the system to supply oil to its refineries in the U.S. Midwest.

The open season, launched Aug. 2, asked shippers to commit to long-term transportation service agreements, or TSAs. The system poses risks to MEG's contracts with U.S. pipelines that take oil from the mainline system, including Enbridge's Flanagan South system. The proposed contract system, which has not been approved by the National Energy Board, would require shippers to sign long-term contracts for as much as 90% of the mainline's capacity and leave the rest open for spot shippers.

MEG and the Explorers and Producers Association of Canada, which represents small producers, have objected to the proposed change, which would give more control over oil exports to large customers such as refiners and integrated oil companies and could put pressure on Canadian prices. The system would also introduce financial risk for shippers while reducing the same risk for Enbridge.

"As a mainline shipper having a firm long-term downstream pipeline commitment, MEG will be faced with the choice of either assuming the risk of apportioned nominations for the 10% of mainline spot capacity or, to mitigate the risk, signing a long-term TSA," Evans said in the letter. "Even if MEG executes a TSA, it faces the risk that it may not obtain all the firm capacity it requests."

The National Energy Board said it would consider the companies' complaints if Enbridge makes an application to change the system.

The mainline system was incorporated in 1949 by Exxon Mobil Corp.'s Imperial Oil Ltd. to move oil from a newly discovered field near Edmonton, Alberta, to refineries in the Great Lakes region. That entity, Interprovincial Pipe Line Co., was taken public and later became Enbridge.