The Canadian Energy Regulator (CER) ruled against Enbridge’s application to contract 90% of the Mainline capacity on Friday. The application proposed the conversion from uncommitted or “walk-up” service to firm service with fixed tolls and volumes for terms from 8 to 20 years.
The CER found that removing 90% of uncommitted capacity from the market would result in inequitable outcomes for some shippers and non-shippers without a compelling justification. The CER also commented that the change would remove uncommitted capacity for what could amount to up to 20 years and could result in significant disruptions to the market with no reliable way for the market to mitigate the impacts in a timely manner. The CER ultimately confirmed Enbridge’s existing process for downstream verification and affirmed that interim tolls would remain in effect.
For years, Enbridge has been focused on transforming itself into a pure regulated midstream and utility company. The conversion of the Mainline pipeline from common carrier to a firm service basis was one of the largest hurdles in this strategy.
Enbridge responded to the CER ruling with a statement that it will re-engage with stakeholders and initiate a process to negotiate an alternative commercial framework to put before the CER for approval. The timeline, says the company, is to begin in 2021, with negotiations through 2022, and then a CER review and decision in 2023.
Enbridge’s efforts convert the Mainline to a firm service system began in 2019. At that time, proposed additional pipeline capacity was forecast to outstrip supply growth resulting in the various export pipelines competing for barrels. One of the major benefits to Enbridge in the change of service type is that Enbridge would be protected from barrels switching from the Mainline to another export pipeline by entering into long-term firm contracts with shippers. Even with the cancellation of Keystone XL, the additional export capacity from Enbridge Line 3 Replacement project and the Transmountain Expansion Project (TMX) (anticipated in-service December 2022, according to Transmountain reports) will provide much needed relief to a region that has been under-piped for years. The risk of barrels switching off of Enbridge in search of higher value markets remains.
The timeline for Enbridge to put a new framework in place is somewhat critical as TMX approaches in-service. The 590 MBbl/d of additional TMX capacity will provide direct access to higher value markets in the Pacific basin, including the US west coast and Asia. Attractive price differentials between Alberta and these destination markets persuade us that that the line will fill immediately, likely at the expense of Enbridge Mainline.