Enbridge Is Said to Eye Long-Term Deals on Biggest Oil Pipeline

Enbridge Inc. plans to overhaul its system of awarding space on the biggest pipeline carrying Canadian oil to U.S. refiners.

Canada’s largest pipeline operator wants to contract 90 percent of the capacity on its 2.85 million-barrel-a-day mainline system by signing long-term deals with potential shippers in an open season early next year, according to people familiar with the matter.

The so-called take-or-pay agreements will begin January 2020, assuming the company gets necessary approvals from the nation’s regulators. This would effectively displace Enbridge’s current system of operating the mainline as a common carrier, where anyone can seek to ship crude on the line. It represents Enbridge’s latest attempt to more efficiently transport Canadian crude south of the border and solve a years-old problem of shippers gaming its nomination process by requesting space for more barrels than they actually have.

“In a take-or-pay system, a company commits to making a payment for a fixed volume for a fixed term, regardless of whether you use it,” Kevin Birn, a director on the North American crude oil markets team at IHS Markit, said in a phone interview. “It can provide a midstream company like Enbridge greater financial security.”

Overbooked Pipelines

The changes may help better allocate space at a time when Canada is severely lacking in pipeline capacity to the U.S. The acute shortage has pressured heavy Canadian crude to the weakest level in more than four years. Enbridge’s mainline system has been consistently oversubscribed this year.

The process of having long-term shippers on a pipeline is commonplace among U.S. and other Canadian pipelines, but the system could sideline small users and favor larger companies such as Chicago-area refiners that take the lion’s share of Canadian oil.

“The number of players admitted to the game is limited by their resources,” said Sandy Fielden, director of research for the commodities and energy group at Morningstar Inc. “That’s always been a problem, and this hurt the smaller guys in the oil sands not just because the pipelines were full but because they couldn’t get a bank to back the commitment.”

Enbridge has for years tried to improve its nomination system to eliminate so-called “air barrels,” an industry term used for nominations above a shipper’s ability to transport that oil. The practice is used as a way to ensure that companies can get as much space on a pipeline as they need.

In a notice last month, the company informed shippers that their volumes would be based on a 12-month rolling average, plus 15 percent for heavy crude and 40 percent for light crude, and that the new rules applied to July shipments onward.

Shippers who wished to send more than their allotted amount would have had to show physical proof of the volumes. The plan was abandoned after industry pushback. BP Plc filed a complaint with Canada’s National Energy Board in early June, saying that Enbridge used an “unreasonable exercise of discretion” when it announced, and then — 11 days later — canceled, the new rules governing the pipeline.