Energy regulator shocks industry by blocking Enbridge's 'open season' process

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CALGARY – The Canada Energy Regulator surprised the oil industry Friday by blocking a proposed change to how a major oil export system operates, a move that will likely have an effect on the spot price for crude.

The CER sided with complaints lodged by Canadian Natural Resources Ltd., Suncor Energy Inc., Shell Canada Ltd. against Enbridge Inc. over perceived abuses of market power.

In an unprecedented decision, the regulator is instructing Enbridge to end an “open season,”  a commercial process where a company calls for new contracts on an existing line. The company argued that the CER should wait until after contracts are signed to intervene.

Enbridge had called on its shippers — a combination of oil producers and refiners — to sign long-term contracts on 90 per cent of the space available on its Mainline. The Mainline system has never operated under long-term contracts and has functioned for years as the Canadian oil industry’s de facto spot market.

The CER found that Enbridge is currently “in a dominant position in the market” and the regulator expressed its “concerns regarding the fairness” about the move to re-contract the line now, when “many potential shippers may have little choice” but to participate.

“Shippers have few alternative transportation options at this time, and the open season is not in support of expansion pipeline capacity,” the CER wrote in its decision, posted after markets closed Friday afternoon.

Despite the unfavourable decision, Enbridge said it is still committed to contracting the Mainline.

“Enbridge remains committed to moving ahead with contract carriage on the Mainline and has strong support for our offering. We will evaluate this decision and the next steps that we will take towards implementing contract carriage,” the company said in an emailed statement.

ARC Energy Research Institute senior director Jackie Forrest said Canadian oil producers were, with a few exceptions, opposed to Enbridge’s attempt to contract the system at this time. “The vast majority of the industry was opposed to this open season,” she said.

Forrest said the CER made the case that this kind of intervention was justified. “I don’t think they had a set of circumstances as compelling as this,” Forrest said.

The decision was welcomed by the small- and mid-sized oil and gas producers represented by Explorers and Producers Association of Canada.

“I’m very pleased with the timeliness of the decision,” EPAC president Tristan Goodman said of the halt to the open season. “We think it’s good news for Canadians. We look forward to working with Enbridge going forward.”

In an earlier decision Friday, CER will allow TC Energy to change how it operates its Nova gas pipeline system during periods of maintenance or construction – granting the requests of the Alberta government and 23 gas producers that said natural gas in the province couldn’t get into storage under the old system.

Better access to storage is seen as a critically important factor in preventing further bankruptcies by gas producers.

The move had been opposed by two U.S. trading houses, a Spanish utility company and a fertilizer company. They argued the change would occur too quickly and that the Alberta government was picking winners and losers in the market.

After a one-day hearing Wednesday, the CER issued its decision two days later without providing the rationale for the decision. The CER said TC Energy can implement the new system beginning Sept. 30.

“The Commission is releasing the decision now, in advance of the reasons, in response to the requests from NGTL and other parties for an expedited decision,” the CER wrote in its decision, released one day after lawyers and gas executives packed into a hearing room for a one-day opportunity to present arguments on the topic.

The sector had been divided for the last two years about the operation of the Nova system but has come together over the course of 2019 to push for the solution that was approved Friday.

“This was the solution that the industry wanted,” Alberta’s Associate Minister for Natural Gas Dale Nally said following the CER’s release of the decision. “This is a big win.”

Nally said that there had previously been divisions within the gas sector about how to fix the issue of extreme volatility in the domestic gas market, where AECO natural gas prices  fluctuate between $3 per thousand cubic feet and 10 cents per mcf in the same week.

The volatility in the market has driven many investors away from Canada’s gas sector.

The protocol change will result in less volatility and there’s no doubt that too much volatility … affected investment capital flowing into the province

Mike Rose, president and CEO of Tourmaline Oil Corp.

“The protocol change will result in less volatility and there’s no doubt that too much volatility – which we’ve been seeing the past couple summers – affected investment capital flowing into the province,” said Mike Rose, president and CEO of Tourmaline Oil Corp.

“I think it makes investors, when they see something more stable, they’re more willing to invest,” Rose said.

EPAC’s Goodman said he couldn’t remember a time when the country’s pipeline regulator had to make two highly important pipeline decisions on the country’s biggest pipelines in such a short time frame – let alone on the same day.

He acknowledged there’s been some friction within the energy industry on both fronts, including some disagreements between oil and gas producers and their main pipeline providers.

“As those lines have continued to get tighter because capacity is limited, there has been ongoing debate as to the best way to efficiently use those lines,” he said.

“They can’t survive without us. We can’t survive without them,” Goodman said of the relationship between the upstream and the midstream sectors of the Canadian oil and gas industry but added the producers and their pipeline operators agree more than they disagree on major issues.