RPT-Enbridge, shippers at odds over "air barrel" relief

Mon Nov 26, 2012 7:54am EST

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* Change aimed at cutting over-booking of pipeline space

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* Tight pipe space cited for deep Canadian oil discounts

By Jeffrey Jones

CALGARY, Alberta, Nov 23 (Reuters) - Enbridge Inc and its crude oil pipeline customers are battling over a plan by the company to try to cut the over-booking of capacity on the massive export network that has played a role in the deep discounting of Canadian crude prices.

The dispute is the latest symptom of an oil pipeline network running ever closer to capacity as production from the Canadian oil sands and North Dakota Bakken surges and expansion plans get bogged down by regulatory delays and environmental opposition.

Under the proposal, which is taking flak from some of the world's largest oil companies, Enbridge wants to shift how it calculates the amount of crude its shippers can nominate on the pipelines each month to a new system based on the capacities of refineries, which it would verify itself.

Since Enbridge's devastating oil spill in Michigan in the summer of 2010, which shut a major line between Indiana and Sarnia, Ontario, for several months, shippers have based nominations on the highest monthly volume they have moved to refining facilities in the U.S. Midwest and Ontario over the previous two years. That system was expected to be temporary.

According to documents filed with the U.S. Federal Energy Regulatory Commission, Enbridge's change is aimed at eliminating "air barrels" -- industry slang for nominations above shippers' ability to move oil. It is a way of gaming the system so companies get as much crude as possible to refineries.

"It's just a more efficient use of space on the system. It's a better, more viable way to confirm nominated volumes. It allows the customers to nominate volumes that reflect their facility capacity," spokesman Graham White said.

Big shippers, including Imperial Oil Ltd, Exxon Mobil Corp, Suncor Energy Inc, Marathon Petroleum Corp and Phillips 66, have all filed motions with the regulator in protest, arguing that it would give the pipeline company too much discretion to allocate capacity without giving the shippers recourse.

Enbridge and its rivals have proposed billions of dollars worth of new pipelines to Canada's West Coast, Quebec and to Texas. Enbridge has also proposed expanding much of its system in the U.S. Midwest. But for now, the industry must deal with the existing pipeline network as production rises.

APPORTIONMENT HITS PRICES

High nominations have forced Enbridge to institute apportionment, a system that results in all of the shippers having their bookings reduced on the two-million-barrel-per-day network. In November, the company added rare mid-month apportionment.

Traders cite apportionment as a major factor behind recent deep discounts on crudes such as Western Canada Select heavy blend and light synthetic, derived from the Alberta oil sands, saying supplies are backing up in Alberta.

This month, WCS heavy crude delivery sold at times for more than $30 a barrel under benchmark West Texas Intermediate, compared with around $15 under a month earlier.

Enbridge says its change would allow its roughly 70 shippers to more accurately match nominations to actual volumes, especially with some of the major U.S. Midwest refineries having undergone expansions. It said it filed to make the changes after several months working with a focus group.

Oil companies protesting the move do not want Enbridge interpreting refinery capacities, which can vary widely based on seasonal production and maintenance schedules.

It would give advantages to refineries that have recently expanded and those served by more than one pipeline, according to filings. In addition, shippers without their own refineries would have less power in the market, they said.

The proposal "also fails to explain how Enbridge, as common carrier pipeline company, is qualified to make sophisticated judgments regarding the 'capability' of individual refineries to receive crude oil," Suncor said in its motion.

"Enbridge does not explain how it is qualified to second-guess its refinery customers regarding their respective capability to receive crude oil."

Officials with the oil companies declined to comment beyond the filings.

BP Plc, which is in the midst of an expansion of its big Whiting, Indiana, refinery, said in its submission it is "generally supportive of Enbridge's proposal."

Enbridge and many of the shippers said they support the idea of a seven-month suspension in the process as a way to resolve issues.

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