U.S. approval of Enbridge pipeline plan irks some oil shippers

CALGARY, Alberta, July 18 Thu Jul 18, 2013 6:49pm EDT

CALGARY, Alberta, July 18 (Reuters) - U.S. regulators have approved a plan by Canada's largest pipeline company Enbridge Inc to alter how it calculates the amount of crude shippers can nominate on its export network, a move the company says will cut overbooking on congested lines.

The plan has been criticized by a number of shippers, who say the changes would give Enbridge too much discretion to allocate capacity and warned pipeline apportionment could rise as a result.

The opposition to Enbridge's move, designed to reduce overbooking, shows the fierce competition among oil sands producers and refiners for space on pipelines that are running close to full capacity.

The U.S. Federal Energy Regulatory Commission (FERC) on Thursday approved Enbridge's proposal to use a new system based on the capacity of refineries to calculate the amount of crude shippers can nominate on pipelines each month. Enbridge will then verify the nominations itself.

U.S. approval is needed as parts of Enbridge's pipeline network runs through the United States.

"In this case, Enbridge has filed a proposed Nomination Verification Procedure that the Commission has deemed to be just and reasonable," said the FERC document that was released on Thursday. Telephone calls to FERC for comment were not answered Thursday afternoon.

Since 2010, when a huge oil spill in Michigan shut for several months a major oil line between Indiana and Sarnia, Ontario, shippers have based nominations on the highest monthly volume they moved to refining facilities in the U.S. Midwest and Ontario over the previous two years.

According to filings, Enbridge say the change will help eliminate "air barrels" - industry terminology 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.

"We are pleased there's some clarification now around the issue and we intend to execute on the procedure for our next round of nominations in September," Enbridge spokesman Glen Whelan said.

Big shippers including Imperial Oil Ltd, Suncor Energy Inc, ExxonMobil Corp and Philips 66 have all filed motions with the regulator in protest, arguing the new system gives Enbridge too much discretion in determining whether to accept nominations from refining facilities.

"We're disappointed in the decision. We'll review it closely. At this point it is too soon to say what our next steps may be," Suncor spokeswoman Sneh Seetal said in an email.

A spokesman for ExxonMobil said it had been apprised of the FERC ruling and was evaluating its impacts.

Enbridge's pipeline system is the largest supplier of crude oil to U.S. Midwest refineries, and the single largest source of U.S. oil imports.

APPORTIONMENT CONCERNS

Surging Canadian oil production and regulatory delays on pipeline projects have forced Enbridge to institute apportionment on its network in recent years, contributing to discounts on Canadian crude that in January slipped to $40 below the West Texas Intermediate benchmark.

Shippers who protested the changes warned apportionment could surge under the new system, with large and newly expanded facilities - like BP Plc's 405,000 barrel per day Whiting, Indiana, refinery - able to nominate to their full takeaway capacity including storage, terminals and refineries.

Previously these shippers were limited by their historical nominations.

"I expect this quantum increase in nominations into a pipeline that has finite capacity will push apportionment through the roof," said one Calgary-based crude trader.

"The August trade cycle for September nominations, and subsequent September apportionment, will be very interesting to follow. I think this could get ugly."

Other industry players said refineries that relied primarily on Enbridge lines to carry their crude feedstock would be most vulnerable as a result of the ruling.

"People that are bringing barrels in from alternative sources win the game because they will maximise the total capacity to their refinery, then if there's 20 percent apportionment they just pull it in from other sources," another Calgary trader said.