Pay attention, control of Canada’s oil hinges on a hearing few even know is happening

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An essential listening to kicked off in Might earlier than the Canadian Power Regulator. It’s about the way forward for the Canadian oil business. Its topic is the primary risk to Canadian oil manufacturing and costs over the following decade — arguably as essential as local weather change.

I communicate, in fact, of the Enbridge Inc.’s Mainline agency contracting software.

Toll hearings are the blocking-and-tackling of pipeline infrastructure. Who pays and the way a lot. They’re far-off from the controversial and well-covered hearings on new pipeline investments. No commissioner ever cried at a toll listening to.

However this one is essential. The intervenors opposing Enbridge Inc.’s software — largely Canadian oil producers — use a few of the foulest language I’ve ever seen in a regulatory software, together with the dreaded “abuse of market energy” accusation.

Enbridge, in distinction, claims this step is required to offer shippers with the long-term precedence entry they need and cut back the Mainline’s future quantity danger.

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With out the Enbridge Mainline, stranded western Canadian oil manufacturing could be nugatory

All people is aware of that pipelines are very arduous to construct. That will increase the worth of pipelines that exist already. The Enbridge Mainline strikes virtually three million barrels daily from western Canada to markets within the U.S. Midwest and past. It accounts for 70 per cent of all of the oil moved from western Canada. It’s an especially helpful and essential asset for Enbridge and all Canadians.

What’s the worth of a barrel of oil? With out a path to market, the worth of the barrel is zero. A big, essential pipeline that strikes a overwhelming majority of the oil from a transport-constrained basin is due to this fact, in principle, price your complete worth of oil manufacturing from that basin.

With out the Enbridge Mainline, stranded western Canadian oil manufacturing could be nugatory. Wars have been fought over much less.

In an effort to forestall the house owners of pipelines from unfairly benefiting from their distinctive place at a provide chain pinch level, regulation limits not simply how pipelines function but additionally how a lot they cost. The CER, along with all its different jobs, is charged with making certain {that a} pipeline’s price is simply and affordable.

What a pipeline prices isn’t left as much as the market.

And it is a enormous downside for Enbridge. A brand new pipeline, owned by you and me, the Trans Mountain Enlargement (TMX) will quickly be in operation. Most forecasters, together with Enbridge’s, consider that the pipeline scarcity of the final decade will change to a pipeline extra.

When there’s an extra of pipelines, by definition they don’t seem to be working chock-full of oil anymore. Enbridge’s quantity danger right here is greater than that of another pipeline, as a result of not solely is it huge, however it’s a “widespread provider.”

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Pipelines could be tolled two methods. One is analogous to a marriage reception, the place the completely happy couple ensures a visitor depend, menu, wine, every thing. If the marriage is known as off the night time earlier than, too dangerous: it’s all paid for. That is known as “agency contract.”

New pipelines are constructed below agency contracts. They’re dangerous. With out agency contracts, new pipelines would by no means get constructed.

In contrast to a marriage, a restaurant reservation has no price and no danger to the consumer. Pipelines that function as eating places are “widespread carriers.” Enbridge Mainline shippers could make a distinct delivery resolution each month.

For Enbridge, this poses a difficulty as a result of the brand new TMX is below agency contract. That pipe will move at contracted capability: its shippers are paying for the quantity anyway. It implies that the widespread provider Mainline will disproportionately see quantity declines, as a result of there’s no contract committing shippers to the pipe.

In all of the methods Enbridge may select to reply to this risk, they took probably the most aggressive: trying to contract the Mainline below agency service. This successfully transfers the chance of declining volumes from Enbridge to the agency shippers. Enbridge precisely states that almost all shippers need this.

A pipeline with quantity declines will see rising prices as economies of scale are misplaced, and extra prices must be recovered on fewer barrels. This may result in a dying spiral of accelerating tolls resulting in extra quantity losses. Everybody — Enbridge, shippers, producers, taxpayers — need to keep away from that end result.

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To this point that is simply enterprise. Enbridge sees a risk to a crown jewel and is responding to shed a few of that danger to its prospects.

However one essential element makes it a matter of nationwide concern.

The toll listening to on the CER is about who successfully controls Canadian sources

Most volumes shipped on the Mainline are below the management of American refiners. Shippers accounting for 70 per cent of Mainline volumes assist agency contracting, and solely two of those are firms headquartered in Canada and majority owned by Canadians: Cenovus Power Inc. (which owns refineries within the Midwest) and tiny Vermillion Power Inc.

Keep in mind, Enbridge can not promote pipeline capability to simply anybody for any worth. It’s sure by regulation. However that very same constraint doesn’t lengthen to shippers who management agency capability. They’ll do no matter they need with it. They need this management so badly that they’re prepared to signal decade-long offers to get it.

Canadians fought arduous to personal and management their oil sources. Now, in a low-level regulatory listening to that few even know is going on, we could find yourself ceding management to international entities.

Management of the pipeline means management of our useful resource. Environmental teams know this. The Canadian producers intervening in opposition to Enbridge’s software know this. Our legislators know this.

The toll listening to on the CER, which finish on June 25, is as a substitute about who successfully controls Canadian sources, what worth they obtain, and what the proceeds are used for. It’s a deeply political query left unaddressed by the bizarre call-and-response format of a regulatory continuing.

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Refiners need low oil costs. Producers and taxpayers need excessive costs: excessive costs pay for capital funding and Canada’s enviable lifestyle. Putting the Mainline below the management of a small variety of refiners wanting low costs materially enhances the bargaining place of these refiners.

This is the reason Canadian producers are extraordinarily upset. Enbridge’s smart place is that refiners who need to pay extra for the capability ought to have it. And if this have been a easy matter of enterprise, Enbridge would have a degree.

For Enbridge, its toll software is simply enterprise. For the remainder of us, it’s massively consequential. Somebody ought to concentrate.

Samir Kayande is an impartial enterprise technique marketing consultant with 25 years of vitality experience.

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