None of the additional facilities that are proposed to address the current shortfall in oil pipeline and rail capacity out of western Canada – pipeline expansions (Enbridge Line 3, TMX), a new pipeline (Keystone XL) and additional rail tanker cars – will be available in the short-term. Optimizing the use of existing capacity has, therefore, become all the more critical.
On 30 November 2018, the Minister of Natural Resources acted under the lightly-used Part II ADVISORY FUNCTIONS of the National Energy Board Act1 to ask the Board’s advice on three questions:
- Is the current monthly nomination process to access available capacity on oil pipelines functioning appropriately, consistent with the “common carrier” provisions of the National Energy Board Act and efficient utilization of pipeline infrastructure (for example, by auctioning uncontracted export capacity to smaller producers)?
- Are there any other impediments to the further optimization of pipeline capacity that could be addressed by the National Energy Board, governments or pipeline companies, in the short-term and long-term?
- Are there short-term steps to further maximize rail capacity that could be addressed by governments to alleviate the current situation?2
The Board provided its advice in a March 2019 report under the title Optimizing Oil Pipeline and Rail Capacity out of Western Canada.3
The context for Question 1 is found in subsection 71(1) of the NEB Act, which, in effect, provides that oil pipeline companies shall act as common carriers. The general obligation is, however, subject to “such exemptions, conditions or regulations as the Board may prescribe…” In fact, several of the major pipelines out of Alberta operate under Board-approved contracted capacity, with limited uncommitted capacity available to satisfy common carrier obligations.4
The notable exception is the largest oil pipeline by far, the Enbridge Mainline, which has no contracted capacity, such that the availability of its whole capacity must satisfy the general requirement of subsection 71(1). Enbridge5 does this by apportioning capacity. Apportionment is conducted in accordance with rules laid out in the pipeline’s tariff and allegedly gives rise to opportunities to “game the system” by nominating and being allocated capacity that may not actually be used by the shipper, resulting in what are often referred to as “air barrels”. The process also gives advantages to major players with upstream and downstream infrastructure that provides supply and takeaway capacity.
Against this background, the Board, in response to Question 1, reported that pipelines transporting crude oil out of western Canada are currently operating at full capacity. In the last quarter of 2018, the average utilization rate on the major export pipelines was 98 per cent. Any notable increase in throughput would have to come from new capacity additions.
The Board noted that integrated producers and shippers that own or have contracted crude oil storage and refinery capacity have a greater ability to acquire pipeline capacity.6 The additional flexibility available to these parties to access pipeline capacity was the result of past investments and, furthermore, involved facilities beyond the jurisdiction of the NEB. The Board added that changes “would have significant effects on markets and stakeholders…but would not increase utilization further.”7
The Board concluded that existing monthly nomination procedures do not appear to affect operational efficiency and do not raise compliance concerns. However, it added that there is scope to improve existing verification procedures, while noting that designing and establishing a new and integrated verification framework extended beyond the Board’s oversight of federally-regulated pipelines. Without broad consultation with industry, governments, and regulatory bodies, “there is a significant risk of unintended consequences…”8 A first step might be an interjurisdictional conference, in which the Board would participate.9
The obvious observation (although the Board refrained from making it) is that, with the advent of additional oil pipeline capacity, issues around nominations and verification would largely disappear. Furthermore, additional capacity would give greater leverage to unintegrated Alberta crude producers and other shippers, including the Alberta government.
In response to Question 2, the Board identified potential solutions to further optimizing capacity, such as building partial upgraders that would reduce the amount of diluent needed to ship bitumen. This would result in freeing up some capacity currently used to import diluent; this capacity could then be reversed and used to ship bitumen. Such solutions would, however, “require structural changes to the market, significant investments, and a long time horizon.”10 Furthermore, private investors may be “reluctant to make major investments in projects that may become uneconomic if new pipeline capacity is added.”11
In responding to Question 3, the Board, in addition to noting the additional cost of moving oil by rail, reported that the timing and approval of additional pipeline capacity is hampering private investment in rail capacity. While there might be a role for governments, “any policy action has the potential to create unintended consequences given the complexity of the system.”12
The NEB’s overall conclusion – that the solution to Canada’s current oil pipeline capacity challenges lies in adding new capacity – is of course not surprising. Two observations by the Board are, however, interesting. Firstly, the Board noted that certain structural advantages enjoyed by some market participants are the result of past investments by those participants. The implication is that those participants should not be penalized. Secondly, with respect to the possibility of government action, the Board cautions that “not all outcomes can be predicted”13 and that “any policy action has the potential to create unintended consequences given the complexity of the system.”14 These two observations perhaps make it unlikely that any policy or regulatory change will follow from the Board’s report.
However, other factors are likely to lead to significant changes in the Canadian oil pipeline capacity market over the next two to three years, such as the completion of any or all of the Enbridge Line 3, TMX or Keystone XL projects. Furthermore, Enbridge, which, as noted, currently does not offer contracted capacity and operates 100 per cent as a common carrier, is exploring with its shippers the possibility of offering contracted capacity on its Mainline system, to be implemented on the expiry of its current agreement with shippers in 2021.
Finally, it has sometimes been commented that Part II of the NEB Act15 (ADVISORY FUNCTIONS) is somewhat anomalous in that it empowers the Minister to call on the Board for advice independently of the Board’s quasi-judicial regulatory responsibilities. Historically, the explanation is found in the fact that at the time the Board was established in 1959 there really was no other federal department or agency with explicit responsibilities relating to energy. Apparently, it was thought that the newly-established Board would become the locus of the government’s knowledge and expertise in the area. Interestingly, notwithstanding that there are now other government institutions with related mandates – Natural Resources Canada (as successor to Energy, Mines and Resources Canada) and Statistics Canada, for example – Part II of the NEB Act16 is proposed to be carried forward under Bill C-6917, which would replace the NEB with the Canadian Energy Regulator.
None of the additional facilities that are proposed to address the current shortfall in oil pipeline and rail capacity out of western Canada – pipeline expansions (Enbridge Line 3, TMX), a new pipeline (Keystone XL) and additional rail tanker cars – will be available in the short-term. Optimizing the use of existing capacity has, therefore, become all the more critical.
On 30 November 2018, the Minister of Natural Resources acted under the lightly-used Part II ADVISORY FUNCTIONS of the National Energy Board Act1 to ask the Board’s advice on three questions:
The Board provided its advice in a March 2019 report under the title Optimizing Oil Pipeline and Rail Capacity out of Western Canada.3
The context for Question 1 is found in subsection 71(1) of the NEB Act, which, in effect, provides that oil pipeline companies shall act as common carriers. The general obligation is, however, subject to “such exemptions, conditions or regulations as the Board may prescribe…” In fact, several of the major pipelines out of Alberta operate under Board-approved contracted capacity, with limited uncommitted capacity available to satisfy common carrier obligations.4
The notable exception is the largest oil pipeline by far, the Enbridge Mainline, which has no contracted capacity, such that the availability of its whole capacity must satisfy the general requirement of subsection 71(1). Enbridge5 does this by apportioning capacity. Apportionment is conducted in accordance with rules laid out in the pipeline’s tariff and allegedly gives rise to opportunities to “game the system” by nominating and being allocated capacity that may not actually be used by the shipper, resulting in what are often referred to as “air barrels”. The process also gives advantages to major players with upstream and downstream infrastructure that provides supply and takeaway capacity.
Against this background, the Board, in response to Question 1, reported that pipelines transporting crude oil out of western Canada are currently operating at full capacity. In the last quarter of 2018, the average utilization rate on the major export pipelines was 98 per cent. Any notable increase in throughput would have to come from new capacity additions.
The Board noted that integrated producers and shippers that own or have contracted crude oil storage and refinery capacity have a greater ability to acquire pipeline capacity.6 The additional flexibility available to these parties to access pipeline capacity was the result of past investments and, furthermore, involved facilities beyond the jurisdiction of the NEB. The Board added that changes “would have significant effects on markets and stakeholders…but would not increase utilization further.”7
The Board concluded that existing monthly nomination procedures do not appear to affect operational efficiency and do not raise compliance concerns. However, it added that there is scope to improve existing verification procedures, while noting that designing and establishing a new and integrated verification framework extended beyond the Board’s oversight of federally-regulated pipelines. Without broad consultation with industry, governments, and regulatory bodies, “there is a significant risk of unintended consequences…”8 A first step might be an interjurisdictional conference, in which the Board would participate.9
The obvious observation (although the Board refrained from making it) is that, with the advent of additional oil pipeline capacity, issues around nominations and verification would largely disappear. Furthermore, additional capacity would give greater leverage to unintegrated Alberta crude producers and other shippers, including the Alberta government.
In response to Question 2, the Board identified potential solutions to further optimizing capacity, such as building partial upgraders that would reduce the amount of diluent needed to ship bitumen. This would result in freeing up some capacity currently used to import diluent; this capacity could then be reversed and used to ship bitumen. Such solutions would, however, “require structural changes to the market, significant investments, and a long time horizon.”10 Furthermore, private investors may be “reluctant to make major investments in projects that may become uneconomic if new pipeline capacity is added.”11
In responding to Question 3, the Board, in addition to noting the additional cost of moving oil by rail, reported that the timing and approval of additional pipeline capacity is hampering private investment in rail capacity. While there might be a role for governments, “any policy action has the potential to create unintended consequences given the complexity of the system.”12
The NEB’s overall conclusion – that the solution to Canada’s current oil pipeline capacity challenges lies in adding new capacity – is of course not surprising. Two observations by the Board are, however, interesting. Firstly, the Board noted that certain structural advantages enjoyed by some market participants are the result of past investments by those participants. The implication is that those participants should not be penalized. Secondly, with respect to the possibility of government action, the Board cautions that “not all outcomes can be predicted”13 and that “any policy action has the potential to create unintended consequences given the complexity of the system.”14 These two observations perhaps make it unlikely that any policy or regulatory change will follow from the Board’s report.
However, other factors are likely to lead to significant changes in the Canadian oil pipeline capacity market over the next two to three years, such as the completion of any or all of the Enbridge Line 3, TMX or Keystone XL projects. Furthermore, Enbridge, which, as noted, currently does not offer contracted capacity and operates 100 per cent as a common carrier, is exploring with its shippers the possibility of offering contracted capacity on its Mainline system, to be implemented on the expiry of its current agreement with shippers in 2021.
Finally, it has sometimes been commented that Part II of the NEB Act15 (ADVISORY FUNCTIONS) is somewhat anomalous in that it empowers the Minister to call on the Board for advice independently of the Board’s quasi-judicial regulatory responsibilities. Historically, the explanation is found in the fact that at the time the Board was established in 1959 there really was no other federal department or agency with explicit responsibilities relating to energy. Apparently, it was thought that the newly-established Board would become the locus of the government’s knowledge and expertise in the area. Interestingly, notwithstanding that there are now other government institutions with related mandates – Natural Resources Canada (as successor to Energy, Mines and Resources Canada) and Statistics Canada, for example – Part II of the NEB Act16 is proposed to be carried forward under Bill C-6917, which would replace the NEB with the Canadian Energy Regulator.
* I wish to acknowledge helpful comments from Dennis McConaghy. Responsibility for the content, however, is entirely mine.