Energy giants battle over costs of oil sands pipeline

In the latest fallout from the oil sands euphoria-gone-bust, a legal battle has erupted between three of Canada's most important energy companies.

Suncor Energy Inc. and Imperial Oil Ltd. are accusing Enbridge Inc. of overbuilding pipeline capacity into the U.S. at a time when it's not needed, and are looking to escape the increase in tolls that will come once Alberta Clipper, a major new crude pipeline, enters service later this year.

Although the oil sands construction frenzy ended in 2008, it has left behind a number of festering problems. A glut of pipeline capacity is among the more serious remnants. In a bid to duck the possibility of billions in extra tolls that could result, Suncor and Imperial have filed nearly 500 pages of documents with the U.S. Federal Energy Regulatory Commission, laying out a plan to force Enbridge Inc. to give them a break on pipeline rates into the U.S.

Though the industry agreed to tolls for the pipeline three years ago, the two companies argue that Enbridge did not heed their urging to reconsider before it began construction in 2008, and called the company "imprudent" for building the 1,600-kilometre Alberta Clipper pipeline after it became clear oil sands production would not grow as quickly as expected.

The $3.7-billion line is to take oil from Hardisty, Alta., to Superior, Wis. It's expected to enter service in the first half of this year.

But Suncor has led an effort asking the U.S. regulator to prevent Enbridge from raising its tolls to pay for the cost of building and operating the 520-kilometre U.S. portion of Clipper until Enbridge can prove that there is enough demand for it.

"Shippers are not required to pay for a pipeline that did not need to be placed into service," Suncor argues in its filing. It's a request that Enbridge chief executive officer Pat Daniel swatted down Wednesday as "without merit," and one analyst said was unlikely to succeed.

But it illustrates the bitter result of the oil sands crash, which has triggered a series of nasty fights, especially among pipeline companies that had already begun investing to seize on that growth. Not only are oil producers trying to back out from Alberta Clipper, but Enbridge itself has battled an effort by TransCanada Corp. to build another major pipeline, called Keystone XL, to export crude to the U.S. That dispute, too, arises from a key problem facing the oil patch: there are simply too many pipelines and not enough crude.

The tiff is a mirror image of the fights produced when pipeline companies overbuilt natural gas capacity in Alberta in the 1990s, which has led to problems that continue today. And though few doubt that all the oil capacity will eventually be needed, "the only bump in the road is that we're getting a little bit of capacity expansion occurring before it was really needed," TransCanada chief executive officer Hal Kvisle said in an interview.

It is a sizable bump.

By 2013, pipeline companies plan to have capacity for 1.65 million barrels of crude a day than Canada's energy companies expect to export.

"There's going to be 41 per cent spare capacity," said Chad Friess, a UBS Securities analyst. Pipeline companies actually like to have about 15 per cent of extra space so they can respond to market demand. But it could take a decade for the pipe glut to resolve itself, he said.

That doesn't give him much sympathy for Suncor.

"This is pretty late in the game to start complaining," he said. "You can't just come back and say, 'we don't want to pay the tolls because we didn't ramp up production as fast as we thought.' It seems a bit silly and unnecessary."

The outcome of the argument could, however, have substantial financial repercussions. Enbridge earns a regulated rate of return, entitling it to the same revenue no matter the number of barrels it carries. In rough terms, that means that if only 50 barrels are flowing through a 100-barrel pipeline, the per-barrel cost doubles.

Based on that logic, Enbridge has warned that oil companies could pay as much as $315-million in additional annual tolls by 2013 if Keystone XL is built, and takes away some of the crude that might otherwise flow through the Enbridge system.

That would add 75 cents per barrel - not enough to seriously affect profits among oil sands producers, but still a substantial fare hike. The current average cost to ship a barrel of oil from Edmonton to Wood River, Ill., is $3.25 (U.S.).

TransCanada has argued that oil producers have already voted with their feet, signing contracts for fully 76 per cent of Keystone XL's capacity. Enbridge, on the other hand, has not secured contracts for its capacity.

TransCanada also believes it has a more attractive project on its hands: Keystone XL will bring oil sands crude to the Gulf Coast, where refiners are desperate for more supply. Alberta Clipper sends oil to the Midwest, where plans for new refineries have largely been scrapped.

That dispute won't be settled until later this year, when the National Energy Board rules on whether Keystone XL should be built.

Enbridge will also have to wait for U.S. regulators to weigh in on its fight with Imperial and Suncor.

Speaking on a company earnings conference call, Enbridge's Mr. Daniel pointed out that the industry signed a toll agreement in 2007, which was approved by U.S. regulators in August of 2008. That same month, Enbridge began Clipper construction.

The company says it is working to ease the pain of toll increases, but it argues that the line is needed as a result of oil sands growth. "Alberta Clipper is now and has always been required," said spokeswoman Jennifer Varey, who admitted that major pipeline projects are time-consuming "and don't always line up exactly with the throughput profile expected at the outset."

The Canadian Association of Petroleum Producers, which negotiated the Clipper toll rates in 2007 on behalf of all oil producers - most of which have not come out in support of Suncor's bid - declined comment.

But Suncor has argued that before shovels were in the ground, industry forecasts for 2011 oil production had already dropped by 800,000 barrels, nearly double Clipper's 450,000-barrel capacity.

"In the face of mounting evidence of changed circumstances, Enbridge continued to incur costs for the project," Imperial said in its filing.

Still, the situation is difficult enough that even TransCanada's Mr. Kvisle managed to muster some concern for his archrival.

"I have sympathy for everybody in this situation," he said. "It's difficult for the shippers on the Enbridge system. It's difficult for Suncor and other big players and it's difficult for Enbridge. It's a tough one for the regulators to deal with as well."