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File photo of the Enbridge oil terminal facility in Hardisty, Alta., where the company's Line 3 begins.

CP

Enbridge Inc. has run into a serious setback with its proposed $7.5-billion Line 3 expansion as Minnesota's Department of Commerce concluded the company has not established a need for the project as required under state rules.

The Commerce Department provided testimony Monday to the Minnesota Public Utilities Commission, which must issue a certificate of need before Enbridge can expand the pipeline through the state.

Enbridge proposes to boost the capacity of its main export pipeline by 375,000 barrels per day, with the ability to expand it further in the future. The company – which received federal government approval last November for the Canadian portion – began construction on Line 3 in Alberta and Saskatchewan this summer.

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However, it has faced opposition in Minnesota from environmental groups, landowners and First Nations. It can now add the state's Department of Commerce to that list of opponents.

Western Canadian oil producers are eager to see new pipeline capacity built to meet growing export volumes over the next three years. Lack of capacity will force producers to turn to more expensive rail, and deprive them of top prices that they can fetch on Gulf Coast and international markets.

Winning final approvals for the several projects currently being proposed has proven to be an uphill battle.

On Monday, the department released expert analysis and its recommendation on the certificate of need for the Line 3 project.

"The comprehensive 338-page testimony concludes that Enbridge has not established a need for the proposed project in Minnesota as required under state rules," it said.

On the contrary, it suggested Enbridge should be required to shut down its existing Line 3, noting the company has expanded another pipeline Line 67 that will help meet demand in Minnesota and the Midwest.

Line 3 currently carries crude from Hardisty, Alta., to Superior, Wis., where it is fed into a network that carries oil to refineries in the U.S. Midwest and, increasingly, to the Gulf Coast.

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An Enbridge spokesman said the department's analysis "is only one view," and that the company and its industry supporters will respond to it as the PUC process continues. A decision is expected in 2018.

"This is critical infrastructure, which is being replaced with the most advanced materials, most up-to-date technology and under superior construction methods," Michael Barnes, a Houston-based Enbridge spokesman, said in an e-mail.

The department's analysis argues that Enbridge did not provide a sufficient analysis of future demand, and independently finds that Minnesota demand for refined products appears unlikely to increase in the long term."

It concludes that "in light of the serious risks and effects on the natural and socioeconomic environments of the existing Line 3 and the limited benefit that the existing Line 3 provides to Minnesota refineries, it is reasonable to conclude that Minnesota would be better off if Enbridge proposed to cease operations of the existing Line 3, without any new pipeline being built."

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