By Nia Williams
CALGARY, Alberta (Reuters) - Oil sands producer MEG Energy Corp has become the largest producer so far to call for pipeline company Enbridge Inc to scrap plans to introduce long-term, fixed-volume contracts on its Mainline system, in a letter to Canadian regulators laying out its opposition.
Last month the Explorers and Producers Association of Canada, which represents smaller producers, also wrote to Canada’s National Energy Board opposing the change because of concerns it will favor larger oil producers and refiners.
The 2.85 million barrel-per-day Mainline is North America's largest pipeline system and a crucial conduit for Canadian producers exporting crude to the United States.
Enbridge's plan to switch from a monthly nomination system to "contract carriage" comes at a time when Canadian export pipelines are so constrained the Alberta government has imposed oil production curtailments and has drawn fierce criticism from small producers.
"It is MEG's position that Enbridge's contract carriage proposal should be abandoned, as it is not in the overall public interest," said the letter, which was filed on Friday and signed by MEG's CEO Derek Evans. Evans said Enbridge could delay a two-month open season launched on Aug. 2 to solicit bids for contracted space on 90% of the Mainline.
A potential delay was dismissed by Guy Jarvis, Enbridge's executive vice president of liquids pipelines, who said the company is working to get regulatory approval to switch to fixed contracts before the current Mainline toll system expires in mid-2021.
"We are committed to continuing down this path. We think we have got the best offering we can come to given the diversity of our shippers," Jarvis told Reuters in a phone interview on Monday, adding the 10% of space allocated to spot volumes was standard for fixed-contract pipelines.
Under the current monthly nomination system, demand to ship on the Mainline regularly exceeds capacity, forcing Enbridge to ration, or apportion, space.
MEG, which produces 90,000 bpd at its Christina Lake project in northern Alberta, is worried the changes will prevent it from meeting previous commitments to ship crude to the Gulf Coast on the Flanagan South pipeline, which the Mainline feeds.
Smaller producers are concerned large U.S. refiners like BPPlc will snap up most of the contracted capacity, leaving them scrambling for the smaller slice of the pipeline open for spot volumes. MEG said it understands other parties will write to the NEB outlining concerns with the Enbridge plan and seeking to delay the open season.
ARC Energy Research Institute analyst Jackie Forrest said the 10% of the Mainline left open for spot shipping would likely be heavily rationed, resulting in more barrels getting stranded in Alberta each month and being sold off cheaply.
"If you shrink spot to 300,000 bpd you are going to see that space be many, many times over-allocated," Forrest said. "As the level of apportionment increases, the level of (price) discount increases."
It is the second time in just over a year that Enbridge has tried to change the current, highly criticized system. In June2018, it introduced plans to verify shippers’ oil supplies before allocating space but scrapped the policy after BP and others complained.
(Reporting by Nia Williams in Calgary, Alberta; Editing by Chris Reese and Lisa Shumaker)