Blog Posts | Pembina Institute

Enbridge Gateway shipping agreements a mere handshake, not a binding commitment

Published Aug. 25, 2011 by Nathan Lemphers

Nathan Lemphers

In business, it's generally considered unwise to launch a new product without clear market research showing a strong customer base and high demand. Moving ahead without confidence there's a market for your product would be a recipe for failure.

Yet that's where Canadian pipeline company Enbridge seems to be headed with its proposed Northern Gateway pipeline, which would transport bitumen from the oilsands in Alberta to the Pacific Coast near Kitimat, British Columbia. Without binding agreements locking in producers to supply the oil and refiners to get it to market, Enbridge doesn't have the proof of market demand required to build a major new pipeline.

Enbridge has promised to demonstrate commercial support for its product before building the pipeline but only after the government has approved it — an unprecedented position that rival companies such as KinderMorgan have been quick to challenge.

Precedent agreements are little more than a "good old boy handshake," or a "commitment in principle"In an effort to prove its project is more than a pipe dream, Enbridge announced yesterday that it has secured 'precedent' agreements from Canadian oil producers and Asian markets. But such agreements aren't binding commitments. Former CEO of TransCanada, Hal Kvisle, calls precedent agreements a "good old boy handshake" that are "commitments in principle" — in other words, tentative agreements that can be abandoned if a number of conditions aren't met.  

So yesterday's announcement isn't enough to settle the debate over whether there is serious commercial support for the proposed pipeline.

Companies can still back out

Enbridge had a precedent agreement with PetroChina back in 2005 to ship oilsands crude to China — but PetroChina withdrew its support in 2007 because of project delays. As demonstrated by PetroChina's hasty retreat, these precedent agreements are rather easy for companies to get out of, and do not represent a legally binding agreement to ship oilsands crude.

Taking a precedent agreement to a legally binding level requires Letters of Support and Transportation Shipping Agreements. Until then, any number of issues such as First Nations opposition, likely regulatory delays, or market volatility may cause prospective shippers to back out, just like PetroChina did.

Where is this oil headed?

Map showing the proposed route of the Northern Gateway pipeline.Is the oil headed to refiners in Washington State, California, the U.S. Gulf Coast or Asia?  If it's headed to Asia, which countries will refine the bitumen and get it to market? Unfortunately, Enbridge has not disclosed any of this information, only stating that "confidential parties have agreed on commercial terms relating to the long term use of the facilities." 

Where the oil is going is crucial information during a regulatory hearing. If Enbridge does not make this information public, how are the government or local communities to assess if this pipeline is needed?

Use evidence to prove your case

Before a regulatory hearing takes place, Enbridge should come to the table with legally binding, publicly available shipper agreements that are contingent on regulatory approval. Without this critical information, it is very difficult to make a case that this pipeline makes economic sense and is in the best interest of Canadians. 

Rather than rely on the confidential, non-binding agreements announced yesterday, Enbridge needs to act in good faith and provide stronger evidence to demonstrate if this apparent commercial demand is real.  

The proposed Northern Gateway pipeline would cross largely pristine land, ship a risky product to a new market and place many communities, livelihoods and ecosystems at risk if there was an oil spill. High risks require high scrutiny.

Despite Enbridge's new precedent agreements, there remains much uncertainty and many unanswered questions about this project, and Enbridge still has much work ahead before it will be able to convince local communities, regulators and Canadians that this pipeline needs to be built.

Philip Beaudoin — Sep 06, 2011 - 07:58 PM MT

Not much to debate.Just look at the price of Brent (world price)as compared to WTI,thats what we get.We are being robbed big time. Our oil is of better quality then Brent,but I'll settle for the same price.Look at all the tax revenue the government is losing as well.This is not rocket science.There are pipelines everywhere and ship's transporting oil everywhere, and have been for years.Safety is improving all the time.

Nathan Lemphers — Sep 26, 2011 - 10:09 PM MT

@ Phillip. Oilsands are getting discounted prices because of the glut of oil in the U.S. and because it costs more to refine heavy sour oilsands crude than light sweet crudes.

It's not hard to argue that safety has improved over time. There have been significant improvements in the health and safety of the oil industry over the decades. But if the amount of oil shipped has increased relatively faster than safety improvements you will likely see an increase in the actual number of pipeline spills. Not to mention if the oil that you are shipping now is more abrasive and corrosive on the pipelines.

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