Enbridge aims to mitigate oil price discounts

CALGARY Enbridge Inc. is proposing to boost capacity on its Mainline pipeline system by as much as 100,000 barrels per day by the middle of next year and reviewing how it operates the flagship line to help alleviate discounts plaguing the Canadian oilpatch.

Enbridge president and CEO Al Monaco told analysts during an investor day presentation Tuesday that the expansion of the company’s mainline, which moves 2.8-million barrels per day out of Western Canada, would relieve the pressure facing domestic producers amid oil discounts that hit US$50 below the West Texas Intermediate price over the past month but have eased slightly in recent weeks.

“We think the system, given its scale and reach, can be a very big part of the solution going forward in this basin,” Al Monaco said.

The Calgary-based company, North America’s largest pipeline operator, aims to switch its main oil pipeline network from a system that operates as a common carrier, where customers nominate the volume of crude they would like to ship each month to one under-pinned by long-term contracts. The change would begin in 2021 and is expected to benefit both large and small producers.

“We did have as part of developing our approach, the smaller producer in mind. They do not have to sign up for 20 years,” said Guy Jarvis, Enbridge executive vice-president and president of its liquids pipeline division, declining to provide more details as negotiations are ongoing.

He also said there is broad support for a contracted system from a group of Canadian producers and U.S. refiners. “They’ve all made multi-billion investments and what we’re hearing strongly from them is they don’t want to have to deal with apportionment,” Jarvis said.

Enbridge has had to ration space on its mainline over the course of 2018 as more oil is currently being produced in Western Canada than can fit in the country’s export pipeline network. The issue has come into sharp focus as oil companies criticized the pipeline operator for the system’s inefficiencies and as wide differentials for Western Canada Select heavy oil reached record-setting US$50 per barrel discounts relative to WTI.

While differentials have since narrowed to the US$14 per barrel range, thanks in large part to Alberta government’s recent move to force oil firms to curtail their production, domestic producers have continued to scale back spending.

Enbridge’s announcement comes as other players are reacting to the lack of pipeline capacity.

Cenovus Energy Inc. has said it won’t move forward with new oilsands projects until there is more capacity, and recently announced oil-by-rail deals to move 100,000 bpd from Alberta to the U.S. Gulf Coast over the next year.

On Tuesday, Cenovus and Athabasca Oil Corp. announced capital budgets that restrict spending to what’s required to almost maintain current production levels in 2019.

Cenovus said it will spend between $1.2 billion and $1.4 billion next year, down about four per cent from this year’s budget, with a target of a two-per-cent decline in overall production to between 472,000 and 500,000 barrels of oil equivalent per day in 2019.

The reduction will result mainly from a 17-per-cent slide in its non-oilsands Deep Basin oil and gas production to between 95,000 and 105,000 boe/d.

Oilsands output is expected to grow by three per cent.

Smaller Athabasca plans to spend between $95 million and $110 million in 2019, down from about $190 million this year, and output will slip to a midpoint of about 38,750 boe/d from 40,000 boe/d.

It also announced it will reduce the number of Calgary head office staff by 25 per cent and cut its executive and director salaries by 10 per cent to save money. “While we are encouraged by the recent shortterm steps taken by the Alberta government, significant damage has already been done to both the Canadian economy and investor confidence,” said Athabasca CEO Rob Broen in a statement.

Enbridge also announced plans to hike its dividend by 10 per cent to $2.95 per share annually, simplify its corporate structure and the way it raises funds through debt financing — a series of moves that were widely praised by analysts.