ECON 366: Energy Economics

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.title[
# ECON 366: Energy Economics
]
.subtitle[
## Topic 2.5: Oil and Gas Transportation Infrastructure
]
.author[
### Andrew Leach, Professor of Economics and Law
]
.date[
### <a href="mailto:aleach@ualberta.ca"> aleach@ualberta.ca</a> <a href="https://github.com/leachandrew"> leachandrew</a> <a href="https://twitter.com/andrew_leach"> @andrew_leach</a> 
]

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# Oil and gas transportation
At the end of this section, you should feel comfortable answering all of these questions:
- Why are pipelines and other transportation technology important in crude oil and gas markets? What impact does infrastructure have on prices?
- What is Canada’s current pipeline infrastructure and how are we positioned to accommodate future growth or contraction in production?
- How and why are pipelines regulated as they are? 
  - What does the Canadian Energy Regulator (CER) do?
  - Why does the CER need to be involved in pipeline approvals?
- What is the difference in realized value for oil sands bitumen transported by pipe vs transported by rail and why?

We will leave toll setting for a different set of slides later on, but we'll introduce the basics here.
---

# Oil supply chain

<img src="oil_supply_chain.png" width="800px" style="display: block; margin: auto;" />
---

# Pipelines link our products to markets

For today's discussion, we're interested in transmission pipelines:
- long distance pipelines which carry oil and natural gas out of Alberta
- oil pipelines you *may* have heard of: 
  - Keystone (not the XL one, RIP)
  - TransMountain (and the TransMountain Expansion or TMX)
  - Enbridge Mainline system
- gas pipelines you *may* have heard of: 
  - TCPL Mainline
  - Nova Gas Transmission Line (think NIT gas prices)
  - Alliance (NGLs)

The transmission pipeline network is [much bigger](https://www.cer-rec.gc.ca/en/data-analysis/facilities-we-regulate/pipeline-profiles/index.html) than you might have thought

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# Pipelines link our products to markets (Source: AER)
<img src="padds_and_pipes.png" width="650px" style="display: block; margin: auto;" />
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# Pipelines link our products to markets (Source: Enbridge)
<img src="oil_pipes_map.png" width="900px" style="display: block; margin: auto;" />
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# Enbridge Mainline
<img src="enb_pipes.png" width="1000px" style="display: block; margin: auto;" />

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# Canadian Production
![](oil_transp_files/figure-html/cdn_prod_graph-1.png)
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# Imports
![](oil_transp_files/figure-html/cdn_imports_graph-1.png)
---

# Exports
![](oil_transp_files/figure-html/cdn_exports_graph-1.png)

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# Canadian Major Pipeline Exports by Line

<img src="cer_oil_pipe.png" width="1000px" style="display: block; margin: auto;" />
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# Canadian Major Pipeline Exports by Grade

<img src="cer_oil_grade.png" width="1000px" style="display: block; margin: auto;" />
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# Canadian Major Pipeline Exports by Grade and Line

<img src="cer_oil.png" width="1000px" style="display: block; margin: auto;" />
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# Enbridge Mainline Movements into Sarnia

<img src="enb_sarnia.png" width="1000px" style="display: block; margin: auto;" />
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# TransMountain

<img src="tm_prods.png" width="1000px" style="display: block; margin: auto;" />
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# Canadian Crude Trade in the US

<img src="import_plot.png" width="1000px" style="display: block; margin: auto;" />
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# Crude by Rail

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# Rail Network and Loading

.cite_fn2[Source: RBN Energy]

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# Domestic Loadings: Crude by Rail

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# Domestic Loadings: Crude by Rail

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# Domestic Loadings: Crude by Rail

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# Exports by Rail
![](oil_transp_files/figure-html/cbr_graph-1.png)
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# Current pipeline capacity situation
<img src="pipe_capacity_real_bw.png" width="950px" style="display: block; margin: auto;" />

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# Gas supply chain

.cite_fn2[Source: CER]

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# Our gas pipeline infrastructure

<img src="gas_pipes.png" width="750px" style="display: block; margin: auto;" />
.cite_fn2[Source: CER] 
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# TCPL Mainline

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# NGTL System James River (NE)

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# NGTL System James River Gate

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# NGTL System James River Gate

<img src="ngtl_james.png" width="1000px" style="display: block; margin: auto;" />
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# NGTL System West Gate

<img src="ngtl_west.png" width="1000px" style="display: block; margin: auto;" />
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# NGTL System East Gate (access to prairies system)

<img src="ngtl_east.png" width="1000px" style="display: block; margin: auto;" />
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# Changes in gas movements in North America

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# Pipeline Regulation
There are multiple steps in the regulation of pipelines. We'll glance at a few of them:
- approval for construction and operation
  - the certificate of public convenience and necessity
      - the Canadian Energy Regulator Act
      - the Impact Assessment Act (for now?)
  - Governor in Council approval
  - US Presidential Permits
  - The duty to consult affected First Nations
- tolls and negotiated settlements on common carrier pipelines
  - more on cost-of-service regulation to come
- open seasons and firm service agreements
- apportionment of common carrier pipeline volumes
---

# Duty to consult

**35** (1) The existing aboriginal and treaty rights of the aboriginal peoples of Canada are hereby recognized and affirmed.

(2) In this Act, “aboriginal peoples of Canada” includes the Indian, Inuit and Métis peoples of Canada.

(3) For greater certainty, in subsection (1) “treaty rights” includes rights that now exist by way of land claims agreements or may be so acquired.

(4) Notwithstanding any other provision of this Act, the aboriginal and treaty rights referred to in subsection (1) are guaranteed equally to male and female persons.
  
  
.cite[*Constitution Act, 1982*, s 35]
---

# Duty to consult

We have case law from both successful ([*Gitxaala Nation v. Canada*](https://www.canlii.org/en/ca/fca/doc/2016/2016fca187/2016fca187.pdf) and [*Tsleil-Waututh Nation v. Canada (Attorney General)*](https://www.canlii.org/en/ca/fca/doc/2018/2018fca153/2018fca153.html?autocompleteStr=tsleil-wau&autocompletePos=2)) and unsuccessful ([*Bigstone Cree Nation v. v. NOVA Gas Transmission Ltd.*](https://www.canlii.org/en/ca/fca/doc/2018/2018fca89/2018fca89.pdf)) appeals of project approval decisions

What can we say is required to fulfill the duty to consult? This, via Osler, is a good list:
<hr.space-1>
- early, direct, meaningful engagement between the proponent and Indigenous groups, prior to and in parallel with the regulatory process;
- demonstrated serious consideration of Indigenous rights and concerns;
- addressing Indigenous rights and concerns through proponent commitments, project conditions, further studies and other mitigation measures, where appropriate;
- CER / GiC reasons for decision that consider the adequacy of consultation; and,
- opportunities for future consultation re: fresh concerns throughout the life of the project.

.cite_fn2[Source: [Osler](https://www.osler.com/en/resources/regulations/2018/resource-projects-and-indigenous-consultation-what-is-best-practice-after-a-year-of-uncertainty)]

---

# Duty to consult

The Duty to consult is not a veto

The duty "falls along a spectrum ranging from limited to deep consultation, depending upon the strength of the Aboriginal claim, and the seriousness of the potential impact on the right." (Clyde River (Hamlet) v. Petroleum Geo‑Services Inc., 2017 SCC 40 at para 20, citing *Haida Nation v. British Columbia (Minister of Forests)*, 2004 SCC 73, at paras. 39 and 43-45).

New case law ([*Yahey v British Columbia*, 2021 BCSC 1287](https://canlii.ca/t/jgpbr)), tells us that cumulative effects are germane to consideration of the impingement of First Nations' rights: i.e. you can't subject rights to death by 1000 cuts

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# Pipeline Regulation: timelines are long
<hr.space-1>
<embed src="keystone_timeline.pdf" width="1100px" height="540px" style="display: block; margin: auto;" type="application/pdf" />

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# Pipeline tolls

The CER oversees pipeline tolls under the *Canadian Energy Regulator Act*:
> 230 All tolls must be just and reasonable, and must always, under substantially similar circumstances and conditions with respect to all traffic of the same description carried over the same route, be charged equally to all persons at the same rate.

> 231 The Commission may determine
>> (a) whether traffic is or has been carried under substantially similar circumstances and conditions for the purposes of section 230; 
>> (b) whether a company has complied with the provisions of section 230; and 
>> (c) whether there has been unjust discrimination for the purposes of section 235.
  
.cite[Source: [CER: Pipeline Tolls and Tariffs](https://www.cer-rec.gc.ca/en/about/who-we-are-what-we-do/responsibility/regulation-pipeline-traffic-tolls-tariffs.html#s5)
]

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# Cost-of-service regulation as a backstop

Companies may only charge tolls specified in a tariff that has been filed with the CER and is in effect or that have been approved by an order of the Commission (*CERA* s. 227)

CER divides companies into two groups for financial regulation purposes:
- Group 1 companies are those with extensive systems under the CER’s jurisdiction;
- Others are Group 2.

A Group 1 pipeline company not regulated on a complaint basis (see footnote 16 in Guide R) that has not reached a negotiated settlement with its interested parties is regulated on a cost-of-service basis

Toll regulation of Group 2 companies is normally carried out on a complaint basis. Complaints may lead to cost-of-service regulation.

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# Cost-of-service regulation

A toll change in the context of cost-of-service regulation requires that a company file a toll application with the supporting documentation

CER holds a public hearing to allow input from interested parties and issues a decision approving final tolls

Tolls are set so investors can recover costs and earn a reasonable return on their investment.

CER manual states that the rate of return calculation will consider whether:
- the pipeline can attract capital on reasonable terms and conditions
- the allowed return is comparable to the return available to other companies of similar risk
- the financial integrity of the regulated pipeline will be maintained

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# Negotiated settlements

Beginning in the mid-1990s, the CER began accepting multi-year negotiated settlements.

Settlements can include incentives to reduce costs and provisions to share savings between the pipeline company and its shippers.

CER role is to make sure all interested parties have a fair opportunity to participate in the settlement process and that there is a general acceptance of the outcome.

The existence of a negotiated settlement does not limit the CER’s authority:

- CER may accept or reject a settlement package in its entirety;
- An unopposed settlement may be taken to indicate that tolls will be just and reasonable without a public hearing.

.cite[Taken with slight modifications from: [CER: Guidelines for Negotiated Settlements](https://docs2.cer-rec.gc.ca/ll-eng/llisapi.dll/fetch/2000/90463/157025/208496/A02885%2D1_NEB_Decision_%E2%80%93_Guidelines_for_Negotiated_Settlements_of_Traffic%2C_Tolls_and_Tariffs_%28A0E4C1%29.pdf?nodeid=208497&vernum=-2)]

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# Negotiated settlements

In the case of a contested settlement, CER may choose one of three options:

- dismiss the objections and approve the settlement
- deny the settlement and refer the matter for hearing
- approve the terms of the settlement on an interim basis and then hold a hearing to address the issues raised by dissenting parties

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# Negotiated Settlements

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# Toll design

Toll design is the process of deriving tolls for different services and different distances from the cost of service or revenue requirement and throughput or contracted quantities.

Principles:
- Tolls should generate sufficient revenue to recover approved costs
- Tolls should fairly allocate charges to users in relation to the costs and benefits of different services.

The basic principle is user pay (or cost-causation from Bonbright)

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# Toll design

Toll design divides costs between the various functions performed by the pipeline system, such as transmission and metering, and then determines costs and usage of those functions:

- Some costs are common to every unit of throughput.

- Other costs may depend upon variables such as the distance shipped.

- Others may be unique to a particular type or class of shipper.

With additions to an existing pipeline, there may be toll issues about whether expansion costs should be rolled into a single, existing rate base and charged to all shippers equally (rolled-in methodology) or kept separate and charged only to particular shippers (incremental methodology).

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# Pipeline Tolls
<img src="mainline_tolls.png" width="1200px" style="display: block; margin: auto;" />
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# Pipeline Tolls

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# Common Carrier Pipelines

All CER-regulated oil pipelines are common carriers by default, and all must have some uncommitted capacity available each month for shippers without contracted capacity.

*Canadian Energy Regulator Act*:
> 239 (1) Subject to any regulations that the Commission may prescribe and any exemptions or conditions it may impose, a company operating a pipeline for the transmission of oil must, according to its powers, without delay and with due care and diligence, receive, transport and deliver all oil offered for transmission by means of its pipeline.

The Enbridge Mainline offers 100% of its capacity on an uncommitted basis every month

.cite[Source: [CER: What is Pipeline Apportionment?](https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2018/market-snapshot-what-is-pipeline-apportionment.html)
]

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# Common Carrier Nomination Process

Customers **nominate** the volume they would like to ship on a monthly basis

If total nominations exceed uncommitted capacity, capacity is **apportioned** on a pro-rata basis based on nominated volumes

Issues have arisen with respect to shippers over-nominating *air barrels*

*Curtailment* may be applied to contracted volumes if the pipeline cannot carry its committed capacity.

.cite_fn2[Source: [CER: What is Pipeline Apportionment?](https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2018/market-snapshot-what-is-pipeline-apportionment.html)
]

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# Pipeline Apportionment

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# Pipeline Apportionment

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# Contracted Volumes

<img src="committed_capacity.png" width="900px" style="display: block; margin: auto;" />
.cite_fn2[Source: CER]

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# Pipeline Tolls - Firm Service Agreements
- New pipelines (Keystone, TMX) have not been built as exclusively common carrier pipelines
- Keystone and TMX negotiated *committed* tolls with shippers through open seasons
- Shippers on these pipelines hold long-term contracts (subsciptions, commitments to pay) for most of each pipeline's capacity
- Both lines have uncommitted rates for small shares of their capacity
  - e.g. Keystone has 36k bbl/d
- Enbridge proposed to shift 90% of Mainline volumed to contracted service, but that application was rejected by the Canadian Energy Regulator

---