OIL SANDS

U.S. producers accuse Canadian pipeline company of refusing to carry their crude

A dispute between Canadian pipeline giant Enbridge Inc. and a small Colorado operator is flaring into a political showdown over whether U.S. domestic production will be squeezed out by oil sands crude flowing from across the northern border.

High Prairie Pipelines LLC is accusing Enbridge of denying its request to directly link a proposed 450-mile pipeline from the booming Bakken Shale play in North Dakota and Montana to a highway of pipelines currently carrying Canadian oil sands crude into the United States.

Enbridge says its 1,900-mile system won't have the capacity to accommodate the U.S. crude by the time the proposed pipeline is built. But producers and refiners throughout the Midwest are accusing the Canadian company of reserving space for an expected surge of oil sands crude that would have been shipped through the proposed Keystone XL pipeline, which the Obama administration delayed.

The case has also fueled arguments by anti-oil-sands environmentalists that pipelines carrying the heavy Canadian fuel can't be trusted to support the United States' booming domestic crude production.

North Dakota oil producers, Indian tribes and refiners have asked the Federal Energy Regulatory Commission to step in and force Enbridge to comply. High Prairie has said its project could be complete by late 2013 but could falter without the Enbridge link.

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The companies are now accusing each other of twisting facts surrounding the case. High Prairie contends that Enbridge verbally agreed to the interconnection earlier this year but later denied that pledge in order to save capacity after Keystone XL was delayed.

Greg Ward, High Prairie's vice president and general counsel, said the Enbridge Lakehead system will likely move oil sands crude to the United States that otherwise would have been shipped on the XL pipeline. "Enbridge is now the backdoor for tar sands production to make it into the United States," he said. "Enbridge is reserving capacity."

Enbridge, Ward said, is clearly favoring oil sands firms over producers in North Dakota's Bakken region, and it could jeopardize the High Prairie project.

High Prairie has also accused Enbridge of rejecting its proposed linkage with the Lakehead system while planning future connections for its own subsidiaries at Clearbrook, Minn. -- accusations that Enbridge has denied.

The Canadian operator dismissed claims that it is holding capacity for crude derived from Canadian oil sands. Lorraine Little, a spokeswoman for Enbridge, said the pipeline is a common carrier that ships 80 commodities, and "if shippers meet our criteria, then those volumes will be moved."

Enbridge has argued that linking the High Prairie pipeline to its system in Minnesota would constrain capacity on its pipelines between Clearbrook, Minn., and Superior, Wis. That section of its system ships mainly Bakken crude and Canadian oil sands crude.

Enbridge also said it offered High Prairie the option of connecting to the system while boosting capacity on the system but that High Prairie rejected those alternatives as costly and unreasonable.

Whether North Dakota producers have enough capacity, the company added, isn't relevant to High Prairie's interconnection request.

"The likelihood of any shipper originating in the Bakken being left without service is extremely remote, and in any event beyond the scope of High Prairie's Complaint, which only involves its request for a pipeline interconnection at Clearbrook," Enbridge wrote in a filing to FERC.

It's not clear how or when FERC will weigh in on the issue.

The commission said in May that it doesn't have the authority to force Enbridge to interconnect with the High Prairie pipeline and that High Prairie isn't a current or prospective shipper that would be protected by the anti-discrimination provisions of the Interstate Commerce Act.

But High Prairie is asking FERC to reconsider that determination and has since filed additional complaints with FERC and the U.S. Forest Service. FERC's legal authority under the law to address "discriminatory" behavior is clear, and the commission must create a "level playing field" for all market participants, Ward said.

Ward said High Prairie is considering legal action if FERC and the Forest Service don't act on its complaints.

Enviro and tribal concerns

Environmentalists have used the case to argue against bringing more Canadian oil sands crude into the United States.

"Many of the political supporters in the U.S. have cited the Keystone as a means of moving oil in North Dakota, and this situation shows the problem with doing that," said Anthony Swift, an analyst at the Natural Resources Defense Council. "The Enbridge system is a common carrier that allows oil from many locations and is more accessible than Keystone, but you have two different industries vying for capacity: One is the domestic U.S. industry that recently cropped up in Minnesota and North Dakota, and the other is the tar sands industry."

Paul Blackburn, an independent legal consultant to environmental groups and other nonprofits active on pipeline safety, questioned Enbridge's assertion that capacity is currently tight on its Lakehead system. Instead, he said Enbridge currently has excess capacity -- and infrastructure -- and is importing less oil on its system than it did in 2007.

Adding High Prairie to the system wouldn't make economic sense for Enbridge, he said, and the company likely wants to preserve the capacity on its system for Canadian crude in the future.

"I'm sure in D.C. there was all this behind-the-scenes lobbying ... to get Keystone delayed so [Enbridge] could get back into the game," he said. "[Within the administration], they probably knew if Keystone XL would get delayed, Enbridge would fill the gap."

For now, the bulk of Canada's oil sands crude is being routed through Alberta-based TransCanada Corp.'s first Keystone pipeline, which runs from Hardisty, Alberta, to central Illinois and Cushing, Okla. Blackburn said shippers on that pipeline have agreements that are lengthier and more difficult to terminate.

Indian tribes in North Dakota are also disputing Enbridge's arguments.

The Mandan, Hidatsa and Arikara Nation told FERC Chairman Jon Wellinghoff in a June 23 letter that pipeline capacity to ship oil out of the state is extremely tight and using trucks and trains on the Fort Berthold Reservation is destroying the roads, making travel difficult and lowering royalty payments to Indian mineral owners because the oil is being sold at a discount.

The reservation has 250 producing wells but expects to have more than 800 wells by the end of 2013, said Tex "Red Tipped Arrow" Hall, chairman of the tribes' office.

The tribes asked Wellinghoff to bar "discriminatory practices" by Enbridge that would restrict shipments of Bakken crude from North Dakota to nearby markets. Hall said the U.S. Geological Survey has estimated that the Bakken formation could hold as much as 4.3 billion barrels of technically recoverable oil, an amount that is slated to grow with the discovery of the Three Forks Formation, a new reservoir located below the Bakken.

Jane Kleeb, executive director of Bold Nebraska, a nonprofit that leads local opponents of the Keystone XL pipeline, said the High Prairie case should be a "huge red flag" for North Dakota and that it confirms her concerns that pipelines carrying Canadian oil sands crude will crowd out domestic oil.

"They'll do anything and everything they can to get tar sands to market," Kleeb said. "They say they'll get domestic oil to market to gain political favor."

Reporter Elana Schor contributed.

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