Enbridge touts support, others call it 'hollow'

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Enbridge Inc. said it has lined up critical industry support for its proposed Northern Gateway pipeline to ship Canadian crude to Asia, but the controversial multibillion-dollar project still faces formidable hurdles before it can be built.

The $5.5-billion mega-pipe would bring up to 525,000 barrels per day of Canadian crude from Alberta's oil sands to the West Coast for shipment to refineries in California and Asia. The 1,172-kilometre line would be the first major non-U.S. export option for the Canadian energy industry, and that potential has won it strong support from provincial and federal political leaders, who are nervous that environmental activism and slowing economic growth south of the border could stymie the expansion of Canada's oil sands.

Enbridge on Wednesday sought to provide evidence that the project has broad corporate backing as well, saying that the company now has agreements to fill both a pipe bringing crude to the coast and a second pipe that would bring an oil-thinner called diluent into Canada.

In regulatory documents filed with the National Energy Board, Enbridge said both pipes have been "fully subscribed for long term, firm service under duly executed Precedent Agreements." That is a "significant milestone for the project," said spokeswoman Gina Jordan.

Still, the nature of those "precedent agreements" raises questions about whether Enbridge actually has firm backing and shows how difficult the road ahead remains for the largest project in the company's history.

Under the agreements, would-be oil shippers are not obligated to send a drop of crude through the pipe. The oil producers and refiners that signed on to Gateway – a list of companies that Enbridge has declined to either identify or quantify – commit no money, no oil and receive no financial penalty for backing out. That prompted one lawyer who has analyzed the agreement to call Enbridge's claims of commercial support "hollow." Hal Kvisle, the former chief executive officer of Enbridge competitor TransCanada Corp., compared early-stage precedent agreements to "commitments in principle."

"It's really like a good old boy handshake, is one way you could characterize it," he said.

Enbridge itself acknowledged that the agreement is non-binding.

"It's not a firm commitment by the shippers," said Paul Fisher, vice-president commercial with Gateway – although the agreement does obligate Enbridge to proceed if it gains approval and enough shipping contracts.

Shippers will have as long as four more years to decide on whether to ink those contracts, based on timelines included in the Enbridge documents.

Mr. Fisher, however, argued that if Enbridge can lay the pipe, the crude will come, based on expectations that oil sands producers will receive higher prices for their crude in Asian markets, where demand growth is expected to far outstrip that in the U.S. Mr. Fisher also pointed to the $100-million fronted by Alberta oil producers and Asian refiners, including Sinopec, toward the $250-million in initial development costs.

"If you look at the money that our partners are putting up and the time and effort they've put into negotiating these agreements, I think once we get past the regulatory hurdle and get a permit we'll have a lineup of people wanting to become shippers," he said.

Environmental critics, however, said the lack of firm support is evidence that Gateway remains a difficult project.

"It's a long, long ways from ever getting built – not only because it lacks commercial support, but because it continues to lack support from the biggest province in the way – British Columbia as a whole," said Eric Swanson, corporate campaigner with the Dogwood Initiative, which along with dozens of first nations groups has opposed Gateway based on its environmental risks.

One of the key questions is how much it will cost. Indeed, before oil shippers move beyond precedent agreements to something more firm, they will have to sign letters of support that will see them split the price of a detailed cost estimate that is likely to take 18 months, and cost about $150-million.

Nobody wants to take the risk that there is going to be a huge cost overrun or they're going to be bound to a pipeline that could not be built for even 15 years," said Chad Friess, an analyst with UBS Securities. "From speaking with shippers, even the guys who have no plans to even ship on this, there's universal support for Northern Gateway. So what I think the shippers are saying is, if you build it we will flow the oil. But right now, we're not willing to sign in blood."

Enbridge (ENB)

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