Secure Energy and Kingston Midstream at odds in Alida

Secure seeking access to Westspur Pipeline at Alida terminal

AlidaSecure Energy Services Inc., which recently shut down its crude oil terminal in Alida, Sask., has applied to the Canada Energy Regulator (CER) for orders to allow it to receive crude oil from, and deliver crude oil to, the Westspur pipeline owned by Kingston Midstream Westspur Limited.

“As the Westspur pipeline is an oil pipeline, Kingston is obligated under the [Canadian Energy Regulator] Act to accept, ship and deliver all oil tendered to it, unless it can demonstrate that complying with its common carrier obligation is unreasonable,” says Secure in its application, as reported by the Daily Oil Bulletin on Jan. 16. It notes that there is capacity on the pipeline and argues that Kingston has not provided any reasonable basis for its refusal to provide the access requested by Secure, especially as there are existing facilities to facilitate the access.

Secure, which acquired the Alida terminal in June 2016, says it requires both delivery and receipt access to the Westspur pipeline to optimize the operation of the terminal and maintain its economic feasibility while providing customers with a competitive option to access markets in Eastern Canada and the PADD II and PADD III regions in the United States. 

The Westspur pipeline, which is regulated by the commission, transports crude oil and condensate from southeast Saskatchewan via the Weyburn pipeline and the Saskatchewan Pipeline Gathering System to the Enbridge Inc. Mainline receipt point at Cromer in Manitoba. The Saskatchewan System along with the Westspur and Weyburn pipelines function as an operationally integrated crude oil transportation system and account for the majority of crude oil pipeline transportation in the region, Secure notes. Apart from the Enbridge Mainline, each of the pipeline systems is operated by an affiliate of Kingston.

Until recently, Secure received trucked-in volumes of crude oil, heavy oil and diluents at its terminal and provided custom crude oil and petroleum blending and optimization services. Through an interconnection agreement with Kingston's predecessor, Enbridge Pipelines (Saskatchewan) Inc., Secure received volumes from the Westspur Pipeline via a six-inch pipeline from Kingston’s Alida terminal (reversal line) and delivered a pipeline specification product to Kingston via a six-inch pipeline (delivery line) for delivery onto the Westspur pipeline and transportation to the Enbridge Mainline.

Under the agreement, Secure paid tolls on the Saskatchewan System to move volumes from its Alida terminal to Kingston’s terminal and, where applicable, paid an additional toll on the Westspur pipeline. Secure said that despite having to pay the Saskatchewan System toll, due to its blending and optimization activities it was able to provide a competitive alternative to the Kingston Alida terminal, often resulting in higher netbacks to producers.

Interconnection termination

However, on March 27, 2019, Kingston provided 60 days notice to Secure that it was terminating the interconnection agreement, effective May 26, 2019.

Kingston later informed Secure that it could continue to nominate trucked-in crude volumes to the Saskatchewan System, subject to meeting the Saskatchewan System rules and regulations (R and R) and paying the system toll. However, Kingston noted that, as a carrier under the R and R, it is not obligated to accept crude oil that has been subject to “blending activities” other than those conducted by the carrier, an affiliate of the carrier or an  “authorized blending facility,” says Secure whose Alida terminal is not considered an “authorized blending facility.”

“The combined effect of the termination of the Former Interconnection Agreement, Kingston’s insistence that Secure was connected to the Saskatchewan System, and the operation of the Saskatchewan System R and R, was to remove all access by Secure to crude volumes from the Westspur pipeline via the reversal line, and effectively prohibit Secure from delivering blended oil from the Secure Alida terminal to Kingston,” says Secure.

Secure continued to operate for a time by not passing the Saskatchewan System toll on to its customers but with no blending upsides to offset the tolls, after making every effort to renegotiate a new arrangement with Kingston, and after suffering significant financial losses, the company says it was eventually forced to pass through the toll to its customers.  Within a matter of days, all of Secure's customers ceased deliveries to its Alida terminal. Secure says it understands that all or most of those volumes are now delivered to Kingston’s Alida terminal which is not subject to the Saskatchewan System toll.

As a result, Secure was forced to lay off staff and mothball its Alida terminal with estimated annual lost revenues of approximately $2.8 million to $5.1 million per year.

Kingston’s termination also has negatively affected Secure’s customers whose agreements were wound up, says Secure. The Alida terminal provided an alternative to Kingston’s Alida terminal which allowed for price competition and likely reduced congestion of truck offloading, especially during times of increased traffic (such as breakup), it says. “Kingston's actions result in reduced competition for producer volumes in Saskatchewan (and thereby higher costs and lower netbacks).”

Secure also notes that part of Kingston's business includes crude oil marketing, blending and trading activities and in this regard it is in direct competition with certain parties, including Secure, that require access to the Westspur pipeline. “Given its virtual monopoly on crude oil pipeline transportation, by denying Secure access to the pipeline, Kingston is able to obtain an unfair business advantage and is able to realize the economic upside on blending activities, while denying such upside to Secure and its customers,” says Secure.

Connection to Westspur pipeline

In its application, Secure says Kingston contends that the Secure Alida terminal ties into the Saskatchewan System and therefore does not connect to the Westspur pipeline system. “While the Former Interconnection Agreement treated the Secure Alida Terminal as if it were connected to the Saskatchewan System, this was done for commercial purposes,” says Secure. “In reality, Secure submits that it is clear the Secure Alida terminal is physically tied into the Westspur pipeline system.”

 Secure’s Alida terminal is connected to Kingston’s Alida terminal by two, six-inch steel underground pipelines, according to Secure. The Kingston Alida terminal, it says, is a receipt point on the Westspur pipeline and is approximately 350 metres from the Secure Alida terminal.

“It is clear in Secure's view that the Kingston Alida terminal forms part of the Westspur pipeline system and is subject to regulation by the commission,” says Secure. “As there can be no question that the Secure Alida terminal is connected to the Kingston Alida terminal, it is therefore also connected to the Westspur pipeline system.”

If the Secure Alida terminal is tied into the Saskatchewan System — which Secure disputes — the connections would nonetheless be proximate to the Westspur pipeline with only minor pipeline relocation work anticipated to connect to the pipeline, says the company. A preliminary high-level estimate of the costs of any interconnection work, if required, is $400,000 says Secure which says it is prepared to pay all costs that the CER considers to be fair and reasonable to interconnect its terminal to the Westspur pipeline.

The Westspur pipeline is owned by Kingston Midstream Westspur Limited (formerly TEML Westspur Pipelines Limited), which in turn is owned by Kingston Midstream Limited. TEML Westspur Pipelines was formerly owned by Tundra Energy Marketing Limited (TEML) which is now Kingston Marketing Limited, also owned by Kingston Midstream Limited.

 

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