Kingston Midstream responds to Secure Energy’s CER filing

If KM can’t blend butane, it doesn’t think Secure should, either. Blending was at heart of settlement between KM, Crescent Point and other producers

Alida – A dispute between Kingston Midstream and Secure Energy Services Inc. is essentially picking at a recently scabbed-over wound for the principal pipeline operator in southeast Saskatchewan. That wound was the issue of blending different products – butane, natural gas liquids (NGLs) and heavy oil into the stream of crude oil flowing out of the region on the Kingston Midstream Westspur Pipeline.

On Jan. 22 Kingston Midstream responded to a Daily Oil Bulletin story republished on Pipelinenews.ca which ran under the headline, “Secure Energy and Kingston Midstream at odds in Alida.” (See related story here.)

The initial story, which ran on Daily Oil Bulletinon Jan. 16 and Pipeline Newson Jan. 20, detailed how Secure Energy Services Inc. had applied to the Canada Energy Regulator (CER) on Dec. 30, 2019, for orders to allow it to receive crude oil from, and deliver crude oil to, the Westspur Pipeline owned by Kingston Midstream Westspur Limited. This was in relation to Secure’s Alida crude oil terminal, located just a few hundred meters south of Kingston Midstream’s Alida terminal. Secure had shut down its terminal last year after Kingston Midstream terminated an agreement with Kingston Saskatchewan Pipelines which had previously allowed Secure to pull crude oil from Kingston’s Saskatchewan Pipeline, blend additional products into it, and reinject it back into Kingston’s Saskatchewan Pipeline. That pipeline connects with the Kingston Westspur Pipeline, allowing deliveries to Cromer, Manitoba, and ultimately interconnects with Enbridge’s Mainline.

In response, Kingston Midstream, as represented by Dentons Canada LLP, submitted an 11-page filing on Jan. 20, plus a copy of its license for the existing pipelines connecting the Secure and Kingston Midstream Alida terminals. Its filing to the CER, Kingston Midstream “requests that the Commission dismiss the application without any further process.”

The issue at hand is the blending of different products into the crude oil stream which is carried by Kingston Midstream’s Westspur line, an interprovincial oil trunk line. Of particular concern is the blending of heavy oil along with NGLs into the crude oil stream, an issue that has recently been contentious for Kingston Midstream.

In recent years, blending has been an issue between Kingston Midstream and several oil producers who, led by Crescent Point Energy Corp., made filings in June 2017 with the Canada Energy Regulator. (At that point, it was known as the National Energy Board, or NEB.)

At the end of 2018, an out-of-court settlement was reached in that matter, and formally agreed to in February 2019. Kingston Midstream had wanted to blend crude oil before it entered the Westspur Pipeline, but several producers fought it, and Kingston Midstream was left with a stranded blending asset (more on that later in this story).

Now blending appears to be at the heart of this current matter between Kingston Midstream and Secure Energy, as Secure wants to take delivery of crude oil from the Westspur pipeline to be able to blend in heavy oils and NGLs and then return it back to the Westspur Pipeline.

The issue before the CER appears to be whether or not Secure can assert common carriage principles. This would force a pipeline operator to make a connection at a mid-point in the pipeline system solely for the purpose of allowing it to take crude petroleum off the system, strictly for blending purposes, and then returning it to the pipeline system to be carried on to an actual delivery point. Kingston Midstream feels a result could potentially undermine the pipeline operator’s autonomy to control delivery connections off of the system where such delivery connection is not intended to carry the crude on to a further destination point to market.

A secondary issue appears to be whether Kingston Midstream’s assets and subsidiaries are truly separate, or one operating entity. This is relevant where it comes to tolls and connections. 

Westspur

The Westspur pipeline transports all of southeast Saskatchewan’s crude oil production that is not handled by rail, or the very small amount that is exported by truck from time-to-time. It terminates at Enbridge’s Cromer, Manitoba, Mainline terminal, and indeed, Enbridge used to own and operate the Westspur Pipeline until December, 2016, when it sold it to Tundra Energy Marketing Limited (TEML), the previous name of Kingston Midstream. Since there is no crude-by-rail in operation in the region at this time, that means Westspur essentially carries all of southeast Saskatchewan’s oil to market.

To further complicate matters, the Westspur system is fed by Kingston Midstream subsidiaries which operate the Saskatchewan Gathering System and Weyburn Pipeline. This is significant, as Secure asserted they all “function as an operationally integrated crude oil transportation system” while Kingston Midstream called that “a mischaracterization” and that “The provincially regulated assets are currently, and have always been, separately owned and are not integrated operationally with the Westspur Pipeline.”

At issue there is Kingston Midstream applying a toll for the Saskatchewan Gathering system on the short connection between the Secure Alida terminal and Kingston Midstream’s Alida terminal.

Taking oil off and blending it

Kingston Midstream noted in its filing to the CER, “For the three-year period during which Secure was a party to the former interconnection agreement, Secure received crude oil from the Saskatchewan Gathering System, returned blended volumes onto the Saskatchewan Gathering System and paid a Saskatchewan Gathering System toll.”

Kingston Midstream terminated its agreement with Secure effective May 30, 2019, having given the 60 days notice as required by their contract. Its filing pointed out that the pipelines connecting the two company’s Alida terminals are part of the Saskatchewan Gathering system, and licensed as such by the provincial government.

The two companies could not come to an agreement to renew their contract, which started in 2013 with the predecessor companies for each party, and whose initial term expired in 2018.

Kingston Midstream submitted, “Secure is now attempting to bypass the requirement to reach a commercial agreement for interconnection to the Saskatchewan Gathering System. Instead, Secure is effectively asking the Commission to provide it with a new contract on the provincially-regulated Saskatchewan Gathering System that it was unable to negotiate for itself.”

To that end, Secure’s filing stated their intention would be to essentially do the same thing it had been doing before; draw oil from the Westspur system, blend in other feedstocks, and then send it back to the Westspur system. They found they could not make a go of it at Alida by simply acting as a trucking receipt terminal, due to the Saskatchewan Gathering System toll applied.

Kingston Midstream submitted, “It is clear from the application that Secure's objective is to recommence blending activity at the Secure Alida Terminal. In fact, the sole purpose of Secure's requested relief is to allow Secure to remove crude oil off of the Westspur Pipeline, blend it with butane, NGLs and heavy oil at the Secure Alida Terminal, and return the blended product to the Kingston Alida Terminal.”

Speaking to Pipeline News on Jan. 22 by phone, Peter Forrester, Kingston Midstream’s vice president for commercial, corporate and regulatory, explained the significance of blending, noting this included, “what the parameters are who can blend, how you can blend, and where you can blend on the pipeline system.”

“There’s an obligation on behalf of a midstream pipeline company to maintain the quality of the crude blends that producers offer up. The obligation of the midstream company (is) to protect that quality. In our view, and in the view of the producers that oppose Secure, we think their application is not beneficial for the crude quality stream, because of their proposed blending operation,” Forrester said.

Support for KM

Forrester pointed out that three producers; Vermillion Energy Inc., Ridgeback Resources Inc., and Canadian Natural Resources Limited, had all filed letters in support of Kingston Midstream, and he provided those letters by email.

Ridgeback’s vice president, marketing, Frank Serpico wrote on Jan. 13, “As a producer, we do not support activities that devalue the quality of crude oil. Heavy oil blending operations do not provide value to the producers shipping on the Westspur and Saskatchewan Pipelines.”

Vermillion Energy’s vice president, marketing, Terry Hergott, wrote word-for-word the same sentiment, also on Jan. 13. They both noted they had not had adequate time to review the application.

Mark Overwater, director, crude oil marketing, for Canadian Natural Resources, wrote Jan. 20, “CNR is not supportive of crude oil that has already been delivered to the Kingston pipeline to then be taken off the system into a third party terminal, where it is then blended with other product and reinjected back into the pipeline through a receipt connection. This activity can change the quality of the native production from the area and can have negative impacts on pricing that all producers receive for their crude oil. CNR is however supportive of providing alternative truck receipt locations that the Secure facility would offer.”

Support for Secure

However, Broadbill Energy Inc’s president and CEO Christopher Ryan wrote to the CER on Jan. 13, “Broadbill works with twenty eight oil producers in Saskatchewan, all of which have been impacted by Kingston's Midstream recent discriminatory changes. These changes to Secure and others have drastically reduced the producer's netback and ability to access the CER regulated Westpur pipeline.”

Broadbill supported Secure providing a truck receipt point, and took issue with the toll applied.  

Diversions unwanted

As for pulling crude out the Westspur system, blending it, and re-injecting it, Kingston Midstream pointed out, “Subsection 239(1) of the CER Act is intended to ensure producers can ship their crude oil from production basins to downstream markets. It is not intended to allow third parties such as Secure, who have not offered crude oil to the Westspur Pipeline at upstream locations, to force Kingston Westspur to divert the Westspur Pipeline line fill so that it may be blended and returned to the Westspur Pipeline.”

Kingston Midstream expressed concern that this could create a precedent affecting common carrier pipelines. It stated, “If Secure's requested relief were granted, it could create a precedent that would require Group 1 pipelines, as part of their common carriage obligations, to deliver crude oil to mid-stream points anywhere along their entire system with no intentions for such crude oil to be transferred to an end user or other interconnecting transportation undertaking, and then returned to the common carrier pipeline after the crude oil has been modified or altered.”

Blending of butane a recurrent issue

Kingston Midstream said Secure’s request “is not in the public interest,” as the “producers representing the substantial majority of volumes transported on the Westspur Pipeline” had, in early 2019, settled a related mater when it came to the “blending Westspur Pipeline crude oil with butane, NGL's and heavy oil.”

Kingston Midstream’s filing referred to the aforementioned dispute with Crescent Point which started with a filing to the NEB in June 2017. It stated, “Through a lengthy written evidentiary process, it became clear that Crescent Point and other producers representing a substantial majority of volume transported on the Westspur Pipeline were strongly opposed to a competitive model that allowed any third party to take delivery off of the Westspur Pipeline, conduct blending, and return the blended product to the Westspur Pipeline. The evidence filed by Crescent Point in the complaint proceeding indicated that producers were opposed to any blending activity which occurred without the prior consent of producers.”

Kingston Midstream, its affiliates, Crescent Point and seven other producers representing a majority of the volumes transported on the Westspur Pipeline settled the matter in February 2019. Essentially, Kingston Midstream had built its own butane blending facility at its Steelman terminal, but several producers did not want them to use it.

In that settlement, Kingston Midstream pointed out, “The parties also agreed that TEML Westspur would not connect its proposed butane line at the Westspur Steelman Terminal to the Westspur Pipeline, nor would it allow any butane to be blended at the Westspur Steelman Terminal and receipted onto the Westspur Pipeline during the term of the settlement agreement. Because of those terms of the settlement agreement, TEML's significant investment in blending facilities at the Steelman Terminal was stranded before it went into service.

“The effect of the settlement agreement was to prevent TEML from conducting any butane blending activity except at Manitoba Interconnect Westspur in respect of volumes nominated to such delivery point.”

Finally, Kingston Midstream said the cost would “significantly exceed” Secure’s estimate of $400,000 to interconnect their terminal directly with the Westspur line at Alida. Additionally, if the CER were to rule in Secure’s favour, there could be significant consequences for common carrier pipelines. Most notably, any party purporting to blend producers’ crude oil may have the right to force the common carrier to deliver volumes to the third party for this purpose.

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