Imperial Oil (Imperial) Complaint Regarding Enbridge Southern Lights GP (ESL) Tariffs No. 1 and No. 2 File OF-Tolls-Group2-E242-TFGen 01 01

National Energy Board Information Request No. 1

Financial/Economic Matters

Topic: Volumes

1.1 Reference: Imperial letter dated 10 June 2010 (A25374)

Preamble: Imperial stated that, for several reasons, the available capacity on the pipeline may be rendered uneconomic, imposing significant barriers to the use of the pipeline to uncommitted shippers.

Request:

(a) Please provide details regarding Imperial’s current and projected volumes on ESL.

(b) How would these volumes be different had the uncommitted toll been set differently.

(c) Please describe in detail how the uncommitted toll is an impediment to Imperial’s volumes on ESL.

Response:

(a) Imperial does not presently ship diluent on the Enbridge Southern Lights pipeline (“ESL”).

Subject to capacity availability and Imperial’s future needs, it anticipates becoming a shipper on ESL when it becomes economical to ship diluent on the pipeline. At the present time, transportation of diluent is not economical at the applied for toll for Uncommitted transportation service on ESL.

Imperial is one of the largest bitumen producers in Canada. Because bitumen is highly viscous, before it can be transported by pipeline it must be diluted with a light hydrocarbon product, referred to as condensate or diluent, in order to meet the viscosity specifications imposed by various pipeline companies. On average, about twenty-five to thirty percent of every barrel of diluted bitumen transported by pipeline is diluent, with the percentage of diluent depending on (i) the viscosity

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properties of both the bitumen and the particular diluent used, and (ii) the pipeline viscosity specifications which may change seasonally to reflect the temperature of the pipe in the ground.

At present the principal sources of diluent for this purpose are sourced within Alberta (“Indigenous Supply”) or imported into Alberta (“Imported Supply”) by rail or though the monopoly ESL (presently the only pipeline in service to import diluent into Alberta).

Imperial agrees with the position advanced by ESL in the NEB Southern Lights proceeding (OH-3-2007) that Indigenous Supply of diluent is unlikely to continue to satisfy the requirements of industry for bitumen blending purposes given the number of oil sands projects in operation or approved for construction and perceived declining supplies of Indigenous Supply 1. Accordingly, the demand for Imported Supply is likely to increase significantly in the near to medium term in response to increased industry oil sands’ activity. Again, evidence submitted by ESL in the OH-3-2007 proceeding suggests that a significant portion of the Imported Supply could be sourced from refineries connected by various pipelines to the Southern Lights receipt point in the Chicago vicinity 2.

Under the Southern Lights tariffs, volumes tendered for transportation are either “Committed Volumes” or “Uncommitted Volumes” paying the “Committed Toll” or “Uncommitted Toll”, respectively. The ESL tolls are to be calculated pursuant to the Transportation Service Agreements (“TSA”) between ESL and its Committed Shippers and the “Toll Principles” scheduled thereto.

Due to the refund mechanisms specified in the TSA, the effective unit cost to a shipper of pipeline service on ESL (whether for Committed service or Uncommitted service) can differ substantially from the tolls posted with the NEB depending on the aggregate volumes shipped during a year. Reference is made to the graph, contained in the ESL tolls’ application, showing indicative effective tolls for various volumes of throughput 3.

As stated above, and implicit in the preamble to the Board’s IR No.1, Imperial proposes to ship volumes on the Southern Lights pipeline when capacity is available and pipeline transportation is economic and competitive.

1 Enbridge Southern Lights Application OH-3-2007 (the “Application”) Exhibit B-1b (NEB file A14995) s. 4.3 p. 4-2. 2 Application Exhibit B-1j “Midwest Diluent Market Analysis November 2006 - Muse Stancil” 3 Enbridge Southern Lights GP letter of May 31, 2010 (NEB File A25270)

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Economics

Imperial’s decision to ship on the Southern Lights pipeline is directly related to whether the unit cost payable for Uncommitted Volume service (“Effective Toll”) is economic. Any assessment of the Effective Toll is subject to a number of forecasting uncertainties. In particular, the Effective Toll is based, in part, on the aggregate of all volumes shipped, not merely the 77 kb/d of Committed Volumes plus any intended shipments by Imperial. Any volumetric assumptions would be wholly speculative as Imperial would have to guess the usage of the Southern Lights pipeline by all potential Uncommitted Shippers.

At a minimum, shipment of diluent on the Southern Lights pipeline cannot be said to be economic if the unit cost of transportation exceeds the cost of similar service by alternative means. At present (and depending on volume assumptions) Imperial agrees with ESL’s assertion that “Pipelines are the safest and only practical transportation mode to move large quantities of petroleum and petroleum products” 4): the only feasible alternative is transportation by rail. Imperial presently intends to submit evidence on this matter at any hearing convened by the Board to hear the Complaint. The Westcoast decision 5, alone would limit any unit transportation cost for Uncommitted Volume service.

Competition

Imperial has, in its Complaint, asserted that the Uncommitted Toll is unjust and unreasonable and unduly discriminatory. A review of the TSA, and specifically the refund procedures provided therein, indicates that the Effective Toll payable by Uncommitted Shippers will exceed that payable by Committed Shippers, when both employ identical Uncommitted Volume service. This is clearly contrary to s. 62 of the National Energy Board Act:

All tolls shall be just and reasonable, and shall 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. [ emphasis inserted]

If ESL’s practice is permitted, Committed Shippers using Uncommitted Volume service will have a significant competitive advantage over Uncommitted Shippers using the exact same service, in the net effective delivered cost of Uncommitted Volumes in the Edmonton marketplace. The Board’s ruling on this issue is critical

4 Application s. 6 p.6-20. 5 NEB Reasons for Decision RH-6-85 Westcoast Transmission Company Limited August 1986

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in establishing the proper basis for determination of the future Uncommitted Toll and Effective Toll for Uncommitted Volume service.

(b) As noted above, the ability to assess the Effective Toll is extremely difficult which prevents decisions to ship on Southern Lights to be based on sound economics. A more transparent rate setting process, and a premium for Uncommitted Toll shipment which is consistent with those approved by the Board for other liquids’ pipelines 6, would remove much of the uncertainty associated with, and eliminate significant elements of the inequities created by, the TSAs and the Toll Principles.

(c) The magnitude of Imperial’s interest in transporting diluent is substantial, potentially in the millions of dollars on an annual basis and growing. Imperial acquires and uses significant amounts of diluent in its Cold Lake production operations. Currently approved is a major Canadian oil sands mining and extraction project of Imperial, known as the Kearl Oil Sands Project, which has significantly escalated the economic interest of Imperial in the supply and pricing of diluent coming from the United States. Imperial anticipates a long-term need for the Southern Lights’ service in connection with the Kearl Oil Sands Project as well as with Imperial’s present and ongoing bitumen production.

All Uncommitted Shippers on ESL will be economically impacted by the level of the Uncommitted Toll (and any resulting Effective Toll) that is ultimately determined by the outcome of this Complaint.

These impacts take two forms.

First, it is reasonable to expect that, at full capacity, the introduction of up to 103 kb/d of diluent into the Edmonton marketplace, delivered employing Uncommitted Volume service, will be factored into the market price for diluent on the Canadian side of the border.

Second, in turn, the increased input cost of diluent will be factored into the price of diluent/bitumen blend, of which Imperial is a major seller.

Thus, the Effective Toll payable for Uncommitted Volume service for diluent will have a direct and substantial economic impact not only on all Uncommitted Shippers (including Imperial) but on all purchasers of diluent in the Edmonton market and sellers of diluent/bitumen blends from Alberta.

6 a review of posted tolls for liquids’ pipelines under the Board’s jurisdiction discloses that premiums for spot/uncommitted tolls over firm/committed tolls is almost universally in the 20% to 25% range.