In business, it's generally considered unwise to launch a new product without clear market research showing a strong customer base and high demand. Moving ahead without confidence there's a market for your product would be a recipe for failure.
Yet that's where Canadian pipeline company Enbridge seems to be headed with its proposed Northern Gateway pipeline, which would transport bitumen from the oilsands in Alberta to the Pacific Coast near Kitimat, British Columbia. Without binding agreements locking in producers to supply the oil and refiners to get it to market, Enbridge doesn't have the proof of market demand required to build a major new pipeline.
Enbridge has promised to demonstrate commercial support for its product before building the pipeline but only after the government has approved it — an unprecedented position that rival companies such as KinderMorgan have been quick to challenge.
Precedent agreements are little more than a "good old boy handshake," or a "commitment in principle"In an effort to prove its project is more than a pipe dream, Enbridge announced yesterday that it has secured 'precedent' agreements from Canadian oil producers and Asian markets. But such agreements aren't binding commitments. Former CEO of TransCanada, Hal Kvisle, calls precedent agreements a "good old boy handshake" that are "commitments in principle" — in other words, tentative agreements that can be abandoned if a number of conditions aren't met.
So yesterday's announcement isn't enough to settle the debate over whether there is serious commercial support for the proposed pipeline.
Companies can still back out
Enbridge had a precedent agreement with PetroChina back in 2005 to ship oilsands crude to China — but PetroChina withdrew its support in 2007 because of project delays. As demonstrated by PetroChina's hasty retreat, these precedent agreements are rather easy for companies to get out of, and do not represent a legally binding agreement to ship oilsands crude.
Taking a precedent agreement to a legally binding level requires Letters of Support and Transportation Shipping Agreements. Until then, any number of issues such as First Nations opposition, likely regulatory delays, or market volatility may cause prospective shippers to back out, just like PetroChina did.
Where is this oil headed?
Is the oil headed to refiners in Washington State, California, the U.S. Gulf Coast or Asia? If it's headed to Asia, which countries will refine the bitumen and get it to market? Unfortunately, Enbridge has not disclosed any of this information, only stating that "confidential parties have agreed on commercial terms relating to the long term use of the facilities."
Where the oil is going is crucial information during a regulatory hearing. If Enbridge does not make this information public, how are the government or local communities to assess if this pipeline is needed?
Use evidence to prove your case
Before a regulatory hearing takes place, Enbridge should come to the table with legally binding, publicly available shipper agreements that are contingent on regulatory approval. Without this critical information, it is very difficult to make a case that this pipeline makes economic sense and is in the best interest of Canadians.
Rather than rely on the confidential, non-binding agreements announced yesterday, Enbridge needs to act in good faith and provide stronger evidence to demonstrate if this apparent commercial demand is real.
The proposed Northern Gateway pipeline would cross largely pristine land, ship a risky product to a new market and place many communities, livelihoods and ecosystems at risk if there was an oil spill. High risks require high scrutiny.
Despite Enbridge's new precedent agreements, there remains much uncertainty and many unanswered questions about this project, and Enbridge still has much work ahead before it will be able to convince local communities, regulators and Canadians that this pipeline needs to be built.
