Enerplus and Targa Start a Fight That Could Impact All Liquids Pipelines

Originally published for customers October 21, 2020

What’s the issue?

Enerplus filed a complaint with FERC, alleging that a crude pipeline it needs to move its Bakken-produced crude to market, a Targa affiliate, is violating the Interstate Commerce Act by charging it higher fees than other customers.

Why does it matter?

Enerplus has been part of a scheme since 2011 to assure that Targa is not obligated to make its rates public, and is only now complaining because it believes some other undisclosed customer is getting a better deal. The complaint could force FERC to re-examine a long-standing policy of exempting certain pipelines from having to comply with the tariff-filing provisions of the ICA, and may limit how pipelines can interact with marketing affiliates.

What’s our view?

FERC will need to determine whether a long-standing policy of granting waivers to the ICA has converted compliance with the statute into a voluntary act of the pipeline and its customers, which may require it to rethink the granting of such waivers and how marketing affiliates are allowed to use a pipeline.

 


 

Late last month, Enerplus Resources (USA) Corporation (Enerplus) filed a complaint at FERC in which it questioned whether a voluntary agreement it entered into with three Targa entities, Targa Badlands, Targa Assets and Targa Fort Berthold, may be a violation of the Interstate Commerce Act (ICA), which is the statute under which FERC regulates all interstate liquids pipelines. Enerplus appears to be a willing participant in a scheme to shield from public scrutiny the rates its pays for use of Targa’s pipelines, and is only complaining because it now “understands and believes that the rates charged by Targa to other producers are significantly lower than the amount charged Enerplus for substantially the same service.” Interestingly, the solution Enerplus proposes is that FERC should only obligate Targa to comply with certain parts of the ICA, but not those portions that would require the public disclosure of the fees Enerplus is paying -- sort of a “having my cake but eating it too” proposal.

As we discuss more fully below, this case raises two issues for FERC. First, whether a long-standing FERC policy has essentially converted compliance with the ICA into a voluntary act of a pipeline and its customers. Second, whether it needs to revisit how pipelines interact with their marketing affiliates in ways that essentially allow discrimination among shippers in a manner that is not permitted under the ICA.

 

History of Enerplus and the Pipeline

In May 2011, an entity called Saddle Butte Pipeline filed an application with FERC and indicated that it was constructing approximately 35 miles of crude oil pipelines, of varying diameters, located wholly within the state of North Dakota. According to the application, upon completion of construction, the pipeline would “solely” transport Saddle Butte’s “own supplies of oil produced from the Bakken Shale Formation in North Dakota” to Saddle Butte’s truck takeaway facility and to an interconnection with the Four Bears Pipeline.

The company requested that it be exempt from the tariff filing and reporting requirements of the ICA pursuant to cases dating back to at least 1978 for pipelines that met four conditions: (1) the pipeline (or its affiliates) own 100 percent of the throughput on the line; (2) there is no demonstrated third-party interest in gaining access to or shipping upon the line; (3) no such interest is likely to materialize; and (4) there is no opposition to granting the waivers. Saddle Butte Pipeline asserted that it met all four of those conditions. It agreed that, if it were given the requested waivers, that it would update FERC if there were any changes in the conditions on which the waivers were based. FERC, through a delegated order issued on July 29, 2011, granted the requested waivers.

We note similar waivers have been granted to others before and after the one to Saddle Butte, but they have certainly become more common in recent years. Set forth below, we show the number of such waivers granted by FERC since 2005.

1_FERCWaiversDblue.png

While there were a number of waivers granted prior to 2012, forty-seven of the fifty-seven granted since 2005 were granted since the end of 2011.

According to Enerplus’s complaint filed last month, less than two weeks after that FERC order, on August 12, 2011, Saddle Butte entered into a Crude Oil Purchase and Sale Agreement with Enerplus providing for the purchase by Saddle Butte of all of the crude oil produced from Enerplus's dedicated acreage and delivered to a receipt point on the Saddle Butte Pipeline. Saddle Butte agreed to resell such crude oil back to Enerplus at the delivery point on the Saddle Butte Pipeline (after providing transportation) for the same base price it paid Enerplus to purchase the crude oil at the receipt point, plus “fees” associated with pumping and gathering of crude oil.

On October 25, 2011, Saddle Butte Pipeline filed a notification with FERC in which it acknowledged its continuing obligation to “immediately report to the Commission any change in the circumstances on which these waivers are based.” In that letter, Saddle Butte informed FERC that it was in the process of expanding its current pipeline facilities to a total of approximately 150 miles of crude oil pipeline facilities. In addition, Saddle Butte would be adding a new delivery interconnection with Enbridge Pipelines (North Dakota). Despite having signed an agreement with Enerplus just two months before the filing, the pipeline reiterated that it would not provide transportation services for any third parties; that no third-party shipper had requested transportation service on its facilities; and that it did not believe any third-party interest was likely to materialize. Interestingly, Enerplus did not intervene to provide FERC a fuller record.

 

Enerplus and Targa

In March 2013, Targa notified FERC that it had acquired the Saddle Butte Pipeline. In July 2013, Enerplus entered into a First Amendment and Restated Purchase and Sale Agreement with Targa effective as of January 1, 2013. Despite the continuing relationship between the parties, neither one notified FERC of the buy-sell agreement between them, and Targa again re-certified to FERC that the pipeline would not provide transportation services for any third parties; that no third-party shipper has requested transportation service on the pipeline; and that it did not believe that any third-party interest is likely to materialize. While it appears both parties were comfortable in 2013 that the buy-sell agreement made these statements technically correct and allowed them to keep the fees paid a private matter, it appears to have become less acceptable to Enerplus, when it apparently got wind this year that it was no longer Targa’s preferred customer and that its “fees” were higher than others.

 

Someone Is Getting a Better Rate

Enerplus’s basic complaint is that while it was perfectly happy to use a buy-sell agreement to avoid public scrutiny of its relationship with Targa, it now wants FERC to treat the fees under that agreement as a rate charged for tariff services under the ICA. This sudden change of heart apparently arose when Enerplus became “aware that Targa has entered into agreements with other producers to deliver barrels to points on its gathering system for fees that are materially less than the amount charged to Enerplus for transportation to the same delivery points.” Now suddenly Enerplus views the buy-sell agreement and the fees owed thereunder as the provision of “gathering services at different rates to different producers,” which it alleges must comply with the non-discriminatory tariff rate provisions of the ICA.

Enerplus does not disclose who it thinks is getting a better rate from Targa, so we looked up Enerplus’s active and recently inactive wells in North Dakota. Its wells are primarily located in eight different fields. A search for other producers with wells in those eight fields shows who the other major operators are.

2_NumberWells.png

While Enerplus is the largest owner of wells in these fields, it has a number of competitors, any one of which, or perhaps all of which, could have entered into buy-sell agreements that are more favorable than the one Enerplus signed in 2013. As seen above, though, it appears that Bruin E&P has become much more active in 2020 and may be the focus of Enerplus’s ire.

 

FERC’s Possible Response

How FERC responds to this complaint could have much wider ramifications for the industry and may require it to revisit a decision it issued in 2017 about marketing affiliates of pipeline companies. While the complaint filed by Enerplus claims that it is not challenging the waivers that FERC granted to allow the pipeline to operate without complying with the key provisions of the ICA, FERC may well need to revisit how it grants those waivers and how companies are complying with them.

FERC could dismiss the complaint filed by Enerplus. However such a decision would essentially make compliance with the ICA a voluntary act of a pipeline and its shippers. As Enerplus now argues, the buy-sell agreement it entered into with the pipeline is no different financially than a third-party transportation agreement for use of the pipeline. By dismissing the complaint, FERC would be sanctioning a system that allows a pipeline to choose between providing tariff services under the ICA or only entering into contractual agreements that eliminate any such obligation.

FERC could grant the petition as filed. Enerplus’s request is an interesting one; it is not asking that FERC revoke the waivers it previously granted, but only require the pipeline to comply with the ICA as if the buy-sell agreement was a tariff service. It is difficult to see how the buy-sell agreement could be considered the equivalent of a tariff service under the ICA, but signing it was not a violation of the conditions upon which FERC based its waiver of the ICA provisions. If the contract is a third-party transportation service that is subject to the non-discrimination provisions of the ICA, it would also seem to be a “third-party interest in gaining access to or shipping upon the line,” which is one of the key conditions that must be absent for the waivers to remain in place.

FERC could determine that the buy-sell agreement is a tariff service for all purposes under the ICA. This outcome would reassert FERC’s authority under the ICA over any pipeline that is providing transportation services, under any guise, to third-parties. Such a decision, however, has the potential of raising, yet again, a decision FERC issued in 2017 about the activities of marketing affiliates on pipelines. That was a case we discussed in Magellan, Plains, Among Others, Request Marketing Affiliate Clarification, almost three years ago. In that case, FERC waded into the fraught relationship between pipelines and their marketing affiliates. One of the key holdings in that case was that a buy-sell agreement with a marketing affiliate was not permitted if the differential in price was not sufficient to cover the cost of shipping on the affiliated pipeline, because to do so would violate the non-discrimination and anti-rebate provisions of the ICA.

Numerous parties asked FERC to reconsider its decision in that case but, to date, FERC has not issued a revised decision and no party has chosen to appeal it to the courts. Magellan has moved on and has established a marketing affiliate, which, based on its recent earnings calls, is being used to keep flows up on its Longhorn pipeline even when spreads between the origin and destination are not sufficient to create tariff rate demand for the capacity on the pipeline. Whether FERC will want to wade in again to the thorny issue of whether buy-sell agreements are essentially tariff services in another guise may be the key reason it avoids a decision in this case.

Comments were due by Monday of this week and none were filed. In particular, Targa filed no response. There is no obligation for FERC to ever act on this petition, so it is possible that it will simply ignore the petition. However, no matter what FERC does in this case, its action or inaction will have ramifications for others. If FERC ignores the complaint, other pipelines will feel secure in structuring their contracts to avoid compliance with the ICA. If FERC wades into this area of the law, whatever it decides will likely impact every pipeline that uses an affiliate to balance the demand for capacity.

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