The risks identified below are specific to the Liquids Pipelines business. General risks that affect the Company as a whole are described under Risk Management.
Supply and Demand
The operation of the Company's liquids pipelines depends on the supply of, and demand for, crude oil and other liquid hydrocarbons from Western Canada. Supply, in turn, depends on a number of variables, including the price of crude oil and bitumen, the availability and cost of capital and labour for oil sands projects and the price of natural gas used for steam production.
Demand depends, among other things, on weather, gasoline price and consumption, manufacturing, alternative energy sources and global supply disruptions.
Competition among pipelines is based primarily on the cost of transportation, access to supply, the quality and reliability of service, contract carrier alternatives and proximity to markets. Other competing carriers are available to producers to ship western Canadian liquids hydrocarbons to markets in either Canada or the United States. Competition could also arise from pipeline proposals that may provide access to market areas currently served by the Company's liquids pipelines. One such competing project is currently under construction to initially serve markets at Wood River, Illinois and Cushing, Oklahoma, commencing in late 2009. This pipeline will have an initial capacity of 435,000 bpd and an ultimate capacity of 590,000 bpd. Commercial support has also been announced to construct additional ex-Alberta capacity of 500,000 bpd for an in-service date during 2012, which would be complemented by an extension of the system from Cushing, Oklahoma to Nederland, Texas. The Company believes that its liquids pipelines are serving larger markets and provide attractive options to producers in the WCSB due to their competitive tolls and multiple delivery and storage points.
Also, shippers are not required to enter into long-term shipping commitments on Enbridge's mainline system. The Company's existing right-of-way provides a competitive advantage as it can be difficult and costly to obtain new rights of way for new pipelines. The ITS and the Terrace Agreement on the Enbridge System provide throughput protection which insulates the Company from negative volume fluctuations beyond its control. The Lakehead System, owned by EEP, has no similar throughput protection on its existing system but will on the Southern Access and Alberta Clipper expansions.
Increased competition could arise from new feeder systems servicing the same geographic regions as the Company's feeder pipelines.
Alberta Royalty Review
In September 2007, the Alberta Royalty Review Panel issued its recommendations to the government of the Province of Alberta calling for the adoption of measures to increase the Alberta government's share of revenues from oil sands development. A majority of the recommendations of the report were subsequently adopted by the Alberta government and became effective January 1, 2009. These measures may impact how oil sands developers evaluate future projects and this may reduce the level of future volumes expected to flow through the mainline system.
The ITS governing the Enbridge System measures the Company's performance in areas key to customer service. If the Company fails to meet the baseline targets set out in the ITS for all service and reliability metrics, the Company could be required to pay penalties to shippers up to a maximum of $30 million in 2009.
Potential Pressure Restrictions
The Company's Liquids Pipelines systems consist of individual pipelines of varying ages. With appropriate inspection and maintenance, the physical life of the pipeline is indefinitely long; however, as the pipelines age the level of expenditures required for inspection and maintenance may increase. Temporary pressure restrictions have been established on some sections of certain pipelines pending completion of specific inspection and repair programs. Pressure restrictions may from time to time be established on other of the Company's pipelines. Pressure restrictions reduce the available capacity of the applicable line segment and could result in a loss of throughput if and when the full capacity of that line segment would otherwise have been utilized. Pressure restrictions to date have not given rise to any loss of throughput. While the Enbridge System is volume-protected, EEP's Lakehead System and certain other pipelines would be adversely affected by pressure restrictions that reduce volumes transported. Additionally, on the Enbridge System ITS metrics penalties may apply if available capacity is reduced below baseline targets.
The Enbridge System and other liquids pipelines are subject to the actions of various regulators, including the NEB. Actions of the regulators related to tariffs, tolls and facilities impact earnings from those operations. The NEB prescribes a benchmark multi-pipeline rate of return on common equity, which is 8.57% in 2009 (2008 8.71%). To the extent the NEB rate of return fluctuates, a portion of the Enbridge System and other liquids pipelines earnings will change. The Company believes that regulatory risk is reduced through the negotiation of long-term agreements with shippers, such as the ITS, Terrace Agreement and agreements for projects currently under construction, which will govern the majority of the segment's assets.