NEW YORK: US pipeline operators are selling their underused space at steep discounts to keep crude flowing – angering shippers and distorting an already opaque market for oil trading. Pipeline firms such as Plains All American and TransCanada Corp move about 10 million barrels of crude around the United States every day. For pipeline operators to secure financing to build pipelines and storage facilities, they need oil producers, refiners and traders to sign long-term contracts to use space on the pipelines. Pipeline firms can then use the guaranteed revenue from those contracts as collateral. Firms shipping on the pipeline have historically benefited from the long-term deals because they offered a discount compared to the price of buying space occasionally. But now, in the wake of a two-year oil price crash, pipeline firms are still struggling to keep their lines full. So their marketing arms are offering steep discounts to ad-hoc buyers of pipeline capacity – which irritates customers whose long-term contracts are now more expensive than spot purchases. “If I were a producer with a long-term contract, I would be very unhappy at the present time,” said Rick Smead, managing director of advisory services at RBN Energy in Houston. “But, the reality is that when they (signed contracts), they were trapped.” Eight pipeline operators contacted by Reuters for this story declined to comment on their discounted spot pricing or the secondary market for pipeline capacity. Some of those pipeline firms are offering prices as low as 25 percent of federally regulated rates, creating a secondary market that undercuts shippers with long-term contracts, according to four sources at companies that regularly ship on the pipelines. The discounts emerged after a global glut and crashing oil prices caused many shippers to let their pipeline contracts lapse or declare bankruptcy. More than a dozen producers, traders and refiners told Reuters they were angry and frustrated that these discount deals have become a mainstay. They declined to be named because they were not authorized to speak publicly. The contract and regulatory framework of the industry makes it difficult for them to bargain down their own long-term contracts, leaving them paying more for the pipeline space than occasional shippers competing to send oil through the same lines. This gives the occasional shippers the edge in delivering cheaper crude to potential buyers at the end of the line. TransCanada’s 700,000 barrel-per-day Cushing-Marketlink pipeline – which carries oil from Cushing, Oklahoma, to Texas refineries – has long-term rates of between $1.63 and $2.93 a barrel to transport heavy crude, while occasional shippers typically paid $3. The industry downturn since 2014 has reduced demand from occasional shippers to use the line at that price. Earlier this year, TransCanada’s marketing arm offered customers the right to send crude through the line at a tariff of between 80 to 90 cents, traders using the line said. At the end of 2016, the rate offered was as low 30 to 40 cents. Even with the discounts, the line rarely reached 70 percent capacity. TransCanada declined to comment. Pipeline operators agree to charge specific tariffs for sending oil through the lines when they sign long-term contracts with oil shippers. Those rates are known as committed tariffs, and are subject to approval by the US Federal Energy Regulatory Commission (FERC). The FERC also reviews the rates paid by occasional shippers, known as uncommitted tariffs. The FERC declined to comment on the secondary market and on the tariffs that the marketing arms of pipeline operators are charging in that market. Most of the 10 largest US pipeline operators – such as Enbridge and Enterprise Products Partners – have established their own marketing or trading arms that are reselling space. Last year, TransCanada – which operates the massive Keystone pipeline system – became the most recent player to open a unit to trade oil and resell pipeline space. A few, such as Plains, have had marketing arms for more than a decade, but in the past they had mostly just sold or traded space that went unused by major producers who had committed to long-term contracts. On lines such as TransCanada’s, big producers such as ExxonMobil and Suncor Energy account for up to 90 percent of the flow in a pipeline. The remaining 10 percent is sold to occasional shippers. Suncor and ExxonMobil declined to comment. With the three-year rout in oil, the volume accounted for in long-term contracts has fallen, and the marketing arms have gone from simply selling occasional space to needing to make big deals to fill the lines. The practice has become so widespread that even pipeline operators who had previously said they disliked the emergence of the secondary market have now joined the fray. Magellan Midstream Partners, for instance, in November applied to the FERC to establish a marketing arm, citing the more favorable terms other firms can offer customers. The move came after Magellan had declined for years to run its own operation out of fear that it would compete with its own customers. The secondary market is formed by marketing firms signing up to long-term contracts with their parent companies, the pipeline owners. The marketing firms become like committed customers to the line, and pay the same rates for the space as the firms with long-term contracts. Those marketing firms book a paper loss for shipping the volumes at a discount. But the sales keep the pipelines more full – which makes the parent firm look better to investors, who use pipeline volume as a key metric to judge those firms. Published in Daily Times, June 29th, 2017.