Notley buying trains to get Alberta’s oil to market, address ‘economic insanity’
Manoeuvre comes as outlook darkens dramatically amid steep price discounts
Faced with a rapidly deteriorating CALGARY economic outlook for her province, Alberta Premier Rachel Notley took her most dramatic action yet on Wednesday with the announcement that her government will buy two trains to move oil out of the province.
“We have already engaged a thirdparty to negotiate and work is well under way. We anticipate conclusion of the deal within weeks,” Notley said during a speech to business executives in Ottawa.
The move comes as Alberta’s economic picture has worsened dramatically over the past six weeks amid discounts on Canadian oil that hit a record US$50 per barrel.
The situation is so dire that ATB Financial chief economist Todd Hirsch revised his forecast downward for the Alberta economy twice before he released it last week, with GDP growth now pegged at 2.1 per cent and unemployment rate averaging 6.6 per cent next year.
If he has the chance to update it now that it’s published, Hirsch said he might revise the outlook down again. “We are in a dramatically different oil price environment than we were two months ago,” Hirsch said, adding the fall in Western Canada Select oil prices relative to the West Texas Intermediate benchmark has darkened the province’s economic outlook.
“In Alberta’s economy, we feel like we’re in this suspended animation, waiting for something to happen,” he said, adding that forecasts could move in either direction depending on how the WCS discount changes in the next few weeks.
To alleviate the pressure, the provincial government is currently negotiating to buy two new unit trains to move oil out of Alberta and clear the glut. The country’s oil output will average 4.59 million barrels a day this year, 22,000 more than previously forecast, National Energy Board data shows.
“Should we be selling our most valuable commodity for pennies on the dollar? No, that is stupid,” Notley said.
The trains would carry capital costs of approximately $350 million and allow the government to move an additional 120,000 barrels of oil per day out of the province by late 2019, which the premier expects would generate $1 million per day in new federal revenues and narrow the discount for Canadian oil by $4 per barrel.
“It seems way too conservative,” said Ninepoint Partners senior portfolio manager Eric Nuttall said of the $4 per barrel figure. “This is really significant.”
The move will contribute to crude oil-by-rail shipments rising from current levels of 270,000 barrels per day to 450,000 bpd in the third quarter of next year, according to Nuttall. Combined with Enbridge Inc.’s Alberta-to-wisconsin Line 3 pipeline project coming into service, the market should balance over that time frame.
Nuttall’s expects the discount to fall below US$25 per barrel for Canadian oil after April 2019, which would be a dramatic improvement over current spreads of US$33.25 per barrel.
“In the short term, there will still be over supply as crude-by-rail ramps,” Nuttall said, noting the Alberta government could further address the over-supply by requiring producers to curtail output.
Notley had previously said she hasn’t ruled out any option, which includes a forced curtailment of production.
On Wednesday, Notely’s rival Jason Kenney, who leads the opposition United Conservative Party, recommended implementing a 10-per-cent production cut to Alberta’s oil output — which is a higher figure than other calls for action.
A recent Scotiabank report indicated a four-per-cent curtailment could balance the market.
Credit ratings agency DBRS Ltd. warned Wednesday that without action on the differentials, it “may take negative rating action on producers leveraged to Western Canadian production if current benchmark pricing prevails for an extended period of time.”
Notley’s speech in Ottawa focused largely on the economic struggles Albertans have faced in recent years, beginning with the oil price crash of 2014 and now exacerbated by the massive discounts that have kept Canadian oil prices low as crude elsewhere has rallied.
In her speech, Notley called the situation “fiscal and economic insanity.”
Alberta is expected to release its second-quarter fiscal update this week, which will offer a peek into the government’s balance sheet.