Alberta to spend $3.7B on oil-by-rail
Province signs 3-year contracts to lease 4,400 cars, plans shipment boost by 2020
CALGARY Alberta’s government is spending $3.7 billion to connect the oilpatch to the key Gulf Coast market via rail, as the province aims to lift prices amid a shortage of export pipelines.
“We have successfully negotiated deals with the Canadian Pacific Railway and Canadian National Railway to start moving oil by rail this July,” Alberta Premier Rachel Notley said Tuesday as she announced the province had signed three-year contracts to lease 4,400 rail cars.
The cars will initially ship 20,000 barrels per day out of the province but as more come into service, the shipping commitment will ramp up to 120,000 bpd by the middle of 2020.
Much of that crude will head to the U.S. Gulf Coast, the world’s largest refining market for heavy oil, though Notley said some volumes will go to Canada’s West Coast and eastern markets as well.
The plan to lease railway cars, buy oil from producers and sell it to refineries will cost a total of $3.7 billion, but generate $5.9 billion in government revenues over three years through a combination of oil sales, higher royalties and taxes, according to the premier.
She said the province had to act in order to lift prices for Canadian heavy oil, which as recently as December suffered record-setting discounts relative to U.S. benchmarks.
“This is something that is fundamentally important to the return that all Albertans get for our energy resources,” Notley said, while also dismissing suggestions that the oil-by-rail contracts should not have been signed so close to a provincial election.
“We plan to ensure that outside of election cycles, the best interests of Albertans are taken care of,” she said.
Notley said that leasing oil-byrail cars was a medium-term solution to Alberta’s oil price woes, following her government’s decision from December to force oil companies to curtail oil production.
“Curtailment is not a permanent solution and it cannot become a permanent solution. It must be very, very temporary,” Notley said.
That curtailment order narrowed the discount for Western Canada Select heavy oil blends to drop from above US$40 per barrel to under US$10 per barrel, which is below the threshold necessary for oil producers to justify the cost of shipping their barrels on trains.
Imperial Oil Ltd. criticized the Alberta government’s curtailment order and said it had scaled back its oil-by-rail shipments from over 160,000 bpd in December to zero this month.
However, data from AltaCorp Capital shows the differential for WCS relative to the West Texas Intermediate benchmark was US$13.61 per barrel on Monday, which is close to the economic threshold for shipping oil by rail.
The latest National Energy Board data shows Canadian oil-byrail exports hit new record highs of 330,402 bpd in November 2018, compared with 148,311 bpd at the same time a year earlier.
While Imperial has decreased its oil-by-rail shipments at the beginning of 2019, rival Cenovus Energy Inc. has been adding railway cars through contracts signed last year to move 100,000 bpd.
The province’s long-term plan assumes that both the Keystone XL pipeline and Trans Mountain pipeline expansion project will be built in the next three years, though there is potential for both to be delayed. The NEB is expected to release its report to government on the Trans Mountain expansion later this week after consultations with Indigenous communities.
Notley said speculation that the Trans Mountain project could be further delayed was overblown as meaningful consultation with affected First Nations always had the potential to take longer than expected. “That is something that you must allow for,” she said.
Prasad Panda, the energy critic for the opposition United Conservative Party, said his party would review any contracts signed leading up to the election. The government has yet to drop the writ and call an election, but polls show the UCP with a lead on the ruling NDP.
“We have said previously that we are not opposed in principle to using rail to get our product to market in the absence of much-needed pipelines. That said, we have also stated that we will review all contracts signed by the government in the current campaign period to ensure taxpayer value,” Panda said in an email.
The government did not provide details about the potential costs of cancelling the contracts.