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Alberta in talks to offload crude-by-rail contracts
ALBERTA
NEW Alberta Premier Jason Kenney has said that the province has started talks with private sector players on handing over crude-by-rail contracts signed by the previous New Demo- cratic Party (NDP) government to Canadian oil producers.
e move was expected, a er Kenney, the leader of Alberta’s United Conservative Party (UCP), pledged during his election campaign to scrap the NDP’s crude-by-rail deals, worth C$3.7 billion (US$2.8 billion). He described the deals as not making nancial sense or o ering good value to taxpayers.
“ ere are con dential conversations going on between our government and private sector actors. Our strong preference is that the private sector take over those contracts,” Kenney told media in Calgary this week.
e deals in question were struck by the NDP in an attempt to prop up the province’s struggling oil and gas industry. Alberta su ers from a lack of pipeline capacity for sending its oil to market, and as the problem has worsened this has put downward pressure on regional crude prices. Indeed, the di erential between Western Cana- dian Select (WCS) prices and US benchmarks widened to record levels in late 2018, prompting the NDP government to introduce restrictions on Alberta’s oil production. e move helped to narrow the discount between WCS and West Texas Intermediate (WTI), but also proved to be a divisive one for the province’s oil industry, with some producers supporting it while others were rmly opposed.
Subsequently, the NDP also struck deals to lease 4,400 rail cars that would transport Alberta crude to market earlier this year. e two largest contracts signed were with Canadian National Railway (CN) and Canadian Pacific Railway (CP) to move the rail cars. e programme was due to begin transporting 20,000 barrels per day (bpd) from July, ramping up to 120,000 bpd by mid-2020. But the NDP government was ousted in the provincial election, held in April. A gov- ernment source with knowledge of the situation was cited by Reuters as saying this week that although talks were under way, the crude-by-rail programme would not start up in July as planned bytheNDP.
“ ose contracts were signed in the last days of the NDP government and pay above the mar- ket rate,” the source said. “ e sticking point is whether the railways are willing to come to the table to o er commercial terms that would be attractive to producers to ship their oil, and whether some or most of the oil producers can agree to conditions under which they can contract directly with the railways,” he added.
According to the source, CN and CP have shown a willingness to discuss the contracts.
The heads of Husky Energy and Cenovus Energy have previously noted the possibility of the private sector taking over the government crude-by-rail deals. Reuters reported that while a Cenovus spokeswoman declined to comment on whether the company was participating in dis- cussions, she said if the province can nd a way to put rail transport into the hands of industry, it would be a “win-win” situation.
Crude-by-rail shipments from Western Can- ada are on the rise, with average rail loadings in May reaching 231,000 bpd, up 34,000 bpd from April, according to Genscape, an energy market monitoring rm. Shipments fell to a nine-month low in February owing to improved WCS prices, which made crude-by-rail transport compar- atively less attractive, but are now rebounding. e trend is being bolstered by US sanctions against Venezuela, which have led to increased demand for alternative sources of heavy oil among re ners on the US Gulf Coast.
e uptick in demand is a welcome develop- ment for the Canadian industry, which has been trying to build additional pipeline capacity to the US for years despite major projects being held up by regulatory and legal delays. However, Alber- ta’s producers will have to contend with ongoing production curtailments. Kenney warned this week that the cuts, which were due to be phased out by the end of this year, may have to continue into 2020 owing to delays to Enbridge’s Line 3 pipeline replacement project.™
Crude-by-rail shipments from Western Canada are on the rise, with average rail loadings in May reaching 231,000 bpd.
Kenney described the deals as not making nancial sense or offering good value to taxpayers.
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w w w . N E W S B A S E . c o m Week 23 13•June•2019