The Alberta government and oil transportation companies are pressing ahead with plans to move 120,000 barrels per day of crude by rail, ignoring threats to quash the deals from the man tipped to become the province’s next premier.
Latest polls show United Conservative Party leader Jason Kenney is on track to oust the New Democratic Party government in the April 16 election. If successful, Kenney has vowed to rip up contracts signed as part of the NDP government’s C$3.7 billion plan to ship more crude out of the province by rail.
Alberta is Canada’s biggest oil-producing province, but congestion on export pipelines pushed Canadian heavy crude to a record discount versus U.S. barrels last year. In a bid to drain storage tanks and shore up prices, the government controversially mandated oil production cuts and announced plans to lease rail cars to ship crude.
“We will stop the $4 billion boondoggle and let the private sector risk its own money rather than imposing the risk on taxpayers,” Kenney told a news conference on Monday.
Companies including Cenovus Energy and Imperial Oil ship crude from their own rail terminals in Alberta.
But two sources at midstream companies that have already signed three-year contracts with Premier Rachel Notley’s government said the plan is moving ahead regardless of who wins the election.
“They can tear (the contract) up all they want, but I still have an email copy,” one source said. “Anybody on a platform in front of 1,000 people can say what he wants…that’s not going to affect how the real world works.”
Notley slammed Kenney’s plan to cancel the rail deal at an event in Calgary on Monday, saying it would slow oil production and deprive Alberta of $2.2 billion in revenue.
Canadian crude by rail has slowed since hitting record levels late last year, National Energy Board data shows, after the discount on Canadian crude shrank dramatically as a result of production curtailments, making rail uneconomic.
But many analysts expect shipments to increase again after Enbridge Inc said its Line 3 pipeline replacement, which would ship an extra 370,000 barrels per day (bpd) out of western Canada, will be delayed until the second half of 2020.
“In the reality where Line 3 is delayed, crude by rail serves as the incremental release valve for a market that has been consistently plagued by bottlenecks,” said RBC Capital Markets analyst Michael Tran.
Notley announced in February that Alberta has leased 4,400 rail cars and will bring them into service in July so it can buy and sell oil itself. Canadian National Railway Co and Canadian Pacific Railway Ltd will haul a combined initial volume of 20,000 bpd, reaching 120,000 bpd by mid-2020.
Alberta will spend $2.95 billion on rail service including capacity at terminals, storage access and rail transportation, and $750 million on rail cars and other fees, the government said.
Trading sources in Calgary said Australian bank Macquarie has been hired to buy crude in the market on behalf of the government. Macquarie Bank did not immediately respond to a request for comment.
Another source at a midstream company said Kenney may be forced to change his mind on rail, given the risk of more pipeline congestion without it.
“The practical reality is if you want to move incremental production it is going to go by rail,” the source said. “For all intents and purposes the agreements are done and signed. They are our contracts to rip up.”