Alberta oil to move by rail as soon as July

The provincial government is spending $3.7 billion to ship Alberta oil by rail, about five months earlier than was first expected.

On Tuesday, Premier Rachel Notley announced the government had negotiated contracts with Canadian Pacific Railway and Canadian National Railway to lease 4,400 railcars for three years.

Albertans were told to expect shipment to begin by summer, eventually peaking at 120,000 barrels per day by July 2020.

The government expects to see $5.9 billion in revenue over the three years, via the sale of oil, royalties, provincial tax revenue and an anticipated narrower price differential.

“While pipelines will always be the best, most efficient, most economical long-term solution, we must take action today to provide relief to our energy workers and the families who rely on these good jobs,” Notley said Tuesday.

“When everything seems to be piling up against us, Albertans don’t just stand by. We take action.”

The Alberta government suggested late last year it would buy oil railcars at the same time it announced a mandatory production cap. However, oil wasn’t expected to start moving by rail until December 2019—and even then, only by 15,000 barrels per day.

The lease program, managed by the Alberta Petroleum Marketing Commission, will see Alberta buy oil from producers and ship the product to as-of-yet undetermined markets.

Most cars are expected to go to the U.S. Gulf Coast, where analysists say there is a higher demand for Alberta crude.

The plan is expected to reduce the price differential between Western Canada Select and West Texas Intermediate by $4 U.S. per barrel by late 2021 and clear Alberta’s backlog of product.

Tuesday’s announcement was touted as a medium-term solution to see better prices for Alberta oil and improve the province’s takeaway capacity, which currently suffers from a lack of pipeline access. When the production cap was announced, Alberta estimated it had 35,000,000 barrels of oil in storage. 

Notley called curtailment effective in narrowing the differential, but a short-term measure.

“Let’s be very clear about something: Rather than produce less, we have to find ways to move more,” she said.

However, the United Conservatives have criticized the province for assuming the risk of selling product.

“This is taking risk that should be borne by the private sector, by oil producers, and shifting it onto taxpayers,” UCP Leader Jason Kenney said.

The government said the strategy ensures its leased railcars are used to their full capacity.

“I suppose in theory it does (put risk on the taxpayers), but we know that there is absolutely no risk to finding markets for this product,” the premier said.

Kenney said if his party was elected, it would review the contracts to ensure they were made in good faith and public interest, and represent money for value.

While the agreements with the rail services have been signed, the government said it is still negotiating deals with market buyers, which could change depending on market activity. No timeline was given for when the final destinations would be announced.

Originally, the government announced about 7,000 cars would be needed to clear out the province’s storage glut. It said on Tuesday more research and consultation determined the previous estimate was high, and that negotiations with CN and CP resulted in more efficient routes.

Amid concerns crude would be allocated more rail capacity, agriculture producers were told they shouldn’t expect increased competition for rail service as oil is going south to the U.S., rather than to the west.

CP and CN also assured Alberta it could fulfill its agricultural commitments while accommodating the additional cars, Notley said.

Approximately two-thirds of the leased railcars will be brand new. The majority of the oil will be shipped in DOT-117J cars, which are considered the latest safety standard.

In response to concern over their use, Notley said, “Know that we are treating the safety of these railcars as though they are travelling through our own backyards.”

About 23 per cent of the fleet consists of DOT-117Rs, retrofitted to match the safety specifications of the 117Js.

With files from Bill Fortier