The Alberta government is trying to offload its lease of 4,400 rail cars to ship crude oil to U.S. refineries.
Attempting to make good on a spring election promise, the government announced Thursday morning it has engaged CIBC Capital Markets to “help oversee the divestment of the crude-by-rail program and its transition to the private sector.”
The contracts, which government has not released, include the costs of loading and unloading oil into railcars and its shipping, purchase and sale, Energy Minister Sonya Savage said at the legislature on Thursday.
“The commercial sector would never have signed those contracts,” Savage said. “Nobody signs a contract where you know that each and every barrel of oil that moves through the system is going to be moved at a loss.”
The negotiations are confidential and could involve breaking up the deals among several buyers, Savage said. Can the government make a deal without losing money? Savage didn’t know, but said they’re trying. She hopes to have an arrangement worked out by fall. Parties are interested, she said.
With several oil pipeline projects stalled, private companies were already investing in oil-by-rail when the former NDP government inked the contracts last February, Savage said.
The $3.7-billion oil-by-rail deal between the Alberta government and Canadian Pacific and Canadian National railways was to ship as much as 120,000 barrels per day out of the province.
The NDP predicted the three-year deal would net the province $2.2 billion in royalties, taxes and sales. However, the United Conservative Party government forecasts a $1.5-billion loss on the deal.
Rail cars were supposed to be available starting next month to begin shipping 20,000 barrels a day, with capacity growing during the next year.
Selling off railcar capacity may make increase the efficiency of getting oil out of Alberta, since producers can work directly with shippers and reduce bureaucracy, said Mike Walls, a Colorado-based senior crude oil analyst with Genscape.
“I think it’s the right move, in that private industry was already ramping up rail at the end of 2018,” he said.
Regardless of who runs the cars, Explorers and Producers Association of Canada president Tristan Goodman said he’s happy to see rail capacity increase. Rail is the only way to grow the industry in the short term, he said.
Oil curtailment easing
Also Thursday, the government said it would ease oil production limits in August.
In January, the former NDP government cut oil production by 8.7 per cent to deal with a glut of product in storage.
In November 2018, Western Canada Select was selling at a painful $45-a-barrel discount compared to West Texas Intermediate, which was costly to the provincial treasury. Cutting production was supposed to help narrow the price differential, and it did, dipping to $7.35 in January.
On Wednesday, the price differential was $12.35.
The government will raise production limits in August to 3.74 million barrels a day, which is an increase of 25,000 bpd from the July limit, said a government news release. The production limits started in January at 3.56 million bpd, and governments have gradually eased them throughout the year.
This lift, though small, also pleased Goodman. He said it shows government is serious about moving away from curtailment, but cautiously enough to prevent another oil glut. More leeway to produce more barrels means more oil industry jobs, he said.
Genscape saw oil storage drawdowns of about 2.6 million barrels in Western Canada in May, when some oilsands operations were offline for maintenance, Walls said. August tends to be one of the largest months for oil production, and government was likely mindful of this, he said.
The government has to balance storage capacity with the risk that holding back too much oil will narrow the price differential too much, he said. If the price gap is too small, it’s uneconomical to ship Canadian oil to the U.S., he said.