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The cost of the new rail contracts will depend on how the government will negotiate with the private sector.

Larry MacDougal/The Canadian Press

The Alberta government is closing in on deals to offload a crude-by-rail program to the private sector, replacing a deal inked by the previous, NDP government in February.

The four-year, $3.7-billion agreement with Canadian National Railway Co. and Canadian Pacific Railway Ltd. would have seen Alberta purchase and ship 120,000 barrels of crude a day to help deal with a lack of pipeline capacity and reduce the price discount on Canadian heavy oil.

The NDP projected revenue of almost $6-billion under the program, but Premier Jason Kenney cancelled it soon after winning the April election, arguing the financial risks were too high.

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Energy Minister Sonya Savage said Friday the negotiations are taking some time owing to the number and complexity of the contracts. “We’re getting there. It’s not quite done, because we’re trying to get a little bit more value out of it for taxpayers, but it’s close,” she said in an interview.

According to a postbudget analysis by TD Securities, a key point in those negotiations will be retaining a provision that allows companies to produce more than their quota under the current curtailment rules as long as the additional oil leaves Alberta by rail. The quota aims to limit the province’s chronic mismatch of oil production and pipeline capacity and has helped narrow a longstanding discount on Alberta heavy crude.

TD forecast oil-production growth of 8 per cent to 30 per cent in 2020 if that arrangement is included in the final deal.

The cost of the new rail contracts will depend on how deftly the government can negotiate with the private sector, particularly after it showed its hand in Thursday’s provincial budget by including a $1.5-billion price tag for backing out of the previous government’s deal.

Mr. Kenney’s government remains adamant that taxpayers should not be in the business of buying rail cars, using an entire page of the budget to explain why it killed the program. Factoring in projected commercial revenues and expenses, it estimated the deal would cost taxpayers $1.8-billion – more than the cost of scrapping it.

Finance Minister Travis Toews said last week the $1.5-billion cost played a large role in Alberta’s projected $8.7-billion deficit, although he hopes the final figure will be between $800-million and $900-million.

“This is a ceiling provision. There’s a lot of complexity in these contracts, and we will be negotiating hard to get the best deal for Albertans,” he said.

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In its postbudget analysis, TD wrote that the $1.5-billion provision indicated provincial coffers will absorb the vast majority of the cost, which could see the energy industry with a decent deal on its hands.

“We believe CNQ (Canadian Natural Resources Ltd.) has the potential to benefit most since it is reportedly a front-runner in these negotiations,” it wrote.

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