Premier Rachel Notley has announced plans to spend $3.7-billion to lease thousands of rails cars to ship Alberta crude, as her government continues an aggressive intervention into a market that has left the province suffering from low prices and constrained pipeline access.
Ms. Notley, who faces a tough spring campaign for re-election in which management of the the energy industry will be a key issue, said the government will lease 4,400 rail cars that will ship 120,000 barrels of crude a day by next year. The first cars are expected to be in service by July, she said, and the province has signed contracts with Canadian Pacific Railway and Canadian National Railway to transport the cars.
The crude-by-rail program is part of a series of measures designed to increase the price and market for Alberta oil, including production limits that took effect on Jan. 1. The government is also handing out billions in grants and loan guarantees to expand upgrading and refining.
“Rather than produce less, we have to find ways to move more," she said.
“While pipelines will always be the best, most efficient and most economical long-term solution, we must take action today to provide more relief to our energy workers and the families who rely on these good jobs across this province and this country.”
The Alberta Petroleum Marketing Commission will purchase oil from producers and then market it. The commission has yet to sign any contracts, so it’s not yet clear where the oil will come from or where it will go, although most of it is expected to head to U.S. refineries.
Ms. Notley said the province expects to bring in $5.9-billion through oil sales, royalties and taxes, leaving net revenues of $2.2-billion. She said there is strong demand for Alberta oil and insisted the province will not only break even but make money.
“There’s absolutely no risk to finding markets for this product," she said.
Jason Kenney, leader of the Opposition United Conservative Party, condemned the announcement as irresponsible and said a UCP government would immediately review such contracts. He said oil producers were already increasing rail shipments before the the NDP government imposed production cuts.
“All the Premier’s announcement today does is to move risks and costs from the private sector onto the backs of taxpayers when we can least afford it,” Mr. Kenney said.
Mr. Kenney declined to say whether a UCP government would rip up the rail contracts, instead saying it would depend on the terms of those agreements and whether there would be penalties for cancelling them.
Crude rail shipments reached record levels last fall largely owing to pipeline constraints. But they have fallen since the beginning of the year as the province’s production cuts narrowed the price difference between Alberta oil and West Texas Intermediate down to roughly US$10 from more than US$50 last fall.
Several large producers have said the current price differential has made shipping by rail uneconomical, with Imperial Oil Ltd. saying it would not ship any crude by rail in February. CP and CN have each seen petroleum shipments drop by about a third since December, according to the companies’ latest weekly data.
The oil price differential was about US$13 as of Friday, according to the Petroleum Services Association of Canada, and Ms. Notley said the government expects the differential to continue to widen, which would make rail more profitable.
About three-quarters of the cars will meet increased safety specifications, known as DOT-117J, put in place after the Lac-Mégantic rail disaster in 2013 in Quebec. The remaining cars will be retrofitted to meet those standards.
A derailment in western Manitoba over the weekend, which saw an undetermined amount of oil spill, involved retrofitted cars.
The government also said CP and CN offered assurances that grain and other commodity shipments would not be displaced by the added crude rail traffic.
Ben Brunnen, vice-president of oil sands operations and fiscal policy for the Canadian Association of Petroleum Producers, said the industry group supports anything that will help get more crude to market.
“We’re not in an ideal situation,” he said. “We’re confronted with what we consider to be a failure in the market to increase our pipeline access. so the government stepped in on a short-term basis to alleviate the pressure.”