Alberta suffers loss on crude-by-rail contracts
Canadian province reverses policy after financial burden begins to mount
The Alberta government has finally done away with crude-by-rail contracts signed by the previous government, as promised by Premier Jason Kenny on the election trail last spring. But the province has had to accept a large financial loss to encourage private companies to take them on.
Alberta’s former leader Rachel Notley had claimed the contracts with Canadian National (CN) and Canadian Pacific (CP)—Canada’s two major railways—would make a substantial profit for the province when she had the Alberta Petroleum Marketing Commission (APMC) sign them in mid-February of last year. This was shortly before she called an election for mid-April and almost six months after a Canadian court quashed the federal cabinet’s original approval of the Trans Mountain Expansion crude pipeline project.
The loss to Alberta from offloading the rail contracts would apparently have been worse, had it not been for the province agreeing to a suggestion by several major oil producers last summer to be rewarded with so-called crude curtailment credits in return for taking on the rail contracts.
In announcing her government’s C$3.7bn ($2.8bn) crude-by-rail plan last February—excluding the cost of crude oil—“this is a good value for Albertans,” Notley said.
Her government had predicted the province’s roughly three-year plan to ship 120,000bl/d with up to 4,400 leased rail cars from railway operators CN and CP would generate more than C$5.9bn in revenue through increased royalties—due to a projected US$4/bl reduction in the spread between the US West Texas Intermediate (WTI) benchmark and the Western Canadian Select (WCS) oil price from early 2020 to late 2022—and increased provincial tax revenues. This would have left Alberta with a profit of C$2.2bn.
Premier Kenney originally planned to simply cancel the rail contracts
In contrast, when Kenney announced the sale of these crude-by-rail contracts to private companies for a loss of C$1.3bn earlier this week, he claimed the province had saved at least C$500mn.
According to his administration, the program would have lost at least C$1.8bn, with commercial revenue of C$8.8bn dwarfed by expenses of C$10.6bn—C$3.7bn for the rail contracts and C$6.8bn for the crude oil. The Kenney government had allocated C$1.5bn to “extricate” the province from these contracts in its October budget.
Premier Kenney originally planned to simply cancel the rail contracts. But he changed tack last June when CN and CP made clear the provincial government would pay substantial financial penalties for doing so. His government had said the divestment would occur by October, before releasing its first budget. Then energy minister Sonya Savage said it was coming “imminently” when announcing the Special Production Allowance (SPA) program at the end of October.
The SPA program, in place since the beginning of December, allows crude oil producers to exceed mandated curtailment levels in Alberta if those volumes are transported using incremental crude-by-rail capacity. The Kenney government generously selected average rail shipment volumes in the first quarter of last year as the baseline for individual producers.
C$1.3bn – loss from the sale of contracts
Volumes collapsed along with the WTI-WCS differential following the imposition of crude curtailment in Alberta at the start of January last year, making rail transportation uneconomic, especially when the amount of oil being withheld from the market was relatively high. Companies were only allowed to produce 3.56mn bl/d in January 2109, compared to 3.81mn bl/d in December 2018—and above 4mn bl/d some months before restrictions were mandated.
The day the SPA program was announced, Mark Little, the president and CEO of Canadian producer Suncor Energy, said it served as an incentive for curtailed companies to buy the crude-by-rail contracts being sold by the Kenney government. The province’s 16 largest oil producers currently have restrictions on their production levels, compared to 29 producers when curtailment was first implemented, as exempted production for each company was increased from 10,000bl/d to 20,000bl/d in August in an attempt to encourage more capital investment in the industry.