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Alberta considers bowing to producers

The Canadian province's new regime sees a way to pivot from a potentially costly repeal threat

Alberta premier Jason Kenney is not a fan of the province's C$3.7bn ($2.8bn) crude-by-rail contracts with transport firms Canadian National (CN) and Canadian Pacific (CP). But he may have to take an approach more pragmatic than his initial populist rhetoric.

Even before former incumbent Rachel Notley had the Alberta Petroleum Marketing Commission sign the contracts in February, and two months before he won office, Kenney warned he would cancel them, labelling them reckless "corporate welfare". But the Kenney government quickly realised that the two railroad firms would seek penalties from Alberta if it broke the contracts, and, in mid-June, switched gears by indicating plans to offload the contracts to the private sector instead.

The Alberta government looked set to have to take a financial hit on this alternative—oil companies were talking about cutting deals—until early July, when several major producers proposed that, rather than financial incentives, they be rewarded with so-called crude curtailment credits in return for taking on the rail contracts.

And it appears this is now the Kenney government's preferred route, to the benefit of major oil producers. Only the 29 largest producers in Alberta are being curtailed, out of more than 300 producers, as the first 10,000bl/d a company produces is exempt. This is despite the fact that the Notley administration's crude-by-rail programme was designed to benefit small producers most.

Contra deal

The idea of the government transferring its rail contracts to producers in return for higher production allocations was first broached by three of Canada's largest oil companies—Canadian Natural Resources Limited (CNRL), Suncor Energy and Cenovus Energy—during a panel discussion at a Calgary energy conference in July.

Only the 29 largest producers in Alberta are being curtailed

"We are very interested in taking rail capacity," said CNRL executive vice-chairman Steve Laut. "It would make a lot of sense to lift curtailment as you bring on rail and, for those who commit to rail, you should get some kind of increased allocation on your curtailment."

It would allow the Kenney government to transfer the rail contracts, representing roughly 120,000bl/d of capacity at its peak, while bringing crude curtailment towards an orderly level, according to Laut. Rail shipments of oil briefly collapsed early this year, with overly aggressive mandated crude cuts—325,000bl/d in January, since reduced by more than half—narrowing regional crude differentials by too much to make it economic to rail crude to US markets. CNRL alone has been forced to halt as much as 80,000bl/d of crude production due to curtailment, including production newly online in 2019.

Alberta energy minister Sonya Savage said in early August that it "certainly could make sense" for the province to accept the industry's proposal to swap rail contracts for curtailment credits. The Kenney government has set an end of August deadline to receive proposals from bidders, with the goal of offloading the contracts to the private sector by the autumn.

Market power

The original intent of the Notley government's rail contracts was to expand evacuation capacity from western Canada—with crude pipeline projects in limbo—and to counter the market power of the two railways, especially for small producers. The railways were demanding relatively high freight rates from small producers, leaving many smaller players feeling that they could not risk being locked to rail contracts of three years or more, and/or failing to meet minimum volume requirements as demanded by the CN-CP duopoly.

The Canadian government has passed numerous rounds of legislation over the decades in an attempt to counter the market power of CN and CP, for example to improve rail services for western Canadian grain growers, most recently the Transportation Modernisation Act in May 2018.

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