November 28, 2018 / 6:00 PM / 13 days ago

Canada's Alberta province to buy rail cars to reduce oil glut

OTTAWA (Reuters) - Canada’s Alberta province is in talks to buy rail cars to transport 120,000 barrels per day of crude oil and expects a deal to be concluded within weeks, Premier Rachel Notley said on Wednesday, as the oil-rich province tries to move oil stuck in the region because of a lack of pipeline capacity.

FILE PHOTO: An oil pump jack pumps oil in a field near Calgary, Alberta, Canada, July 21, 2014. REUTERS/Todd Korol/File Photo

Notley, who said the cars were needed to help deal with a glut that has slashed the price of Alberta oil, told a business audience she was disappointed the federal government was not helping fund the purchase.

Reuters reported last week that Alberta had proposed a joint purchase of two unit trains worth of capacity and estimated the one-time capital cost at about C$350 million ($263.7 million). Federal officials are cool to the idea, saying that by the time the first cars come on line late next year, the supply problems will have eased.

Alberta estimates it is producing about 250,000 bpd more than can be shipped using existing pipeline and rail capacity.

“Alberta will buy the rail cars ourselves to move this oil,” Notley said in a speech. “We have already engaged a third party to negotiate and work is well under way. We anticipate conclusion of the deal within weeks.”

She later told reporters a deal could be announced before year end.

Based on the initial talks, Alberta expects the first 15,000 bpd of capacity to come online in December 2019, ramping up to the full 120,000 bpd by August 2020, with the agreement running for three years.

“It’s a lot of trains and a lot of cars,” Notley told Maclean’s magazine in a webcast interview on Wednesday evening, noting it took multiple 60,000-barrel unit trains to move the equivalent of 120,000 bpd.

The added transport capacity is expected to improve the Canadian crude discount by about $4 over the three-year term, the provincial government said.

Under that time line, the first rail cars would roll out just as an expansion of Enbridge Inc’s (ENB.TO) Line 3 oil export pipeline is set to start operation, although Notley argued the rail capacity would still be needed.

“Line 3 only clears the market for three months before we find ourselves back in this situation again,” she told Maclean’s.

Notley said the cost of buying the cars would be fully recouped through royalties and the selling of shipping capacity.

Her spokeswoman, Cheryl Oates, said the province did not anticipate keeping the unit trains beyond 2021.

FEDERAL HELP WANTED

Notley said there was “no excuse” for Ottawa not helping and castigated the federal government for proposing tougher environmental standards that she said would make it harder than ever to build pipelines.

The supply glut “is happening because Canada willfully holds Alberta’s economy and Canada’s economy hostage,” she said, estimating the losses at C$80 million a day.

Ottawa denies it is being unhelpful, noting that it bought Kinder Morgan Canada Ltd’s (KML.TO) Trans Mountain pipeline earlier this year.

Vanessa Adams, a spokeswoman for federal Natural Resources Minister Amarjeet Sohi, said Ottawa was analyzing Alberta’s proposal about splitting the cost of the unit trains.

Several Canadian crude producers have curtailed production and asked Alberta to mandate cuts for other producers. Oates said a decision on that would be made within a week.

Oates also said Alberta was not considering a “royalty holiday” to incentivize output cuts, adding a number of tools were being considered, including the way royalties were applied.

Last week, federal Finance Minister Bill Morneau said businesses would be allowed to write off additional capital investments, something that he said oil industry executives had pressed for.

Reporting by David Ljunggren; Additional reporting by Julie Gordon in Vancouver; Editing by Lisa Shumaker and Peter Cooney

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