What we know about Alberta's plan to buy thousands of oil tank cars

In late November, Alberta Premier Rachel Notley announced that within "a few weeks"her government would unveil its plan to buy thousands of railcars to help transport the province's oil to market.

Eight weeks later and the provincial government is still in negotiations with railway companies and suppliers. The latest update from Energy Minister Marg McCuaig-Boydwas only to say"it's an ongoing conversation."

The government says it needs thecars because there's a backlog of oil in the province and a lack of pipeline space to export it.

With few details coming from the Notley government, here's what weknow and don't know about itsplan.

Total cost

The government hasn't provided an estimated cost for buying the railcars, as negotiations are ongoing. It's difficult to hazard a guess considering how few details are known about what the government is trying to acquire.

Notley has said Alberta needs to buy as many as 7,000 tank carsto meet its goal of shipping an additional 120,000 barrels of oil a day by train. She has also said that could include about 80 locomotives, with each train pulling 100 to 120 cars.

Each tank car can hold nearly 700 barrels of oil.

The province likely won't buy the cars, but instead lease them for between three and five years, which experts say is the industry standard.

The government also wants to sign agreements with railway companies and secure capacity to load oil in Alberta and unload the trains at destinations in North America.

Railcar shortage

Finding that many tank cars may prove difficult because of a shortage throughout North America.

In the third quarter of 2018, railcar manufacturers received orders for 11,000 new tankers, according to data from the Washington-basedRailway Supply Institute (RSI). About 3,000 new cars were produced in that quarter and the backlog of orders now sits at about 31,000.

The shortage of tank cars is partlythe result of Canada and the U.S.both transitioning away from the old model DOT-111 tank cars,which were involved in the deadly rail disaster in Lac-Mgantic, Que., in 2013. The new standard is the TC-117 in Canada (DOT-117in the U.S.), which featuresa thicker steel hull, thermal protection, and protective valve covers, among other safety features.

Some rail companies are also retrofitting the older tank cars to meet the new safety standards in North America.

"We're seeing fairly strong demand over the last few quarters in terms of tank car manufacturing and retrofits," RSI presidentMike O'Malley said in an interview.

Premium price

The shortage is one reason why Alberta will likely have to pay a premium to secure the thousands of tank cars it wants.

One of North America'slargest railcar leasing companies said prices are increasing.

On a conference call with investors and analysts earlier this week, GATX executive Thomas Ellmansaid market lease rates for tank cars were up 25 to 50 per cent in 2018 compared to the previous year.

Another factor driving up tank car prices has been an increase in the amount of crude shipped by rail in both Canada and the U.S.

For eight straight months, Canada's rail system set new records for crude volumes, according to the National Energy Board. The NEB's most recent data is for November2018, although recent statementsfrom CN and CP Rail indicate crude-by-rail volumes have since dropped.

In the U.S., volumes increased to more than 20 million barrelsin October, but the numbers arestill lower than in 2014, when oil prices were about $100 US per barrel and more than 35 million barrels were transported by rail, according to the U.S. Energy Information Administration.

'Insurance' plan

The potential impact of the Alberta government's railcar plan is debatable. Thefirst railcars are only expected to arrive at the end of this year, with the bulk of them arriving in 2020.

By then, Alberta should have more space to export oil by pipeline, which is cheaper and faster compared to rail. Enbridge's Line 3 replacement project, which runs from Alberta to southern Manitoba,is expected to be complete by December2019, just as the first of the government's railcars are expected to roll into the province.

"If that's the case [with Line 3], we really don't see a need for crude-by-rail volumes to continue to grow,"saidMichael Dunn, an analyst forGMPFirstEnergy.

Considering delays that pipeline projects can face, Dunn said the government likely wanted to have backup measures in place in case Enbridge wasn't able to get the pipeline up and running on time.

"I view their purchase as basically an insurance policy."

Michael Dunn on whether Alberta will need more oil rail cars

6 years ago

Duration 0:49

The analyst with GMP FirstEnergy says the province will only need more rail cars as a backup plan if there are delays constructing new pipelines.