Alberta's government in talks about offloading crude-by-rail contracts to private sector, Kenney says

The Alberta government has started talks with the private sector about Canadian oil producers taking over crude-by-rail contracts signed by the previous government, Premier Jason Kenney said on Tuesday.

The talks follow a campaign promise from therecently elected United Conservative Party to scrap the former New Democratic Party government's $3.7 billion crude-by-rail deals, which Kenney has slammed as poor value for taxpayers.

"There are confidential conversations going on between our government and private sector actors. Our strong preference is that the private sector take over those contracts," Kenney told reportersafter giving a speech to kick off the Global Petroleum Conferencein Calgary.

The NDP had planned that the crude-by-rail program would start up in July.

Price discount

Alberta is Canada's main crude-producing province and home to the country's vast oilsands but a lack of pipeline capacity leaves oil bottlenecked, adding to the price discount on Canadian barrels versus U.S. oil.

That discount hit record levels in late 2018, prompting the former NDP government to curtail oil production.

Earlier this year, the NDP also signed deals to lease 4,400 rail cars that would transport Alberta crude to market, before being ousted in an April election.

The two largest contracts signed were with Canadian National Railway and Canadian Pacific Railwayto move the rail cars. The program was meant to start transporting 20,000 barrels per day next month, ramping up to 120,000 bpd by mid-2020.

Private sector reaction

A CP spokesman said the company is "working with industry and the province of Alberta on opportunities to deliver crude-by-rail safely and efficiently to market."

CN did not immediately respond to a request for comment.

The chief executives of Husky Energy Inc. and Cenovus Energy Inc.previously talked about the possibility of the private sector taking over the government crude-by-rail deals.

Husky did not immediately respond to a request for comment.

In an email to CBC News,Cenovuscalled the Alberta government's move a "positive step" and said it makes sense to move the contracts into the hands of energy producers rather than cancelling them entirely.

Cenovus had signed three-year agreements with both CN and CP Rail last year to move 100,000 barrels of oil per day by rail.

A Cenovus spokeswoman declined to comment for Reuters on whether the company is participating in current rail discussions.

The Canadian Association of Petroleum Producers called crude by rail "essential" to the industry in an emailed statement to CBC News, and said increasing market access for Canadian oil and gas needs to be a priority.

Richard Masson with the University of Calgary's School of Public Policy said it's encouraging to see the government move away from outright cancelling the contract, but the details matter .

"It all depends on how many companies think thatthey can use this capacity effectively and that'll set the price that they're willing to pay," he said.

"So the government may end up getting a bit of a discount, that they have to incur a bit of a loss, or they may get a premium."

Curtailments could stay longer

Rail is seen as a crucial conduit for Canadian crude in the absence of new export pipelines, which have been long delayed by regulatory and environmental concerns.

Kenneyalso said on Tuesday that the oil production curtailmentsintroduced by the NDP might have to continue longer than was anticipated.

The previous government had initially orderedproduction of raw crude oil and bitumen to be cut by 325,000 barrels per day starting Jan. 1, 2019, to clear up a glut of oil that had overwhelmed pipeline capacity and driven down prices.It was to fall to about 175,000 bpd by June.

"Our decision will be based on what's in the best interest of Alberta taxpayers, because they own the resource and last November they were getting nothing for it," Kenney said.

"We initially had hoped, as did the previous NDP government, that we could eliminate curtailment by the end of 2020, but with the one-year delay in the Line 3 replacement, we may have to consider continuing some of the curtailment into next year, into 2020."

Gary Mar, CEO of the Petroleum Services Association of Canada (PSAC), said we might be getting to a point where it's not cost effective to move oil by rail.

"Crude-by-rail was an economic way of moving oil before, when the differential between West Texas Intermediate and Western Canada Select was much higher. Now that the differential has closed because of curtailment, it does not make as much sense to move crude by rail, because you can't cover the transportation costs with the differential as easily as you could before," he said.

"So it makes sense that there be a logical way of getting out of curtailment in a smooth transition and dealing with the rail issue at the same time."

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