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Alberta unloads 120,000 b/d of crude-by-rail contracts

Highlights

19 contracts shed at C$1.3 billion loss

WCS price discount narrows, limiting spot arbitrage

Crude-by-rail expected to rise in 2020

Alberta — Alberta's government has offloaded a suite of crude-by-rail contracts totaling 120,000 b/d, although some traders are questioning spot rail arbitrage economics as Canadian crude price discounts have tightened.

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The contracts, entered into by a previous administration, were unloaded at a loss of C$1.3 billion ($980 million), the Alberta government said in a release Tuesday.

Premier Jason Kenney, who pledged during his 2019 election campaign to divest the contracts, said the loss would have totaled at least C$1.8 billion had the government continued to carry the commitment to ship 120,000 b/d by rail. The government did not disclose which companies opted to pick up the discounted contracts.

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The cost of keeping the 19 contracts was estimated at C$10.6 billion while revenue was forecast to be C$8.8 billion.

"We made a clear commitment to cancel the previous government's risky deal made in the dying days of their government to spend billions on crude-by-rail contracts," Kenney said in the release. "We are saving Alberta taxpayers [C]$500 million, and bringing an additional 120,000 b/d of egress online."

The previous government of Premier Rachel Notley brought the crude-by-rail program into force as part of its response to a glut of oil production that swamped pipelines and sent prices tumbling at Alberta hubs.

Notley's plan was to buy heavily discounted oil from Alberta producers and resell it in more-lucrative US markets. The program was intended to give small producers without the financial means to book rail cars access to markets outside the province.

Alberta produces the majority of Canada's oil and the government takes crude from companies as royalties, then resells it. The precipitous drop in Alberta prices in late 2018 came as a serious blow to government coffers.

Western Canadian Select at Hardisty, Alberta, averaged a discount of $45/b to WCS at Nederland, Texas, in October 2018, S&P Global Platts data shows.

That discount has since tightened, and is averaging $13.89/b so far in February, which some traders say is harming spot crude-by-rail arbitrage economics.

It costs about $12/b to ship crude from Hardisty to the USGC on a committed rail contract, and can cost from $15/b to $18/b to ship on a spot basis.

Kenney said in an interview with Platts last week that the offloading of rail contracts would not result in lower crude-by-rail shipments.

He expects crude-by-rail shipments to average 500,000 b/d this year. Canada railed 297,476 b/d of crude in November, according to the most recent Canada Energy Regulator data.

Canada's oil export growth has slowed on a shortage of pipeline space after oil sands producers committed to large projects while anticipating new pipeline capacity would be in place late in the last decade.

Exports for 2019 through November averaged 3.728 million b/d, up 149,681 b/d from the same period in 2018, CER data shows. The average production in 2018 was at 3.601 million b/d, up 279,619 b/d from 2017.

Projects that would add almost 2 million b/d of export capability are in various stages of development, but still face regulatory and environmental hurdles.

Companies including Cenovus Energy and ExxonMobil subsidiary Imperial Oil own rail-loading terminals and lease or own specialized cars that give them flexibility in moving crude by rail when market conditions make it worthwhile.

"Shipping crude by rail is something the private sector is in the best position to be doing itself," Alberta's energy minister Sonya Savage said in the press release. "Enabling industry-led rail capacity is an important aspect of ensuring sufficient market access for our resources."