The rail industry is watching whether Alberta’s government will allow for more crude oil volumes to travel via freight rail.
Crude market participants are speculating that the Alberta government could announce the sale of extra crude-by-rail contracts later in October, according to an October 8 Bloomberg report.
The Alberta government has been working with the energy industry in response to requests from energy companies seeking an exemption from their production limits if crude is moved via freight rail. The government is seeking to maintain a balance between production and takeaway capacity.
The extra crude-by-rail contracts would be on top of monthly production limits set by the government. The Alberta government has been limited in how much monthly crude production output in 2019 as a way to keep production levels on part with export capacity. Alberta produced more crude in 2018 than could be shipped for export via rail or pipeline, the government said, which helped add to a global supply glut and depressed pricing. The move by Alberta was extraordinary; the assumption in the oil market is that non-OPEC countries will produce to capacity unless private companies choose to shut uneconomic production. Output reductions ordered by governments are not assumed to be a factor.
November’s production cap is set at 3.8 million barrels/day (b/d), with the December cap slightly higher, at 3.81 million b/d. The government is currently involved in arranging crude-by-rail contracts, but that could change as the province’s leaders look into privatizing the contracts.
The government will continue to limit crude production through December 31, 2020 “to give industry more flexibility to make timely business decisions and reduce red tape for small producers,” according to Alberta’s website. The decision to limit crude production is also the result of pipeline construction delays.
Canadian National (NYSE: CNI) didn’t return a request for comment while Canadian Pacific (NYSE: CP) declined to comment about the possible additional crude-by-rail contracts. But both have said at investment conferences and earnings calls that they have the ability to ship more crude if demand arises.
“Our expectation is that [allowing crude production levels]…would come with some sort of one-to-one credit, so [that] the more crude by rail that you can prove that you’re going to move, maybe you get a credit against the curtailment,” CP chief marketing officer John Brooks said at the CIBC investor conference on September 25.
Brooks also said CP moved 25,000 crude carloads in the second quarter of 2019, and he estimated that the railroads would haul 27,000-28,000 carloads in the third quarter and 30,000 carloads in the fourth quarter.
News that the Alberta government could offer additional crude-by-rail contracts sent Canadian crude oil prices lower. A more favorable market to ship Canadian crude oil occurs when the contract Western Canada Select is priced at a $20/barrel discount to WTI crude, which is the U.S. benchmark crude contract.
“The discount for Alberta heavy crude has widened considerably to the benchmark WTI crude at Cushing, Oklahoma, meaning that the high cost of rail would not be enough to negate the profitability of buying crude in Alberta, shipping it by rail and delivering it into Cushing or even the Gulf Coast,” FreightWaves market expert John Kingston said.
For now, the Alberta government has been steadily increasing the production limits for crude oil each month, and government data appears to show that crude-by-rail volumes grow in tandem. Crude oil production limits have grown from 3.56 million b/d in January and 3.63 million b/d in February to 3.76 million b/d in September, according to Alberta’s government.
Meanwhile, crude-by-rail volumes grew from 544,138 million metric tonnes, or 3.4 million barrels, in February to 1.5 million metric tonnes, or 9.7 million barrels, in July, according to the Canada Energy Regulator. July totals represent the latest data available.