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November 29, 2018 12:15 PM, EST

Alberta Buying Rail Cars to Ship Crude Amid Pipeline Pinch

Crude rail cars Daniel Acker/Bloomberg News

Alberta is working to buy railcars to help ship more crude as pipeline bottlenecks have the oil-rich province grappling with historic low prices.

The province has engaged a third party to negotiate the purchases, and a deal may be struck “within weeks,” Premier Rachel Notley said Nov. 28 in a speech in Ottawa. The province’s costs will be fully recouped through royalties and the selling of shipping capacity, she said.

“Don’t mistake me — this is not the long-term answer,” Notley said. “It absolutely is not. New pipelines are the long-term answer.”

Notley’s proposal is one of several put forward by government and industry officials to boost Canadian oil prices by increasing the amount that can flow to refineries in the United States and elsewhere. Some producers have begun to curb output — and asked the government to mandate cuts ☺— after prices fell to as much as $50 a barrel below the U.S. benchmark. Canadian Prime Minister Justin Trudeau took the unusual step of buying a pipeline project earlier this year to help get enough transport capacity.

crude oil graph

The announcement comes about a month after Alberta asked the federal government to buy more locomotives. The federal government was said not to favor that plan, and Notley has said in recent weeks that her administration may buy the equipment on its own.

Western Canada Select, a grade of crude produced by Alberta’s prolific oil sands, closed at $13.46 a barrel earlier this month, the lowest on record in Bloomberg data dating to 2008. WCS’s discount to U.S. benchmark prices widened to about $50 a barrel last month, also a record.

Notley said buying two new unit trains could help transport an additional 120,000 barrels a day and help narrow the oil price gap relative to the U.S. benchmark by around $4 a barrel.

“We see the time delay in sourcing railcars as further evidence that 2019 may be a challenging year for Canadian crudes,” analysts at Tudor, Pickering, Holt & Co., who assisted the Alberta government in evaluating the crude-by-rail option, said in a note. Still, the additional capacity will be “a positive for the Canadian 2020 crude outlook.”

The province, which last week appointed three envoys to find solutions to the crisis, has a range of options that it’s considering, including adjustments on oil producers’ royalties, Notley said. However, such a move “probably isn’t the best” option, she said in response to reporters’ questions.

Some of Canada’s large oil producers asked Notley last month to consider mandating an industrywide production cut, which would help clear the crude glut and raise prices. But that option has been opposed by the nation’s large, integrated producers, whose refineries are benefiting from the cheaper feedstock. Notley has said she hasn’t ruled that option out.

United Conservative Party Leader Jason Kenney, who will be Notley’s rival in an election next year, came out in support of a government-mandated production cut Nov. 28 and said his party is drafting legislation that would enable a curtailment.

Longer term, the Canadian oil industry is counting on three pipeline projects to help get more of its oil to market. Those encompass Enbridge Inc.’s expansion of its Line 3 conduit, TransCanada Corp.’s Keystone XL and the Trans Mountain expansion, which was acquired by the Canadian government.

In the meantime, producers are working on their own to increase rail-shipping capacity and are even shutting in some of their own capacity.

“It’s worth more in the ground than it is to produce it right now,” Athabasca Oil Corp. CEO Rob Broen said in an interview Nov. 28 with Bloomberg Television. “These differentials are so extreme.”