Premier Notley Asleep At Locomotive’s Throttle?

On Monday afternoon Premier Rachel Notley announced the province of Alberta will be presenting a business plan to the federal government by early next week outlining several strategies — including getting the feds to invest in locomotives and tanker cars — to support the rapid ramp up of crude-by-rail shipments as a short- to medium-term method to quell massive discounts for western Canadian oil.

Potentially a great idea, but why the heck did it take so long? In A Modest Proposal To End Western Canada’s Railway Pinch, published in DOB in early February, we argued the two railway companies have regional oil producers over a barrel — and even more so now with even wider regional crude differentials — and the Canadian Transportation Agency (CTA) should be included in negotiations at the earliest possible date to encourage Canadian National Railway Company (CN) and Canadian Pacific Railway Limited (CP) to bargain in good faith — and if not, for the CTA to impose fair deals between the railways and small and large oil producers alike.

Western Canadian grain growers have long complained about rail service from CN and CP, suggesting the two railways act as an oligopoly and misuse their market power to secure greater profits. In turn, the two railways have as much as said, “You get what you pay for,” as the revenue they can make moving western Canadian grain is capped by the Maximum Revenue Entitlement (MRE), a remnant of the 1897 Crowsnest Freight Rate.

The federal government has passed legislation after legislation in an attempt to improve rail service for western Canadian grain growers — the most recent the Transportation Modernization Act, passed in May — while the CTA has been involved in numerous disputes between the grain growers and two railway companies.

But Notley mustn’t know any Alberta grain growers, or know much about the Canadian railway industry, because instead of acting when regional crude differentials were only poor, and not yet horrific, she created a crude-by-rail working group in early May to study the bottlenecks limiting the amount of Alberta oil being shipped by rail.

The working group presented its results in mid-August. The key findings were: more locomotives and crews are needed to move more crude by rail; railways should concentrate efforts on the U.S. Gulf Coast region; and the Alberta government is not impeding more locomotives coming into service or greater rail access to the U.S. Gulf Coast. Hmmm, the Notley government needed a crude-by-rail working group and over three months to figure that out?

At the same time it has been reported that the two Canadian railway companies are playing hardball with oil shippers, demanding multi-year, take-or-pay contracts, and at higher tariffs than in the past, with Cenovus Energy Inc.’s recent deal a good guide. In late September, Cenovus announced that it had signed three-year deals with CN and CP to ship roughly 100,000 bbls/d of heavy crude oil from northern Alberta to various destinations on the U.S. Gulf Coast. The company indicated the all-in shipping cost is in the mid-to-high teens in U.S. dollars, with exact commercial details of the deals confidential.

The mid-teens is what Alberta producers have tended to pay to rail their oil to the U.S. Gulf Coast by unit train in the past, and the high teens is obviously significantly more. If a major producer such as Cenovus is paying even the lower rate, what are the railways demanding from smaller oil producers? This may explain the lack of crude-by-rail deals to date, and is likely another important factor for slow growth in the amount of western Canadian oil being transported by rail, especially compared to need and crude-by-rail uploading capacity — roughly 200,000 bbls/d versus one million bbls/d, based on National Energy Board (NEB) statistics.

You’d have thought the Notley government would have been in more of a rush to encourage greater volumes of crude-by-rail, with regional crude differentials hitting the stratosphere and a provincial election right around the corner. In terms of Notley’s business plan for the feds, hopefully it also includes mechanisms to deal with the market power issue between railways and oil producers. But I wouldn’t hold your breath given the limited scope of her crude-by-rail working group, and her government’s failure to show even a modicum of business acumen in its nearly four long years in power.