Don’t Bet Farm On Alberta Rail Plan Making Money
Call me skeptical.
In announcing her government’s $3.7 billion crude-by-rail plan on Feb. 20, Alberta Premier Rachel Notley said: “This is a good value for Albertans.”
The Alberta government is forecasting the province’s three-year plan to ship 120,000 bbls/d with up to 4,400 leased rail cars will generate more than $5.9 billion of revenue through increased royalties due to a US$4/bbl reduction in the WTI-WCS differential from early 2020 to late 2022 and increased provincial tax revenues, leaving the province with a profit of $2.2 billion.
The plan may be needed as insurance against further delays in crude pipeline projects, and because many smaller producers simply can’t risk three-year rail contracts and/or don’t meet minimum volume requirements as demanded by the Canadian National (CN)-Canadian Pacific (CP) railway duopoly (see A Modest Proposal To End Western Canada’s Railway Pinch). But there is far more risk to provincial revenues from the plan than suggested by Premier Notley.
First off, why is Premier Notley insisting that the federal government join her government’s rail plan if she is so confident it is going to make $2.2 billion? I certainly wouldn’t want to share the profits with the dastardly feds — at least dastardly in the eyes of our premier since federal approval of the Trans Mountain expansion (TMX) was quashed in court in late August.
Secondly, where the heck did the Alberta government come up with its US$4/bbl reduction in the WTI-WCS differential? The last time Premier Notley used this figure was when she announced the Alberta government’s crude curtailment program on Dec. 1.
After peaking at over US$50/bbl the second half of November, and sitting at almost US$40 at the time of the announcement, the WTI-WCS differential has been stuck below US$15/bbl, making crude-by-rail uneconomic (see Imperial Overstates Case Against Crude Curtailment) despite the government slashing required curtailment levels by 75,000 bbls/d as of the beginning of February.
Thirdly, the Alberta government’s projected rail profits for 2020 appear to be under severe threat, and in fact the province could lose a tidy sum, as 370,000 bbls/d of incremental crude pipeline capacity from Enbridge’s Line 3 replacement project is a relatively sure thing for late this year.
This increase is greater than the original curtailment of 325,000 bbls/d of Alberta crude production as of Jan. 1, which pushed the WTI-WCS differential below US$10/bbl. And as of now, there is no reason to expect any more than modest growth in western Canadian oil production in 2020 compared to pre-curtailment 2018 levels given slashed capital budgets and drilling programs.
As a result, the Alberta Petroleum Marketing Commission (APMC), which will be purchasing crude from Alberta producers on behalf of the province, could end up paying significantly more next year than it receives from U.S. refiners after subtracting the cost of rail.
For the sake of simple quantification, let’s conservatively peg the APMC’s cost of rail to complex refineries on the U.S. Gulf Coast at US$17.50/bbl. A US$15-20 range is generally bandied about, but CP Rail president and CEO Keith Creel recently said his company’s recent deal with the Alberta government — CN also cut a deal with the province —was “just as good if not better” than it had hammered out with oil companies.
Assuming a US$10/bbl WTI-WCS differential, and the APMC contracted to ship an average of 105,000 bbls/d by rail in 2020 as a whole — 90,000 bbls/d in the first half as volumes ramp up and 120,000 bbls/d in the second half — that translates to a loss of about $380 million based on the current Canada-U.S. exchange rate, not a profit of $733 million — a third of the projected $2.2 billion.
Finally, potential profits or losses from Premier Notley’s crude-by-rail plan in 2021 and 2022 are much more speculative than for 2020 as they are dependent on future capital spending and drilling plans by the western Canadian oil industry and the timing of two more pipeline projects: TransCanada’s 830,000 bbl/d Keystone XL (KXL) and the feds’ 590,000 bbl/dTMX. But it should be noted that the much delayed KXL is currently scheduled to come online in early 2021 and TMX sometime in 2022.
To conclude, former Montréal Mayor Jean Drapeau said, "The Olympics can no more lose money than a man can have a baby,” when he first announced the budget for the 1976 Olympic Games. In fact, the city had to take on more than $1 billion in debt to cover the cost of the games. Premier Notley’s “This is a good value for Albertans,” is not as memorable of a line as Mayor Drapeau’s, but it could prove every bit as misguided.
Note: Vincent Lauerman began his career at the APMC in the mid-1980s.