Alberta will pull back on some curtailment restrictions imposed on its oil industry and allow producers to ship more crude by rail, a move that is expected to provide a boost for Canadian railways.
The Alberta government announced Thursday that starting in December, it will allow special production allowances for operators who plan on increasing their oil production and move it by rail. The government said the temporary curtailment relief – which can be applied for on a monthly basis – will help address the lack of capacity because of pipeline construction delays.
“The special allowance program will protect the value of our oil by ensuring that operators are only producing what they are able to move to market,” Alberta Energy Minister Sonya Savage said in a news release.
“This program will lead to more production and increased investment, benefitting industry, our province’s bottom line, and, ultimately, Alberta taxpayers.”
Alberta’s previous NDP government had initially implemented the curtailment restrictions last December after the price of Canadian oil plunged to near-record lows. Premier Jason Kenney’s United Conservative government kept the restrictions in place, but has gradually increased the quota since it came into power.
But Kenney did cancel the previous government’s contract to lease 4,400 rail cars to ship Albertan oil as part of its 2019 budget, calling it a “costly, interventionist and necessary approach.” Cancelling the contract will cost the government $1.5 billion.
RBC Capital Markets analyst Walter Spracklin expects that shipments of petroleum will increase at Canadian National Railway and Canadian Pacific Railway by 10 per cent and 7 per cent, respectively.
“We see a scenario where the Canadian rails are using all of their crude-by-rail capacity as more likely,” Spracklin wrote in a note to clients on Thursday.
“Our view is that these volumes will come at low incremental cost because both rails have already built out capacity and could provide upside to earnings into 2020.”
Executives at Canadian railways have previously said they are prepared to ship additional crude shipments in the event that the province lifts the curtailment restrictions.
“There’s about 200,000 barrels a day of crude that is not moving that’s in the ground and wants to move, if the production curtailments are lifted,” James Cairns, CN’s vice president of rail centric supply chain, said on a conference call with analysts last week.
“If that does happen, we’re ready, willing and able to move that volume.”
CP’s chief executive Keith Creel told analysts last week that the company is supportive of the government’s latest mechanisms aimed at offsetting curtailment restrictions.
“In anticipation of this, we’ve seen the spread begin to widen and we’re seeing growing interest with our shippers and expect volumes to increase,” Creel said.
In fact, CP said it sees crude by rail as a significant opportunity for the next few years, given the limited progress made on building new pipelines that will bring oil to tidewater.
“I don’t see any imminent pipeline coming into play,” said CP’s chief marketing officer John Brooks. “To me it still feels like a two to three year opportunity before we realistically see new pipes.”