The Alberta government is looking at a plan to purchase rail cars to help clear the oil sands backlog which has significantly driven down the cost of Alberta crude.  Western Producer photo by Robin Booker. 

Oil sands backlog, low oil prices costing Canadian economy $80 million a day

Alberta Premier Rachel Notley says her government is willing to buy trains to transport Alberta crude to help clear the oil sands backlog that has resulted in a significant drop in oil prices.

According to Reuters, the Alberta government asked Ottawa to share in the $350 million capital cost and $2.6 billion operating costs associated over three years of buying rail capacity to boost crude transportation.  Premier Notley hopes to put her plan into action by July of next year.

Speaking to the Canadian Association of Oilwell Drilling Contractors in Calgary on Thursday, Notley said the additional rail capacity will boost shipments by an additional 120,000 to 140,000 barrels per day (b/d).

Premier Rachel Notley speaking to COADC event Thursday in Calgary.

“Until pipelines are built, we need to move oil by rail,” the Alberta premier tweeted on Thursday morning after her government announced that six partial upgrading project proposals are being considered under and expanded provincial program to speed up the commercialization of the new technology.

The proposals are collectively worth nearly $5 billion of new private sector investment and could create almost 10,000 construction jobs with 500 more jobs during operations, according to the government press release.

“For decades, Albertans have been talking about getting more for our oil by upgrading more here at home. We’re taking action to make that a reality. By supercharging energy upgrading in Alberta, we can create more jobs and open more markets to finally get top dollar for our resources,” Notley said.

Partial upgrading is an emerging technology that reduces the thickness of oil sands bitumen so it can flow through pipelines more easily, without having to be blended with diluent. This provides significant cost savings to industry, increases pipeline capacity by up to 30 per cent, and provides access to more refineries around the world.

So far, Alberta has not received an answer from the Trudeau government on the cost-sharing proposal for rail shipment of crude oil.

The pipeline bottlenecks have stranded much of Western Canada’s rising oil production and has driven down the price US refineries will pay for the crude.

“Ottawa needs to join Alberta to help ease the economic pain,” Notley said while speaking to CAODC. “If Ottawa won’t come to the table, then we’ll get it done ourselves. If it takes buying trains to (move more oil to market) then that’s what we’re going to do.”

Mark Scholz, CAODC.

Low oil prices are costing the Canadian economy about $80 million per day, according to the Alberta government.  Mark Scholz, president of CAODC says oil service companies are “on life support.”

The association released its 2019 drilling forecast Thursday, noting that pricing differentials and pipeline delays will continue to curtail capital expenditures. The forecast estimates that 6,962 wells will be drilled (increase of 51), 69,617 operating days (increase of 507), and the rig fleet is expected to decrease by 58 (580 drilling rigs to 522 drilling rigs).

“The Canadian oil and gas industry is simply too dysfunctional to anticipate any kind of quick recovery,” said Scholz.

“Our members are on life support. With the exception of perhaps Venezuela, Canada is the only oil and gas producing jurisdiction in the world that cannot at the very least see a recovery on the horizon.”

Despite a recovery in the price of oil, and LNG Canada’s positive announcement early in Q4 that it would be building its LNG export facility, drilling activity in 2018 remained flat year-over-year.

Sliding prices have forced some producers, including Cenovus Energy, to cut back on their production.  The Calgary-based company has asked the provincial government to mandate output cuts for other producers.

Such mandated cuts are opposed by producers like Suncor Energy and Imperial Oil who own refineries and are taking advantage of the cheap oil.

Notley says her government is considering a number of options to boost prices.

Reuters reports the premier also says that Alberta would have liked to see the federal government’s fiscal update include greater recognition of the oil industry’s struggles.  Finance Minister Bill Morneau delivered the update on Wednesday and did not offer any measure to help the oil sector.

When asked about the rail capacity purchase, Morneau did tell reporters “that’s a discussion that might go forward in Alberta”.

Signalling Ottawa is not backing the plan, The Vancouver Sun reports Morneau said during an interview “We’ve clearly said that pipelines are efficient, cost-efficient and a safe way for us to get our resources to market”.

Morneau added “If the industry and Alberta choose to find other alternatives, then that we understand. But we are focused on that long-term, cost efficient and safe way for us to get our resources to market”.

Alberta Finance Minister Joe Ceci said on Wednesday in response to the update “The crisis happening in this province affects the whole country but they are speaking a different language.”  He added “We must get our product to tidewater and nothing today addresses that.”

With US refineries returning to full capacity soon and Enbridge’s Line 3 pipeline set to go online next year, the bottlenecks will be somewhat alleviated.

Reuters approached a spokesperson at the CNR for comment, but the representative could not be reached immediately and the CPR declined comment.  Both rail companies are already increasing their shipments of Canadian crude.

Along with boosting crude transportation capacity, Premier Notley says her government has short-listed six projects to partially upgrade oil.  The projects could be worth a total of $5 billion.