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Canadian Natural eyeing a piece of Alberta's $3.7-billion oil-by-rail sale


CALGARY – Some of the largest oil companies in Canada are in talks to purchase the crude-by-rail contracts currently held by the Alberta government that Premier Jason Kenney has been looking to offload.

“We are very interested in taking on rail capacity,” said Steve Laut, executive vice-chairman of Canadian Natural Resources Ltd., which is the largest upstream oil and gas producer in Canada. “We are seriously participating in the process.”

Speaking on the sidelines of a TD Securities investment conference in Calgary, Laut said he didn’t know when the government would award the contacts but that Canadian Natural had responded to a request for proposals.

The Calgary-based producer has been widely considered the most likely buyer of the crude-by-rail contracts, especially after its $3.8-billion purchase of Oklahoma City-based Devon Energy Corp.’s oilsands business in May, that has increased the company’s need for takeaway capacity.

Kenney’s government hired CIBC Capital Markets on June 27 to divest the $3.7-billion, 120,000-barrels-per-day crude-by-rail contracts that former premier Rachel Notley and her NDP government secured in the middle of February in an effort to clear a glut of oil in the province.

Kenney has repeatedly said the contracts belong in the private sector and there are multiple companies interested in the rail capacity, though some are looking for a bargain.

Cenovus, which owns a crude-by-rail loading facility near Edmonton, and is in the process of ramping up its oil-by-rail capacity to 100,000 bpd by the end of this year would only look at the opportunity if there is a bargain on offer.

“We’ll always take a look at everything but, in my view, 100,000 barrels per day is our rail commitment, which is pretty meaningful for our company. So we’re probably, unless there are some real bargains there, we’re more likely just going to be happy with our situation,” Cenovus Energy Inc. president and CEO Alex Pourbaix said.

The oil-by-rail contracts are widely seen within the oilpatch as the key to lifting an oil production limit imposed by the previous NDP government in late 2018 to prevent domestic heavy oil prices from collapsing further. In the fourth quarter of 2018, Canadian heavy oil traded at various times for US$50 per barrel less than the West Texas Intermediate benchmark.

“This will be a very orderly way to reduce curtailment over time. I don’t think the Alberta government is interested in seeing differentials blow out again,” CNRL’s Laut said of selling off the oil-by-rail contracts.

Currently, oil producers in the province are required by the Alberta government to limit their production by a cumulative total of 175,000 bpd. At the same time, and to the annoyance of the country’s largest oil companies, there is enough oil-by-rail loading capacity in the province to move that volume of crude but it’s not being used.

“I call this the Kindergarten MBA test. What’s wrong with this picture? We have oil shut in and we have idle takeaway capacity,” said Mark Little, president and CEO of Suncor Energy Inc., the largest oil company in Canada by market capitalization.

What’s wrong with this picture? We have oil shut in and we have idle takeaway capacity

Mark Little, president and CEO of Suncor Energy

Little said a group of oil producers in the province have been in talks with Kenney’s government on how it can ease the curtailment order in a way that would prevent massive discounts for Canadian crude and encourage more oil-by-rail movements.

“I think that we’re within rounding distance of being able to literally get all of the production to market with the excess rail that’s available and get a fair price for it, and I think that’s the objective that the companies working together with the government is focused on,” Little said.

The industry has also suggested to government that their production limits under the curtailment order should be lifted if they’re willing to take on additional oil-by-rail contracts, thereby clearing more of the glut out of Alberta.

Alberta Energy Minister Sonya Savage said “it’s a possibility” but is waiting to see the results of the sale of the oil by rail contracts first. “There’s been a great interest in (buying the contracts),” she said.

The challenge is that oil production from Alberta exceeds pipeline takeaway capacity and there have been multi-year delays to all active pipeline proposals out of the province, including the federally owned Trans Mountain pipeline expansion, TC Energy Corp.’s Keystone XL pipeline and Enbridge Inc.’s Line 3 pipeline.

“We all had an expectation that around this time this year Line 3 would be line filling and would be taking a significant amount of pressure off the egress situation and that obviously hasn’t occurred,” Cenovus’ Pourbaix said.

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