The Alberta government will incur a financial penalty if it goes ahead with Premier Jason Kenney’s pledge to cancel $3.7-billion worth of crude-by-rail contracts, the head of Canada’s largest railway said Wednesday.
Speaking to reporters in Calgary, Canadian National Railway president and CEO JJ Ruest said his company has ramped up capacity in recent months to meet its crude shipment obligations under the terms of the contract entered into by Rachel Notley’s government in February .
While the contract does not come into effect until July 1, Ruest said CN has already made significant capital investments to meet its end of the deal.
“We have the locomotive, we’ve built this double track, we’ve paid the cost of training these crews for six months. If you don’t use them, there will be a stand-by cost for not using the asset that you’ve asked us to create for you,” Ruest said, following a question and answer session with the Calgary Chamber of Commerce.
As the ongoing pipeline bottleneck led to a widening discount for Alberta crude earlier this year, the NDP government signed $3.7-billion worth of contracts with CN and Canadian Pacific Railway to lease up to 4,200 rail cars capable of carrying an additional 120,000 barrels per day of oil out of the province.
During the provincial election campaign, Kenney called the rail contracts a “catastrophic mistake” and an example of “market interference” and said he would do everything in his power to get out of them.
Some industry insiders have suggested that if the government can’t break its rail leases, it may be able to transfer them to private sector oil shippers instead. On Wednesday, Ruest did not discount that idea, saying CN wants to be part of the solution and help Alberta get its resources to market for the best price.
“A lot of things are possible,” he said. “It doesn’t have to be the way it was envisioned back in December, when discussions first took place.”
Montreal-based CN, which shipped a record 250,000 barrels per day of crude oil in December 2018, saw a “sudden collapse” in its crude business in 2019 after the NDP government curtailed Alberta’s oil production in an effort to free up pipeline space and boost the price of Western Canadian Select. While curtailment has narrowed the price differential between Alberta oil and U.S. oil prices, it has also eroded the economics of shipping oil from Alberta to the Gulf Coast by rail.
Ruest said CN shipped 145,000 bpd in April — up from a low of 89,000 bpd in February, but still half of what it has capacity for. He said the company has had to issue temporary lay-off notices as a result of the slowdown in oil shipments.
“We actually have about 300 people right now on temporary lay-off on the crude train on the Canadian Prairies, because we thought at this point we would be moving twice as much crude,” he said.
Oil curtailment levels have been partially eased in recent months, but it remains unclear when the new United Conservative Party government will end the program, which was originally expected to wrap up later this year.
Ruest said CN never expected crude-by-rail to be a long-term business, but added the company is committed to doing its part to move Alberta’s resources to market in the short-term until more pipeline capacity can be created.
“Our role here is to be a solution for a period of time, my view is maybe the next 24 to 36 months,” he said.
Copyright Postmedia Network Inc., 2019