CALGARY, Alberta—The Alberta government has started talks with the private sector about Canadian oil producers taking over crude-by-rail contracts signed by the previous government, Alberta Premier Jason Kenney said on June 11.

The talks follow newly elected Kenney’s campaign promise to scrap the former New Democratic Party government’s C$3.7 billion ($2.78 billion) crude-by-rail deals, which he has slammed as poor value for taxpayers.

“There are confidential conversations going on between our government and private sector actors. Our strong preference is that the private sector take over those contracts,” Kenney told reporters in Calgary.

Although talks are underway, the crude-by-rail program will not start up in July as originally planned by the NDP, said a government source with knowledge of the situation, who is not authorized to speak about the matter.

Alberta is Canada’s main crude-producing province and home to the country’s vast oil sands but a lack of pipeline capacity leaves oil bottlenecked in Alberta, adding to the price discount, or differential, on Canadian barrels vs. U.S. oil.

That discount hit record levels in late 2018, prompting the NDP government to curtail oil production. Earlier this year the NDP also inked deals to lease 4,400 rail cars that would transport Alberta crude to market, before being ousted in an April election.

The two largest contracts signed were with Canadian National Railway Co. and Canadian Pacific Railway Ltd. to move the rail cars. The program was meant to start transporting 20,000 barrels per day (bbl/d) next month, ramping up to 120,000 bbl/d by mid-2020.

“Those contracts were signed in the last days of the NDP government and pay above the market rate,” the source said.

“The sticking point is whether the railways are willing to come to the table to offer commercial terms that would be attractive to producers to ship their oil, and whether some or most of the oil producers can agree to conditions under which they can contract directly with the railways,” he added.

Alberta is so far encouraged by suggestions that CN and CP would be willing to discuss the contracts, the source said.

A CP spokesman said the company is “working with industry and the province of Alberta on opportunities to deliver crude-by-rail safely and efficiently to market.” CN did not immediately respond to a request for comment.

The chief executives of Husky Energy Inc. and Cenovus Energy Inc. previously talked about the possibility of the private sector taking over the government crude-by-rail deals.

Husky did not immediately respond to a request for comment. A Cenovus spokeswoman declined to comment on whether the company is participating in rail discussions but said if the province can find a way to get rail into the hands of industry, it would be a “win-win.”

Rail is seen as a crucial conduit for Canadian crude in the absence of new export pipelines, which have been long delayed by regulatory and environmental concerns.

Kenney also warned on June 11 that oil production curtailments, which were meant to wrap up by the end of this year, may have to continue into 2020 because of delays to Enbridge Inc.’s Line 3 pipeline project.

“We all believe the sweet spot is a differential that is wide enough to incentivize private sector crude-by-rail shipments but small enough that it does not completely eliminate the value for the Alberta government,” Kenney said.

Onshore