March 18 (Reuters) - Drought in the western Canadian

province of Alberta is stretching into its fourth year and

farmers and oil companies are planning for water restrictions

that threaten production of wheat, beef and crude.

The severe conditions have prompted Alberta to open

water-sharing negotiations among licence-holders for the first

time in two decades, hoping to salvage output from two of its

biggest industries.

Alberta, which relies on melting snow and precipitation for

most of its water supply, has allocated water since 1894. That

system prioritises those who have held licences the longest,

although holders rarely exercise that right.

Alberta's water talks underline the difficult compromises

facing resource-rich regions adapting to extreme weather.

Hydrologists say the future will bring Alberta more rain instead

of snow due to climate change, which will strain summer water

supplies.

The province produces most of Canada's oil, natural gas and

beef, plus big wheat and canola harvests, much of which it

exports.

Irrigation to grow crops in dry areas accounts for 46% of

Alberta's water allocation, with oil and gas using 10%.

Reuters spoke with more than a dozen farm, energy and

government officials and found those industries preparing for

the drought to potentially scale back production and raise

costs.

Drought could cause double-digit declines in Alberta's wheat

yields, based on crop production data from the past two decades.

Oil producers are making costly contingency plans to store more

water on site and truck water across the province.

Brad Deleeuw, who manages the 5,500-head Delta Cattle

feedlot near Coaldale, Alberta, said the impact of water

scarcity "could be huge."

Deleeuw will prioritize watering cattle over irrigating his

wheat, corn and barley, but that shift will likely reduce

yields.

"You'd go from a black situation to a red situation pretty

quick," Deleeuw said, referring to financial losses.

If he must import significantly more expensive cattle feed

this summer from the U.S. to make up for smaller Canadian crops,

Deleeuw said he would have to reduce how many cattle Delta

fattens for slaughter by Cargill and JBS.

Drought contributed to Canada's beef herd shrinking this

year to its smallest on record, according to Statistics Canada.

Snow water equivalent, which measures water content of

mountain snowpack, was down 40% as of March 5 from a year

earlier in southern Alberta's St. Mary River basin. The nearby

Waterton basin was down 27%, according to provincial and federal

government data.

CROP HIT

Some 70% of Canada is abnormally dry or in drought,

according to the government, with the driest conditions in

Alberta and British Columbia.

Alberta's largest-ever water-sharing talks could result in

major consumers agreeing in early April to share water

voluntarily with others downstream, environment ministry

spokesperson Ryan Fournier said. If conditions remain dire, the

province could declare an emergency and is working on a plan

involving additional steps, Fournier said.

In 2001, the last time water-sharing negotiations happened,

Alberta's durum wheat yield was 22 bushels per acre, down 37%

from the previous five-year average, according to Statistics

Canada. In dry 2021, spring wheat yield fell 35% while barley

yield dropped 36% year-over-year. The vast majority of Alberta's

grain grows on dry land, not irrigated land.

Alex Ostrop, who farms near Lethbridge, is bracing to make

do with much less water to irrigate fields. In 2001, his

district's water allocation was eight inches per acre or 38%

less than what Ostrop used last year.

"Commodity prices are down generally - (this year) would be

a double whammy of lower commodity prices and reduced yields,"

Ostrop said.

COSTLY CRUDE

For oil companies, dry conditions may elevate costs by

forcing them to shift drilling to sites with water access or to

truck water, said Tristan Goodman, CEO of the Explorers and

Producers Association of Canada. Companies will not drill if

wells get too expensive, he said.

Oil producers are renting on-site water storage structures

known as C-rings and other swimming pool-sized spaces, drilling

company Trican Well Service ( TOLWF ) said.

"You're seeing customers start to really think about how

they're going to be managing water months in advance - they just

haven't had to worry about that before," Trican CEO Bradley

Fedora told analysts in February.

For now, parts of Alberta and British Columbia with the most

conventional drilling and fracking have manageable water levels,

Goodman said.

Drilled wells did not decline in the dry years 2001 and

2017, according to data from industry group Enserva.

Shell is putting water contingency plans in

place for its Alberta wells, spokesperson Stephen Doolan told

Reuters, declining to give details. Suncor Energy ( SU ) told

analysts the drought has prompted it to plan a water-treatment

plant in its oil sands operations for the end of this decade.

With Alberta possibly heading to a drier future, the

province is spending C$933 million ($691.32 million) to expand

irrigation. That means Alberta will spread limited water supply

over 230,000 additional acres, but the upgrade will reduce

evaporation by converting open canals to pipelines, Alberta

Agriculture Minister RJ Sigurdson said.

Oil and gas producers are maximizing efforts to store and

recycle water, with all eyes on the skies, said Ken Wagner, CEO

of Fraction Energy Services, which rents water storage

equipment.

"It's definitely top of everybody's mind. We need some more

snow and we need big rain."

($1 = 1.3496 Canadian dollars)