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It's a Bitumen, oil - Does it go too far? It might not matter anyway. Where is the natural home for Canadian oil sands crude oil? The Gulf Coast?

They call it oil sands.  It used to be called tar sands, but that was bad marketing.  Regardless, it looks like dirt. Oily dirt.  It is a mixture of sand, water, clay and petroleum – crude bitumen.   Pronounced bich-oo-muhn.  Even after it has been separated from the dirt and water, this bitumen is difficult to handle.  

Bitumen won’t flow and it can’t be pumped unless it is heated or diluted.  The gravity of Canadian bitumen is a rock bottom 8° API.  This is the oil that (1) is responsible for the majority of Canadian crude oil production growth, (2) that has motivated several U.S. refineries to spend billions on crude upgrading equipment, and (3) of course is the material that has stirred all the controversy with Keystone XL.  We’ll look at the current outlook for bitumen, how it is being transported, and the logic for moving it 2,700 miles to the U.S. Gulf Coast.  Is that going too far?

[To make this one work, you must pronounce ‘Oil’ in the title the way we do in East Texas.  You say ‘Oil’ as ‘Earl’ in Etxabonics.  Then think Hall & Oates.  Ok, it’s a stretch.]

How much bitumen do they have in Canada?  As shown in the graph below from James Cairns, VP Petroleum & Chemicals, CN, they have a lot.  This is from the Platts North America Crude Marketing Conference held last week in Houston.  The CN numbers show Oil Sands Heavy increasing from about 1.0 MMb/d up to 2.0 MMb/d by 2016, then up to 3.5 MMb/d in 2025.  There is another 1.0 MMb/d of upgraded light, which is bitumen that has been run through an upgrading plant to make synthetic crude oil (SCO).  For you refining jocks, the upgraders are basically a delayed coker with a hydrotreater on the back end. If this means nothing to you, think of an upgrader as half a refinery that takes bad crude and makes good crude.  It is a high-dollar process that is one way to make bitumen transportable by pipeline.

It makes economic sense to upgrade bitumen because disposition of the material is a problem.  Most of the refineries in Canada can’t run the stuff.  So there are three choices: (1) move to the U.S., (2) move to waterborne export facilities in British Columbia, or (3) don’t produce it in the first place.   [For more info, see an earlier RBN posting A Home For Canadian Oil Sands Crude.]

To move it, it must be upgraded, heated or diluted.  Almost all bitumen in one of these forms is transported to market via pipeline or railcar.  Bitumen moving via pipeline is diluted (think paint thinner) with natural gasoline, condensate or similar light material (generically called ‘diluent’) to make it flow.  Until 2010, most of the diluent had to be shipped into the Canadian Bitumen producing areas via rail car.  In late 2009, Enbridge completed the Southern Lights pipeline from the Chicago area into Alberta (see map below).   Some of this diluent comes from the Aux Sable natural gas processing plant near Chicago, but most comes from much farther away.  Diluent demand is pulling natural gasoline and condensates from Eagle Ford all the way up Capline (the big crude system that runs from St. James, Louisiana, to Patoka, Illinois) into Southern Lights, then all the way to Edmonton., AB.

The cocktail of bitumen and diluent (70%/30% mix) is called Dilbit.  I’m not kidding.  No relation to Dilbert.

Google it if you don’t believe me. Another flavor is Synbit, which uses SCO as the diluting agent instead of natural gasoline or condensate.  Regardless of what is used to make the bitumen pumpable, the result is a 19°-22° API gravity heavy crude blend that moves south to Midwest refineries via Enbridge and  Keystone (the part of that system completed in 2010-11).    

The necessary diluent for dilbit comes in from Southern Lights (about 200 Mb/d) and via rail (about 50Mb/d).  As shown in the graph below (also from Mr. Cairns presentation), significant additional diluent receipts would need to come from somewhere if blended dilbit is used to move all the growth in bitumen production, getting up to 1.0 MMb/d by 2025.  That’s a lot of diluent.  For that reason, Mr. Cairns (from CP) asserts that rail transportation will become an increasingly important part of moving bitumen to market.  Bitumen moved by rail does not require diluent, but instead is heated when put on the railcar and heated to extract it from the car.  No doubt there will be significant volumes of hot bitumen that move in this manner.

Moving Dilbit is expensive, but much more cost effective than running Bitumen through an upgrader and a lot less labor intensive than rail.  And that’s why the Canadians want to build Keystone XL – to move all that Dilbit to U.S. refineries designed to chew up this heavy material. 

Several years ago, it looked like most of the incremental North American crude oil production that would be available to U.S. refineries would be these Dilbit/Synbit blends, which kicked off a planning and investment cycle in refinery upgrading capacity.  That cycle is just now coming to fruition.  As detailed here last week in It Ain’t Heavy, It’s the Bakken, about 705 Mb/d of new heavy crude upgrading capacity is being added in the U.S. between late 2011 and 2014.  All but 130 Mb/d of this total is located in the Midwest, in Ohio, Illinois, Indiana and Michigan. 

But wait!  If the Canadian Dilbit and Synbit have a natural home in the Midwest, why does Transcanada want to build a pipeline all the way to the Gulf Coast?  It's a Bit..oil - Does it go too far?  Transcanada just announced that they plan to build the Cushing-to-Gulf segment without waiting for Presidential approval of the northern segment.  What does that tell us about the real need for the entire 2,700 miles of Keystone XL?

It does not go too far.  The full length of the pipeline is needed and does matter.  In the short term, Dilbit and Synbit will be absorbed into Midwest refineries, with their new heavy oil capacity.  But Canadian crude production will be increasing so much that it will soon exceed the 575 Mb/d of new heavy crude capacity being built.  And fortunately so.  Because the heavy Canadian crude will arrive just in time to start replacing heavy Venezuela and Mexican imported crude oils that are in decline.  Canadian heavies will fill an important gap in Gulf crude supplies, and find warm welcome in U.S. Gulf coast refineries.

But even Keystone will not be enough.  Hot bitumen barrels will move out of Canada via rail to refineries around the U.S. In addition, still more bitumen barrels will move to the west coast of British Columbia on the Enbridge Northern Gateway project from Edmonton to a new marine terminal in Kitimat and Kinder Morgan’s TransMountain Pipeline (TMX) expansion from Alberta to British Columbia’s Lower Mainland, Washington state, and even California.  Waterborne bitumen barrels from these two projects are destined for China, India, Japan and South Korea.  Even the Far East markets are not too far for this bitumen.


"Rich Girl" is a song by Daryl Hall and John Oates which became their first #1 hit on March 26, 1977. “It's a b*%ch girl and it's gone too far 'Cause you know it don't matter anyway.”

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This seems to be a good news

This seems to be a good news for Canadian people because the discovery of bitumen money in such a way that investors will be attracted to make business in the country. This is also good because if there'll be investors, news establishments will be opened thus, additional jobs. This could help the Canadian people avoid getting a payday loan.