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He Ain't Heavy, He's My (Diluent), Part 4 - Assessing Future Demand and Sources of Diluent

So far, 2020 has been another bad year for bitumen producers in Alberta’s oil sands. For the second year in a row, they have been forced to endure production curtailments, this time in response to COVID impacts on demand and the resulting record-low heavy oil prices. Still, there are at least glimmers of hope that the bitumen market will soon enter at least a modest recovery mode, and that further gains will be possible in 2021 and beyond. Moving all of that bitumen to market in pipelines and in rail cars is going to require even more diluent than the record amounts already consumed in late 2019 and early 2020. Today, we consider the outlook for bitumen production, what that outlook means for future diluent demand, and if that demand can — or cannot — be met by the various sources of diluent supply.

Over the course of this series, we have been taking a closer look at diluent, the light liquid hydrocarbons that are blended with bitumen — the extremely heavy and viscous form of crude oil from Alberta’s oil sands — to create a more fluid form that can flow in pipelines or be shipped in rail cars. With bitumen production on the rise since the start of the century and pushing Canada into the top ranks of global oil producers, an entire side industry has arisen to gather and distribute diluent to the oil sands regions of Alberta.

In Part 1, we began our analysis with a look at the shifting diluent supply and demand in Western Canada. Using a relationship known as the blend ratio — or the amount of diluent required per barrel of bitumen — we estimated that diluent demand more than doubled in the past decade or so, rising from about 300 Mb/d in 2010 to more than 750 Mb/d as of early 2020. In-region diluent supply also climbed in that time, but the homegrown sources of diluent are insufficient to meet all of the demand, necessitating imports via two dedicated import pipelines from the U.S. Midwest.

Part 2 looked more closely at the sources of diluent supply in Western Canada and the various pipeline gathering systems that move those liquids to the Edmonton/Fort Saskatchewan and Hardisty trading hubs. To sum up, a large share is sourced from mixed NGLs (referred to as y-grade) in the form of condensate (also known as natural gasoline), which is extracted from the NGLs at gas and fractionation plants. Significant volumes of diluent also come from simple processing of the liquids directly from the wellhead (called field condensate, but also called condensate in Canada, to keep it confusing). And finally, a small portion of diluent demand is met by using Alberta-sourced butane (or normal butane) as a blending agent. The biggest of the liquids pipelines facilitating movement of diluent supply out of the supply regions is the Peace Pipeline system operated by Pembina Pipeline Corp., but there are also a number of smaller pipeline gathering networks in the region operated by Keyera Energy and Plains Midstream Canada.

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