Keystone Kops Chase Oil Onto Trains - Challenges for Smaller Oil Sands Producers

With the Keystone Pipeline decision booted down the road again Friday, the challenge for Canadian oil sands producers trying to get their crude to market looms large once again. Growing volumes of Canadian crude will be carried by rail this year to bypass pipeline congestion. But although larger unit trains are beginning to operate from the oil sands region, they mostly help larger producers connected to the pipeline feeder network. Today we review continuing manifest rail shipments by small producers.

Two weeks ago we noted that a unit train of railbit moved from Alberta’s oil sands region to an unloading facility at Natchez, MS (see Railbit Train To Natchez). We learned subsequently that the unit train concerned carried dilbit crude (bitumen typically blended with 30 percent diluent) not railbit (bitumen blended with 17-20 percent diluent). Turns out we made some assumptions about the capability to load unit trains with railbit that ran counter to existing constraints that appear to make such a shipment impractical at present. In today’s blog we clarify these constraints and in the process shed light on the challenges faced by smaller oil sands producers trying to get their bitumen crude to market.

As we have documented many times, the principal challenge getting bitumen crude to market is its high viscosity – meaning that it doesn’t flow at room temperature. To get it to flow you either need to heat it up or to blend it with lighter hydrocarbons known as diluent. Bitumen produced by surface mining is mostly upgraded to synthetic crude oil (SCO).  Most sub-surface bitumen production projects use steam assisted gravity drainage (SAGD) techniques to extract bitumen that already contains ~ 20 percent diluent added during the production process (see We Are The Champions). SCO is a light crude that requires no further blending to flow in pipelines, but SAGD output typically requires more diluent to create a 30 percent blend that flows in pipelines. However, SAGD production can be transported as-is by truck or by rail without adding more diluent than the ~ 20 percent used in the extraction process. This bitumen grade with no further diluent added is known as railbit. 

Growing volumes of new SAGD oil sands production combined with pipeline constraints between Western Canada and the main US Gulf Coast refining market for these new supplies have motivated producers to develop new transport strategies to get their bitumen to market. 

For larger SAGD producers the journey to market typically begins with a feeder pipeline from the production plant to terminals in Edmonton or Hardisty (see map in Figure 1) – requiring the addition of enough diluent to their output to create a pipeline specification dilbit crude. Once in Edmonton or Hardisty such crude can join mainline pipelines that flow to Eastern or Western Canada or south to the US (see Edmonton and Hardisty). Trouble is that growing oil sands bitumen production volumes now exceed practical pipeline capacity for this type of crude out of Edmonton and Hardisty. That is in part because of delays to long planned pipelines such as the (830 Mb/d) Keystone XL now looking increasingly unlikely to get built before 2016, if ever. But it is also the case that not all the pipelines out of Edmonton and Hardisty carry heavy dilbit crude and that there are already constraints on those that do. A case in point is the Enbridge Line 67 which parallels the Enbridge mainline from Hardisty to Wisconsin (known as the Alberta Clipper), which Enbridge is in the process of expanding in two phases – first by 120 Mb/d in July of 2014 and then by another 230 Mb/d to a total of 800 Mb/d in 2015 – subject to US State Department agreement to amend a previous permit. In the meantime, shippers on Line 67 face regular apportionment (a process whereby committed shipper volumes are reduced by the pipeline operator to accommodate demand in excess of available capacity). Foremost among producer concerns about the pipeline constraints are the price haircuts of $25/Bbl or more that they have to swallow on crude delivered to pipelines in Alberta. Because of such pipeline constraints and fears that they will continue for some time into the future, SAGD producers that are able to deliver dilbit grade crude to Edmonton and Hardisty by feeder pipeline are turning to unit train alternatives to get their incremental crude production to market. We will delve further into the transport alternatives for these larger producers in our next episode.