Parallel Lines – The Diluent Trail Across Canada – Part 9 Economics

Since we began this series on diluent supplies to Canada (used to blend with heavy oil to facilitate pipeline shipment), questions about diluent supply have been overshadowed by the bigger concern with falling crude prices. Right now, oil sands producers are probably more concerned with understanding the economics of their expansion projects and whether to go ahead with new oil sands development programs than with securing diluent supplies. Nevertheless, falling diluent costs in Edmonton have provided some relief to existing producers. Today we look at how improving diluent supplies and better prices for Canadian crudes have reduced diluent costs.

This is the final installment in our series looking at infrastructure to deliver diluent material to oil sands producers in Western Canada. We start as usual with a recap of the series so far. Episode One provided an overview of current and expected demand for diluent range materials. Assuming that the recent crude price crash is sustained then it will likely impact investment decisions about future oil sands projects in the coming years. For the moment, however, any oil sands projects where the bulk of development is complete should continue into production since break-even values are relatively low after production starts.  Episode Two covered the Southern Lights and Cochin pipeline diluent routes from the U.S. to Western Canada. In Episode 3 we looked at the diluent distribution network in the two Edmonton hubs of Sherwood Park and Fort Saskatchewan, operated by Enbridge and Keyera respectively. In Episode 4 we looked at plans by Pembina to build a Canadian Diluent hub at Fort Saskatchewan. In Episode 5 we described expanding diluent pipelines operated by Plains Midstream Canada and Inter Pipeline. In Episode 6 we reviewed planned diluent pipelines out of Fort Saskatchewan proposed by TransCanada and Enbridge and the Devon/MEG Energy 50/50 joint venture Access pipeline. Episode 7 looked at Husky Energy gathering systems into Hardisty and Episode 8 looked at how other Hardisty producers obtain diluent.

The main theme to emerge from this series so far is that Edmonton is today and will continue to be, the most important trading and delivery hub for diluent materials delivered to oil sands producers by pipeline and by rail. Diluent supplies are distributed throughout the Edmonton region via pipelines that adhere to a standard specification known as Enbridge CRW condensate. That condensate specification resembles plant condensate or natural gasoline produced by processing natural gas liquids (NGLs). However, out in the producing regions of the oil sands, producers use a variety of diluent materials including lighter NGLs such as butane and heavier materials such as synthetic crude oil (SCO) to blend with heavy crude. The proposed Pembina diluent hub described in Episode 4 is expected to provide producers with better access to a range of diluent materials besides CRW. Pembina also expect increased supplies of condensate and NGLs from Western Canadian shale production in the Duvernay and Montney plays to reduce the need for diluent imports from the U.S. in coming years. Growing demand for diluent materials is being driven by new oil sands projects using the steam assisted gravity drainage (SAGD) process to recover raw bitumen that must then be blended with up to 30% diluent to flow in pipelines. As we have noted in this and other blog series (see Go Your Own Way), less diluent is required if pipelines are heated or if bitumen is shipped by rail. In this episode we look at diluent economics for both suppliers and consumers.

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