UPDATE 1-In boost for Canada oil-by-rail, MEG plans diluent recovery unit

(December 6, 2012- Reuters) UPDATE 1-In boost for Canada oil-by-rail, MEG plans diluent recovery unit (By: Nia Williams)


CALGARY, Alberta, Dec 6 (Reuters) - Canadian producer MEG Energy said on Friday it will build Western Canada's first diluent recovery unit, a C$75 million ($70.55 million) facility that could be a crucial step in the quest to ship raw oil sands bitumen by rail.

Diluent is a type of ultra-light oil that is blended with heavy bitumen crude from the Alberta oil sands to dilute it enough to flow through pipelines. The new recovery facility will allow MEG to extract the diluent from the heavy crude that it moves 250 miles (400 kilometres) by pipelines from its Christina Lake project in northern Alberta to a new rail terminal at Bruderheim, Alberta.

The diluent-free bitumen can then be loaded into special rail cars at the Bruderheim crude-by-rail terminal operated by Canexus Corp, the first terminal in the region capable of loading 100-plus-car unit trains. The terminal is due to begin shipping 50,000 barrels per day of crude later this month.

Logistics firms have raced this year to build new oil-by-rail facilities across Western Canada to capitalize on a looming shortage of export pipelines. But the lack of diluent recovery units has raised questions about whether the railway shipments will be economically feasible.

In the absence of any diluent recovery units in Western Canada, other than those used at oil sands production sites, producers such as Baytex Energy that want to ship raw bitumen by rail currently have to truck their product to the rail loading terminal, a more costly mode of transport.

Other producers using rail have to ship partially diluted bitumen all the way to U.S. refiners, another costly option. Much of the diluent is then separated by the refinery and shipped back to Canada.

With a DRU, however, a company can efficiently ship oil from the field to the rail terminal by pipeline, then extract the diluent and put the bitumen onto heated and coiled rail cars, reducing the overall cost of shipping it south by rail.

"We would be looking at shipping undiluted bitumen. That increases our shipping capacity and the value of each barrel," MEG spokesman Brad Bellows said.

He said MEG could see a 50 percent increase in the amount of bitumen it is able to ship in each barrel, translating into improved netbacks.

In theory, pure-bitumen rail shipments may even be cheaper than exporting diluted bitumen by pipeline, analysts say, although complicated logistics make the economics hard to predict.

"Theoretically it's a cost-effective way of doing it but there are a lot of moving parts. MEG is the bleeding edge. If it plays out, they will be ahead of the game and they will be in the money," said Sandy Fielden, an analyst at RBN Energy.