Polaris Pipeline outage impacts Canadian diluent flow, tightening WCS discount

Houston — An outage of the Polaris Pipeline that moves diluent from Edmonton to Canadian oil sands developments caused heavy crude price discounts to tighten Sept. 1 and is expected to temporarily slow the production and transportation of oil from the region.

The pipeline's partial closure was triggered by a diluent leak east of the Fort McMurray Airport, said pipeline operator Inter Pipeline. The diluent, which is mostly condensate, is blended with the heavy oil sands to prepare the crude for pipeline transport. There's no estimated timeline yet for the pipeline's restart, Inter Pipeline said.

Prices for Western Canadian Select at Hardisty, Alberta, jumped following news of the pipeline shutdown. WCS Hardisty was heard bid late Sept. 1 at a $9.85/b discount to the October WTI calendar month average, and offered at a $9.75/b discount, up from an $11.15/b discount assessed by S&P Global Platts on Aug. 31.

Front-month WCS has not been assessed higher since Aug. 17, when it reached WTI CMA minus $9.15/b.

Condensate prices in the Fort McMurray area also spiked by up to 50 cents/b, a trader said, but the condensate pricing impact was only regional.

The nearly 900,000 b/d Polaris diluent pipeline services a bevy of oil sands projects in the region, including the Kearl mine and the Sunrise project in the Athabasca and Cold Lake regions of Alberta. Up to 400,000 b/d of crude production could be impacted by the temporary outage, according to a source, with the most impacted development being the Kearl mine that's operated by Imperial Oil and co-owned by ExxonMobil.

Crude flows

"We are assessing the impacts on our Kearl operation," said Imperial spokesman Jon Harding, declining further comment.

The pipeline closure is partial and the eastern portion of the pipeline system is still operating, said Inter Pipeline spokeswoman Breanne Oliver.

Inter Pipeline said on Sept. 1 that a leak detection system first reported an anomaly early on Aug. 29 and that a response team later found the diluent on the ground in the area.

The pipeline's partial closure was announced late on Aug. 31 after it was determined that the problem was isolated to Polaris and the nearby Corridor pipeline system could be safely restarted.

"In addition to our focus on containment and clean-up, environmental and wildlife monitoring has been established in the area," Inter Pipeline added in a statement.

Some producers will need to find other ways to get diluent in the meantime, a trader said.

A note from energy investment firm Tudor, Pickering, Holt & Co. said some producers may store enough condensate on-site to tide them over for a few days, but that any prolonged outage could curtail crude deliveries because of the limited diluent supplies in the region.

Apart from Kearl and Husky Energy's and BP's Sunrise project, other impacted oil sands developments could include Cenovus Energy's Christina Lake and Foster Creek projects, as well as Canadian Natural Resources' Kirby project, the analyst note stated.