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Canada's oil sands producers working hard to pack more crude onto trains

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Canada's oil sands producers working hard to pack more crude onto trains

Companies including Cenovus Energy Inc. and ConocoPhillips Co. are working to drastically reduce the amount of condensate — a substance used to dilute tar-like bitumen to make it viable for rail transportation by using heat and other methods to get more of the oil sands-derived product into cars.

Cenovus has increased the number of heated and insulated rail cars it uses at its loading facility in Central Alberta, while Houston-based Conoco has contracted with regional midstream operators to extract condensate from as much as 50,000 barrels a day of diluted bitumen at an oil sands loading terminal to deliver it to the U.S. Gulf Coast. Increasing the efficiency of rail shipment of bitumen has gained urgency since Alberta's government exempted crude-by-rail shipments from its mandatory cap on oil production.

Facing overbooked pipelines and brimming storage, Canada's producers have been shipping diluted bitumen to Gulf Coast refineries by rail, where refiners of heavy oil are hungry for Canadian crude amid supply disruptions from traditional producers like Venezuela and Mexico. Condensate, which can make up as much as one-third of the volume of oil sands pipeline shipments, is a major expense for oil sands producers as it must be bought at a premium to light oil, blended and later extracted from the crude mix.

Cenovus already uses heat to extract bitumen, which in its natural state has a consistency similar to peanut butter. At its operations in the oil sands region near Fort McMurray, Alberta, the company drills well pairs into bitumen pools near the surface, then injects steam into one well and pulls bitumen and steam out of the other. The water remaining from the steam is mostly recycled while the bitumen is diluted with condensate and other drag-reducing agents, known together as diluent, for storage and shipping along regional pipelines.

Cenovus leases a fleet of "coiled and insulated" rail cars to move its product to from its Bruderheim Energy Terminal near Edmonton, Alberta to the U.S. The company co-owns two refineries with Conoco affiliate Phillips 66 which are capable of running oil-sands bitumen. Cenovus has been steadily increasing its rail shipments throughout 2019.

"In September, we reached an average of more than 80,000 barrels per day of oil transported by rail for delivery to U.S. destinations, where we continue to increase our exposure to global pricing for our products," Cenovus CEO Alex Pourbaix, a former pipeline executive, said on an Oct. 31, 2019, conference call. "We are well down the path to reaching our target of approximately 100,000 bbl/d of rail loading capacity, which we continue to expect to achieve by year-end."

SNL Image

Rail cars are loaded with oil sands-derived bitumen at Cenovus Energy's Bruderheim Energy Terminal.

Source: Cenovus Energy Inc.

At specialized rail facilities like Cenovus's Bruderheim Energy Terminal, condensate can be extracted and the bitumen loaded onto the specialized cars, which are thickly insulated and can be heated with steam carried in tubes, which keeps the product in a movable state.

The incentive to ship crude-by-rail to U.S. refiners has increased as the price difference between Western Canadian Select, the nation's standard heavy oil blend, and U.S. benchmark West Texas Intermediate crude has increased. In order to be profitable to ship by rail the heavy Canadian crude needs to trade at a discount of about US$17/bbl to the U.S. benchmark oil. While the price difference had averaged US$13.33/bbl through 2019 as of Dec. 20, it has been wider for much of the second half of the year. The price gap closed at more than US$20/bbl on Dec. 19, according to statistics compiled by the Petroleum Services Association of Canada.

Canadian crude-by-rail exports averaged 270,070 bbl/d in October, according to the Canada Energy Regulator. Exports touched a record 353,789 bbl/d in December 2018 but tumbled to 132,426 bbl/d in February as the price gap closed. Some analysts predict crude-by-rail exports could hit 500,000 bbl/d by early 2020.

Conoco's recent rail-loading contract is with Canadian midstream operator Gibson Energy Inc. and US Development Group LLC. The companies plan to build a diluent recovery unit, or DRU, at Hardisty, Alberta, which is a major oil sands hub. The companies will extract diluent from the bitumen using proprietary technology owned by US Development. The remaining diluent product is called DRUbit by the companies.

DRUbit "is crude oil or bitumen that has been returned to a more concentrated, viscous state that is classified as a non-hazardous, non-flammable commodity when transported by rail in Canada and the U.S.," the companies said in a Dec. 3 statement. Just over two weeks later, on Dec. 18, Gibson announced it would add two new tanks with a capacity of 500,000 barrels each at its Hardisty storage facility. When construction is completed in late 2020, Gibson will have approximately 13.5 million barrels of storage at Hardisty.

The hazard of transporting bitumen diluted with condensate, which is similar in composition and volatility to gasoline, was underscored in a Dec. 9 train derailment in Saskatchewan which saw more than 9,000 barrels of petroleum products bound for Oklahoma released. The spilled product burned for more than 24 hours.

In addition to being safer to transport, removing diluent from the bitumen allows shippers to deliver higher volumes of the oil sands product. Higher shipment volumes with better economics, whether by pipeline or rail, are critical to future oil sands projects, including those proposed by Cenvous.

"We will sanction those projects if and when we have high level of confidence that we will have long-term market access to get those barrels to market," Pourbaix said on the Oct. 31 call.