CALGARY – High prices for condensate, a diluent that allows sticky oilsands bitumen to flow in a pipeline, are expected to remain a thorn in the side of producers already reeling from low prices.
In first-quarter results last week, both Cenovus Energy Inc. (TSX:CVE) and MEG Energy Corp. (TSX:MEG) complained their losses were magnified by the high cost of condensate. For every 10 barrels of raw bitumen, about three barrels of condensate are required.
While bitumen prices tumbled briefly to below US$10 a barrel in the early part of 2016, condensate prices in Canada were at or near the much higher price of West Texas Intermediate crude in New York.
“Oilsands growth into 2019-20, with its heavy weighting towards non-upgraded bitumen, remains the driving force behind rising condensate demand in Alberta,” said RBC Dominion Securities in a research report released Monday.
“Although the North American condensate market appears in equilibrium with adequate pipeline import capacity for now, we envision a wider supply gap emerging in Western Canada over time bridged by mounting U.S. rail imports.”
RBC forecasts that oilsands production, driven by projects including Suncor Energy Inc.’s Fort Hills mine, will grow by 760,000 barrels a day to about 3.1 million bpd by 2020 before stabilizing.
Raw bitumen is expected to account for 600,000 bpd of the growth, thereby driving condensate demand growth from 451,000 bpd in 2015 to 631,000 bpd in 2020.
Meanwhile, according to RBC, growth in condensate production in Western Canada is slowing as companies cut back on drilling liquids-rich natural gas wells — the source of the condensate — due to low prices for the other products in the gas stream. It said growth will moderate to about six per cent per year.
Canadian condensate production was 226,000 bpd in 2015. Condensate imports averaged 225,000 bbl/d in 2015 and are set to reach 335,000 bbl/d in 2020, RBC said.
High diluent prices further complicate oilsands marketing strategies. Bitumen doesn’t need to be diluted to be transported in a rail car but rail transportation tends to be much more expensive than pipeline.
Both Cenovus and MEG have access to crude-by-rail loading operations in the Edmonton area, although the bitumen must be diluted at their northern Alberta operations to be piped to the railheads.
MEG has regulatory approval to build a $75-million diluent recovery unit to strip out the condensate before it’s loaded in railcars.
“We like the strategic advantages and economics,” said MEG spokesman Brian Bellows. “With capital constraints in the current low price environment, construction has been postponed, but we are continuing to advance engineering.”
Cenovus CEO Brian Ferguson said last week his company is also considering a project, noting it could save the company $2 to $4 a barrel in certain market conditions
RBC said it expects two key condensate import pipelines, Enbridge’s Southern Lights and Kinder Morgan’s Cochin, with a combined capacity of 275,000 bpd, will run fuller into 2018, opening the door for more transport by rail into Canada.
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