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Favorable decisions made within the last few months by authorities in both Ottawa and Washington are advancing key North American crude oil pipeline infrastructure, that if completed successfully, should drive long-term gains in Canadian crude oil production, double incremental Canadian diluent demand forecast and kick off construction opportunities for diluted bitumen (dilbit) and diluent logistics including pipelines, diluent recovery units, storage and custom blending operations across North America.

New Diluent Demand

In November under the Trudeau administration in Canada, or in January under the Trump administration in the U.S., TransCanada Corp.’s (NYSE: TRP) Keystone XL, Enbridge Corp.’s (NYSE: ENB) Line 3, and Kinder Morgan Corp.’s (NYSE: KMI) Trans Mountain pipelines each received favorable treatments at their respective national or federal levels that improve the likelihood of these projects being completed.

Combined, the completion of these three dilbit-capable pipelines could add nearly 1.8 million barrels per day (MMbbl/d) of dilbit takeaway (590,000 bbl/d at Trans Mountain, 370,000 bbl/d at Line 3, and 830,000 bbl/d at KXL). Because bitumen does not flow naturally at pipeline operating temperatures and pressures, moving that amount of dilbit in these pipelines every day would necessitate nearly 600,000 bbl of diluent to be blended with about 1.2 MMbbl of bitumen produced in Alberta.

Said another way, these new pipelines could represent a condensate demand double that of North America’s current approximate production. According to the U.S. Energy Information Administration (EIA) and the Canadian Association of Petroleum Producers, North America’s condensate production, as represented by pentanes-plus output from U.S. and Canadian field gas plants, amounted to only 434,000 bbl/d and 216,000 bbl/d, respectively.

Changing Forecasts?

To illustrate the magnitude of this potential shift in diluent demand, Stratas Advisors include the firm's most recent condensate demand forecast for Canada’s bitumen industry.

The chart shows Stratas Advisors' most recent conservative expectations for diluent demand that result from the firm's integrated forecasts for production of conventional heavy oil and bitumen (piped dilbit, railed bitumen and bitumen diluted with synthetic crude) as well as synthetic crude oil output at Alberta’s upgraders. This forecast effectively includes only about half of the potential opportunities inherent in nearly 2 MMbbl of new pipeline takeaway if these projects are all completed.

Between 2015 and 2026, Stratas Advisors' conservative forecast shows that dilbit production will grow by 961,000 bbl/d while condensate demand grows 246,000 bbl/d. If instead, all of these pipeline projects are completed and fully utilized to shuttle diluted bitumen, the firm could see a further 830,000 bbl/d of greater incremental dilbit taken to market. Above the 246,000 bbl/d Stratas Advisors already forecast, the increased takeaway would require a further incremental 300,000 bbl/d of diluent.

But Wait, There’s More Takeaway

Additionally, Trump in January also boosted the prospects for completion of the Dakota Access Pipeline under an executive order signed during his first week in office. If completed this quarter as the management of one partner, Phillips 66 (NYSE: PSX), expects, this new pipeline pathway could offer an additional 570,000 bbl/d of takeaway for light crude oil production or synthetic crude oil from the intermediate hub at Patoka, Ill., to Nederland, Texas, via the southbound ETCOP Pipeline.

Key Points:

  • It remains to be seen if North American producers of condensate, the heaviest of field plant-separated NGL—otherwise referred to as pentanes-plus—can actually double output over the next 10 years to meet the demand created if all these new pipelines go into fully utilized dilbit service.
  • More likely is that butane and light crude oils will continue to be used, or even expand their share in Alberta’s diluent blend pool.
  • Stratas Advisors would also expect additional diluent recovery units and diluent return loop infrastructure (rail and pipeline) to help recycle and return North America’s diluent for use in Alberta’s bitumen industry.
  • Despite the uncertainty around the quantities and types of hydrocarbon volumes to be seen in future dilbit pipelines, the imports of heavy offshore crude oils will likely fall as U.S. refiners access Canada’s onshore heavy oil wealth.
  • Given the properties of Canadian heavy crude oil, Stratas Advisors project U.S. imports of Venezuela’s heavy crude (with total acid numbers similar to Canada’s) will likely see the greatest displacement. The firm, therefore, expects that exports of U.S. condensate to Venezuela will likely fall, with the barrels flowing to Canada instead. Stratas Advisors also note that Mexico’s heavy crude oil imports are not easily substituted by Canadian crude oil.
  • If these projects proceed, a wave of construction, not just limited to the pipelines themselves, will ensue across North America to produce, transfer, and blend diluents and dilbits.
  • The activity should result in lower U.S. reliance on OPEC imports and at the same time boost North America’s integrated oil industry and overall economies. These potential benefits, soon to be realized if the pipelines are completed, were part of the positive selling points of these crude oil pipelines when first proposed.
  • Hopefully, any potential Border Adjustment Tax on crude oil or other import/export or pipeline related extractions that may come under the new Trump administration will not obviate the rationale for building and filling these pipelines.
  • These projects, and their utilization rates, are not yet certain. But their completion and utilization would serve the security, environmental and economic interests of North America much better than the status quo, which perpetuates OPEC reliance and a continuation of a circuitous, far-flung condensate and crude oil circuit traveling over international waters rather than overland through onshore, efficient, modern pipelines.