| CALGARY, Alberta, June 6
CALGARY, Alberta, June 6 Canada is enjoying an
unexpected boom in production of ultra-light crude known as
condensate, defying long-held predictions of dwindling supply.
This surprising bounty from one corner of Alberta, better
known as the home to Canada's vast tar-like oil sands reserves,
is a boon for firms like Vermilion Energy Inc and
Chevron who have built up positions in the Duvernay, now
hotly tipped as one of North America's most exciting shale plays
with vast reserves waiting to be tapped.
It also is fuelling hope of cost relief for traditional
heavy oil sands companies such as Cenovus Energy Inc,
who in the past have paid premiums of up to $25 a barrel to buy
imported condensate used to dilute their viscous oil sands
production so that it can flow through pipelines.
The change in outlook has been abrupt. A year ago, the
Canadian Association of Petroleum Producers expected condensate
production to shrink from 139,000 barrels per day to barely
100,000 bpd by 2025, according to its annual forecast.
The group's updated forecasts, due out next week, will
likely show a very different trajectory, according to Greg
Stringham, vice president of oil sands and markets.
"(Condensate) had been in decline. We are now seeing
relatively strong growth," he said. He declined to give exact
numbers until the report is released on Monday. In April,
Canada's National Energy Board said it expected output to rise
13 percent this year to 172,000 bpd.
While the growth is modest compared to the shale revolution
that is upending the U.S. industry in places like North Dakota
and Texas, its impact may reverberate far south of the border.
Rising domestic supply is coming at a time of lower than
expected demand for imported U.S. diluent because more companies
are moving to ship bitumen by rail, which doesn't necessarily
need to be diluted, instead of pipeline.
As a result, the trends may further depress U.S. condensate
prices and thus add to mounting political pressure to relax U.S.
rules barring overseas exports.
Along with a newly reversed Cochin pipeline that will start
delivering up to 95,000 barrels per day of U.S. condensate from
Illinois to Alberta in July, some producers are growing hopeful
that prices may finally begin to ease.
"I don't believe there's such a thing as cheap condensate.
But all other things being equal, more supply coming into the
basin should be a positive thing for the buyer," said Rick
Dembicki, director of crude oil marketing at Cenovus, which
sources half its condensate from outside the province.
A LONG WAY TO DUVERNAY
Condensate supply, though small, plays a critical role in
the growth of Canadian oil sands, the world's third-largest
crude reserves behind Saudi Arabia and Venezuela.
Because raw bitumen is too heavy and thick to flow easily
through pipelines, it must be blended with around 30 percent of
a lighter oil, known as diluent. A number of different types of
hydrocarbons can do the job - including condensate, natural
gasoline and synthetic crude oil. The diluent is then stripped
out by refiners or terminal operators at the destination, often
to be pumped back to Canada and blended again.
With oil sands production expected to nearly double over the
next decade, demand for diluent is expected to surge to around
900,000 bpd in 2025, consultancy Wood Mackenzie said. Other
forecasters suspect demand will be over 1 million bpd.
Thanks to the recent boom in the Duvernay formation, a
growing share of that may be met with Canadian condensate.
Last month, Canada's Encana Corp said the northern
Simonette area of the Duvernay was producing up to 400 barrels
of liquids per million cubic feet of gas, more than twice the
150 barrels per million it had expected.
Chevron's well performance and yields in the
Duvernay had exceeded expectations with initial production rates
of 1,300 barrels of condensate per day, Jeff Shellebarger, North
America Exploration and Production, said last October. A Chevron
spokesman said that was the latest production estimate.
Western Canada could produce 375,000 bpd of condensate by
2025, with 200,000 bpd coming from the Duvernay under the most
optimistic scenario, said Wood Mackenzie analyst Mark
"That will mean less money that Alberta operators will have
to pay in the United States to ship it up," Oberstoetter said.
DIFFS AT A DISCOUNT
At the moment Canada uses for diluent about 200,000 to
250,000 bpd of condensate, most of that imported from the United
States. Much of it travels more than 4,000 kilometres (2,485
miles) from the U.S. Gulf Coast, where supply is abundant. The
added transport costs mean condensate has typically commanded a
premium in Alberta, though it trades at a discount in Texas.
Because supplies are tight and existing pipeline shipments
can be difficult to predict, prices are often volatile. At times
condensate in the Alberta trading hub of Edmonton spiked as high
as $25 per barrel over U.S. benchmark futures about five years
ago and in recent years premiums have touched $15 dollars.
But the growth in local production coupled with the rise of
oil-by-rail and the imminent reversal of Kinder Morgan Energy
Partners LP's Cochin pipeline may shave that.
The premium dropped from an average of $10.23 per barrel in
2011 to $3.72 per barrel in 2013, according to a presentation
from Cenovus. On Thursday, condensate was pegged at a $3
discount because of strong supply from the 180,000 bpd Enbridge
Inc Southern Lights pipeline from Chicago, Illinois,
and lower blending requirements during the warm summer months.
"The price of condensate has historically been plus $5 to
$10 per barrel. I think that's a thing of the past and it's
dropping to par with WTI," said John Homan, senior marketing and
logistics representative at Calgary-based Laricina Energy Ltd.
RAIL DENTS DEMAND
For the moment, the growth in Canadian output looks too
minimal to disrupt plans for more imports, such as the Cochin
reversal and a proposal by Enbridge to boost capacity on its
Southern Lights pipeline to 275,000 bpd.
But demand forecasts are in flux as producers look for
innovative ways to trim their use of the costly diluent. More
companies are embracing rail as an alternative to congested
crude export pipelines and using heated and coiled cars to ship
bitumen raw, requiring no diluent, or as "railbit," which blends
just under 20 percent diluent into each barrel.
An estimated 1.1 million bpd of rail loading capacity will
be available in Western Canada by year-end, if proposed terminal
projects stick to construction schedules.
Companies such MEG Energy and Gibson Energy Inc
are running pilot projects to develop partial upgrading
technology and diluent recovery units that would also reduce
demand. Meanwhile, on the supply side CNOOC Ltd subsidiary Nexen
Inc is selling light oil from its Long Lake project
into the Alberta diluent market.
(Reporting by Nia Williams in Calgary, editing by Jessica
Resnick-Ault, Jonathan Leff and Cynthia Osterman)