Why The Economics of Dilbit Transport Make Moving Toxic Diluents Profitable and Dangerous

The dangers and politics of dilbit, diluted bitumen, discussed in the last two Mud Reports [here and here] are big parts of the dilbit issue, but there's more including the economics of the diluent, also called condensates when derived from natural gas, used to thin bitumen so it can be transported by pipeline or rail [rail needing only about 1/2 as much per barrel as pipelines require].

Although a small fraction of condensate is produced at the field level, production from natural gas drilling is the main source of condensate in Canada. Until recently almost all of the diluent used to move tar sands crud by both rail and pipeline was produced from conventional natural gas 'plays' in Canada. But condensate (C5+) production has been declining since ‘07/08 while the demand for it has risen. Now condensate must compete with many other sources of diluent for bitumen. Western Canada produces some quantities of those competitors, but nowhere near the amounts that would be required to move all the crud that the proposed pipelines and rail transport would demand.

Remembering that the proposed 'new' pipelines would move over 4Mb/d in addition to what is already moved, the tar sands would need at least 1.5Mb/d of diluent and Canada's most optimist projections come nowhere near that. For instance in 2012, over 260,000 b/d of imported condensates, diluents from upgraders, as well as quantities of butane were needed to supplement the condensate supply from natural gas wells in western Canada to keep the crud moving. Where will all the rest come from? Who stands to gain from getting it to Alberta? The answers are both important and unsurprising.

One website, 'Detailing The Future Projections Regarding The Supply And Demand For Condensate In Western Canada' is a great source of more detailed information that i'll try to summarize and comment. Currently the Enbridge Southern Lights pipeline to Edmonton, AB supplies the shortfall and has a capacity of 180,000 bpd, so will supply more as demand rises. Kinder Morgan Cochin's recently approved pipeline reversal will move about 100,000bpd of light condensate from Kankakee County, Ill., to existing
terminal facilities near Fort Saskatchewan, Alberta. Still far from what 'Pipelineistan' would need. Conventional Canadian condensate supply will continue to drop but as more and more fracked gas comes online that will more than make up for it as time goes by but not immediately as existing fracked gas condensate capacity is already being fully utilized.

But in the US it's a different story. Stateside exploding tight oil and shale gas plays are beginning to flood the Southern US with condensates and super light oil at levels that are still unclear but considerably above forecasted demand in North America. Rapidly increasing volumes from the Bakken are adding to condensate supply but the main source of the over supply is coming from the Eagle Ford in West Texas. Current analysts' forecasts indicate that in 2014 there will be condensate production of over 500Mb/d in South Texas alone. In addition Permian Basin production is also adding to supply along with other plays like the Utica in the Michigan Basin and the Anadarko and Fort Worth Basins.

The fact is there is so much of the various diluents available the prices will plummet unless new outlets are found fast. Exporters are lining up for permits to ship condensates to Mexico, Venezula and Columbia who all have 'heavy' oils that require diluents to transport them. So the tarsands will have no trouble obtaining 1.5Mbd, or more, in the future if all the pipelines go ahead. And unsurprisingly the same fossil fuel gangsters will profit from it.

My last post naively assumed the industry would employ diluent recovery units (DRU) to recover the diluents and ship them back for reuse. Now i understand that not only aren't DRUs economical the supply that they'd add to the 'market would just further depress the price [making the gangsters less profit and depressing share prices]. In addition the condensate refines [distillates] right along with the bitumen just fine. It actually makes the end products more valuable because the combination thins out the sulphur content that the refineries have to eliminate in transportation fuels. Also the portion of  exceptionally chunky bitumen is used in the refinery process as heat feedstock whereas in an upgrader the chunky bits become an almost unusable by-product [petroleum coke].

These diluents-condensates are much more dangerous to transport in many ways than dilbit because they are highly toxic and explosive [see crudemonitor.ca]. If the proposed pipelines go ahead western Canada will have more of  this toxic diluent brew being transported through it to the tarsands than all of the existing pipelines containing dilbit and conventional oil combined. It's a formula for disaster. Be it pipelines or rail, no technology is foolproof, disaster will happen , it's only a matter of when.

Many folks, including many i usually agree with environmentally, say the solution lies in upgrading and refining the bitumen in Alberta so the diluent issue is minimized. Tomorrow The Mud Report will focus on the economics of and other reasons why those ideas make for better fantasy than reality.