Diluent units proposed to boost crude-by-rail

Ongoing pipeline project delays and growth in crude-byrail capacity from Western Canada are leading some oilsands producers to consider spending billions of dollars to build diluent recovery units.

Oilsands bitumen is a thick, sticky oil which must be diluted with about half as much light petroleum to flow in a pipeline, but diluent isn’t needed for rail transport because the product can be heated for loading and unloading.

Building diluent recovery units at Alberta rail-loading terminals would allow about one-third more room for bitumen in the railcar to improve the efficiency and profitability of using rail to supply refineries in the southern U.S., said Eight Capital analyst Phil Skolnick in a report published Friday.

“DRUs in some cases can provide attractive returns, but more importantly, they can also improve the landscape of crudeby-rail and egress (to the tune of about 190,000 barrels per day of incremental bitumen if all 600,000 bpd of crude-by-rail capacity used a DRU),” he said.

“However, reduced costs and maximum diluent recycling are key to making this effort work. These current hurdles are likely reasons companies aren’t in a rush to build them yet.”

Shipping more bitumen by rail would free up space on export oil pipelines, he added, helping to relieve a glut of trapped oil in Alberta that led to the province imposing production curtailments this year after price discounts soared last fall.

Shipping undiluted or “neat” bitumen would also improve safety because, unlike the diluted product, it’s not considered very flammable, Skolnick pointed out.

Cenovus Energy Inc. is investigating building a recovery unit at its rail terminal near Edmonton which would cost between $800 million and $1 billion, CEO Alex Pourbaix told The Canadian Press in a recent interview.

It would be capable of processing up to 180,000 barrels per day of diluted bitumen, recovering about 60,000 barrels per day of diluent to be returned to Conovus’s northern Alberta oilsands projects for re-use, he said.

“Right now, about one-third by volume of every tank car of oil we send is taken up by diluent and that diluent actually has a cost to us, it has no value. If we could ... move pure bitumen, it effectively reduces our freight costs by over a third, so it makes rail movement of oil much more economic,” he said.

“On top of that, the straight bitumen generally is a much more attractive feedstock for our refining customers at the other end of the line. We believe there may even be a premium value associated to stripping the diluent out.”

An investment decision is likely several months away and will depend on how proposed pipeline project timelines advance, said Pourbaix.

Rival oilsands producer Imperial Oil Ltd. considered building a diluent recovery unit in the Edmonton area in 2015 but decided against it based on its high construction cost and market uncertainties, said CEO Rich Kruger on a recent conference call.