Diluent Shortage on the Horizon

The growth in Alberta's oil industry has reached numbers that it hasn't seen since the 1960's as Albertan oil companies can finally make use of the oil that they previously thought was inaccessible due to modern technology. Alberta is rich in oil, and much of it can be found in the oil sands, close to the industry and housing of Fort McMurray. The Energy Resources Conservation Board (ERCB) said energy companies extracted 556,000 barrels of oil a day in 2012 from conventional zones, which is up 4% from 2011. The ERCB forecasts oil output to continue to grow in the coming years, and make a 7% leap in 2013.

The increase in Alberta's oil production may cause chronic transportation bottlenecks and weigh on prices for Albertan companies. Al Monaco, chief executive officer at Enbridge notes, "We're in the midst of a massive increase in North American crude oil supply. That's generally good news, however the lack of sufficient pipeline capacity is causing significant regional price disparities. We're all concerned about the short-term and longer-term effects this could have on energy development."

The oil that is extracted from Alberta's oil sands is bitumen which must be removed from the sand in a modern extraction process. The conventional process includes horizontal drilling coupled with multi-stage hydraulic fracturing techniques. The ERCB forecasts a dip in conventional oil production in 2014 if there is no further advancement in technology. Scott Saxberg, president and CEO of Crescent Point Energy Corp is hopeful despite ERCB's warning, he stated, "We're just at the front end of the technology change," he said. "In the next five to 10 years, we're going to see even more advancements in that technology and the knowledge we have around developing these assets using the multistage fracking horizontal drilling."

Due to the nature of the pipelines and regulation, Alberta's bitumen is too thick to be transported through pipelines, so it must be blended with a lighter hydrocarbon to make it into ultra-light oil commonly referred to as diluent. With the increased output of bitumen in Alberta, where production is expected to double by the year 2022, the demand for diluent could increase from about 330,000 barrels a day last year to roughly 935,000 barrels per day according to the Energy Resources Conservation Board. However, several major oil companies are reluctant to invest in the high-cost of processing in their own region, and instead have opted to send the crude oil directly to Asia and to the U.S Gulf Coast for processing.

The reluctance of oil companies to invest in processing may cause a significant shortage in diluent in the future. Chris Cox, an analyst at AltaCorp Capital Inc, noted "For each new barrel of oil sands production going forward, there's going to be greater demand for condensate than we've seen historically. That could trigger price spikes and squeeze margins if demand outstrips available supply."

at 12:05 AM
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