How a synthetic crude oil disruption floated heavy oil prices to multiyear highs​

Image: Joey Podlubny/JWN

It starts with a fire at Syncrude in March.

The facility is shut down for repairs and up to 350,000 bbls/d of synthetic crude disappears from the market in April.

The disruption has had a potentially surprising impact—significant drops in bitumen production at nearby in situ oilsands projects.

Two SAGD facilities—ConocoPhillips Surmont and CNOOC/Nexen Long Lake—require synthetic crude to make a bitumen blend for pipeline transportation. The scarcity of synthetic crude supplies prompts them to cut production.

ConocoPhillips, which currently is producing about 110,000 bbls/d of bitumen at Surmont project, has cut production by 40 percent, according to Reuters reports citing market sources.

Long Lake, which produces around 40,000 bbls/d of bitumen, reportedly cut output by 48 percent.

Meanwhile, heavy oil/bitumen demand at U.S. refineries is strengthening as seasonal maintenance wraps up and some Canadian oilsands producers move into turnarounds.

The net result is more demand for Canadian heavy oil and less supplies, so a narrower heavy/light oil differential, with the benchmark Western Canada Select (WCS) blend for May delivery closing at a 22-month high of $9.60/bbl barrel below U.S. crude.

“The impaired output from Western Canada due to the knock on effects of the Syncrude outage and seasonal maintenance is helping the WCS price—and obviously the synthetic crude price is being helped by the synthetic crude shortage,” said Mike Dunn, director of institutional research with GMP FirstEnergy.

He noted that the second quarter is typically when SAGD plants do turnarounds, including this year MEG Energy at Christina Lake and Suncor Energy at Firebag.

Considering the poor economics and vulnerability to disruptions of using synthetic crude as diluent—instead of condensate—it is surprising that any oilsands projects run synbit today amidst depressed oil prices.

Synbit does take a “small premium” in the market over dilbit, Dunn said, “but you need about twice as many barrels of synthetic crude as you do pentanes plus to blend. So your diluent costs are, let’s say, twice as high and you’re selling your product for not much difference in revenue. We know synbit gets you worse net realized bitumen prices than a dilbit.””

It’s unclear why Long Lake uses synthetic crude as a diluent, but the project was designed to upgrade its production until CNOOC/Nexen mothballed the upgrader last year.

At Surmont, the decision to blend with synthetic crude was likely made 10-plus years ago, at that time when there was still some debate over how the economics of synbit and dilbit would play out, Dunn said.

“I suspect [the decisions on pipeline transportation blends] had something to do with what these projects had access to at the time when they were initiated. There may or may not have been long-term contracts associated with that."

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