​Conoco’s diluent shift to keep Canadian synthetic crude under pressure

Aerial view of the Surmont SAGD project. Image: ConocoPhillips Canada

ConocoPhillips’s shift to a cheaper substitute to dilute the thick bitumen coming from its oilsands operations may deal a blow to companies that turn heavy oil into more-valuable lighter grades.

The company currently uses synthetic crude produced in local upgraders to thin out the bitumen extracted from wells at its 150,000 barrel-a-day Surmont site. But by end of the fourth quarter, Surmont will be able to switch to using condensate -- a very light hydrocarbon produced from natural gas wells -- as a diluent instead, according to documents submitted to the Alberta Energy Regulator.

Using condensate to dilute the heavy crude so it can flow through pipelines has some advantages. While an entire barrel of synthetic crude is typically needed to dilute one barrel of raw bitumen, half a barrel of condensate is needed. Also, condensate is more than $3 a barrel cheaper, according to data compiled by Bloomberg.

“Work to enable our Surmont 2 central processing facility to utilize either condensate or synthetic crude oil is nearly complete,” Katherine Springall, spokeswoman for ConocoPhillips Canada, said in an email. “While we currently use a small percentage of condensate in our blend, this work, when complete, will allow us to use either diluent in order to react to changing market conditions.”

A switch by the Surmont operation to 100% condensate would amount to more than 10% of the total volume of synthetic crude produced in Canada, according to Canadian Energy Regulator data. That loss of demand may depress prices of synthetic crude, hurting companies that process bitumen in refinery-sized plants called upgraders to make the lighter grades.

Sturgeon Refinery

Surmont isn’t the only headwind for synthetic crude demand. By year-end, the North West Redwater Partnership’s 79,000 barrel-a-day Sturgeon refinery in Alberta is poised to start processing bitumen rather than the synthetic crude it’s been using since early last year.

Synthetic crude prices have weakened ahead of the changes. After trading at a premium to West Texas Intermediate futures since June, the grade flipped to discount last week and is now trading at $1.25 a barrel below WTI, data compiled by Bloomberg show.

Oilsands producers have been switching to condensate from synthetic for several years after upgrader breakdowns caused shortages. Cnooc Ltd.’s Long Lake site, as well as Surmont, were forced to throttle back output two years ago after Syncrude Canada Ltd.’s upgrader went down. Athabasca Oil Corp.’s Leismer site, previously owned by Equinor ASA, switched to condensate before the Syncrude disruption.

The loss of local consumption from Surmont and Sturgeon could be partly offset by demand from refiners elsewhere, Kevin Birn, IHS Markit’s director of North American crude oil markets, said by telephone. International regulations will require oceangoing ships to burn lower-sulfur fuel oil or diesel starting next year, a change that is expected to boost refiners’ thirst for lighter, lower-sulfur grades of crude that yield higher-quality fuel.

“Synthetic crude is particularly attractive in that world,” Birn said.

But an increase in exports would place more pressure on Canada’s already-rationed pipelines, according to Birn. Alberta’s largest oil producers are under mandatory production limits after delays in building new lines caused local oil prices to collapse last year.

© 2019 Bloomberg L.P.

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