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Canada tries out bitumen 'road apples'

A novel way of transporting bitumen could help overcome Canada’s export pipeline shortage

Backers of the planned new method of transportation hope it will chime with lovers of the country's national sport. In ice-hockey-mad Canada, children call frozen pieces of horse manure "road apples", used as an erstwhile substitute for hockey pucks when none are in supply. It is wryly symbolic that the Canadian National Railway (CN) is embarking on a C$15mn ($11.3mn) pilot plan to solidify bitumen into a similar puck-like form to facilitate transport by rail.

The company aims to encase thick and gooey heavy oil in a biodegradable polymer-recycled plastic grocery bags essentially-it calls Canapux, a bitumen pellet that can easily be transported by rail without the need for pipelines. The company is working with unnamed partners, governments and First Nations to build a 10,000bl/d demonstration plant on the Heart Lake native reserve in northern Alberta. If successful, it would be expanded to 50,000bl/d in short order.

The immediate benefit is to alleviate a nagging capacity crunch on the country's saturated export pipelines, a situation which has been aggravated by regulatory delays to the Trans Mountain expansion and Keystone XL pipelines to the west coast of Canada and the Gulf of Mexico.

By contrast, railways are regulated by centuries-old common carriage agreements that allow rail wagons to cross the Canada-US border unimpeded. According to Canada's National Energy Board, oil shipments by rail have exploded in recent years, jumping more than 100pc in 2018 alone. But this method is still seen as a costly-even dangerous-alternative to pipelines.

To allay those concerns, CN claims its Canapux pellets are non-combustible and float on water. They can be shipped in conventional coal hoppers, precluding the need for thousands of new oil tankers. It also precludes the need for expensive diluents-a cocktail of natural gas liquids used to thin viscous bitumen to pipeline specification. Some analysts have estimated the diluent premium to be on the order of C$15/bl ($11.30/bl).

In addition to reducing costs, eliminating the need for those diluents in turn frees up pipeline capacity. Depending on oil quality, diluting agents comprise a third or more of a typical Canadian barrel. Given that Canada exports 3.5mn bl/d, the back of napkin savings are theoretically enormous.

It almost sounds too good to be true. The real question is whether rail is economic at all. That is now an open debate.

Down to zero

Rail needs a Western Canadian Select-West Texas Intermediate (WCS-WTI) differential of at least US$15/bl to be viable. As of mid-February the discount was roughly US$10 compared to more than US$50 in October of last year.

The CEOs of Canada's two largest oil-sands producers-Suncor and Imperial Oil (majority owned by ExxonMobil)-say they will reduce rail shipments to zero. Suncor, in particular, claimed in Q4 results that its realised bitumen price shrank to C$7.96/bl ($6.01/bl), from C$42.80/bl ($32.33/bl) the year before.

Imperial CEO Rich Kruger said the company shipped 146,000bl/d by rail in the final four months of the year. No more. "With current conditions as they are in differentials, we expect to be at or near zero," he said. "I think this is great. The implication is that crude by rail should be helping to alleviate this situation in the province,"

According to BitCrude, a Calgary-based start-up, diluted bitumen costs roughly $30-40/bl to move from Alberta to the US Gulf Coast by rail, compared to $25/bl for conventional pipelines. The company is promising a more detailed breakdown of cost, but it claims moving bitumen pucks by rail to those same Gulf Coast refiners can be had for less than $15/bl.

If so, it would be a game changer for Canadian producers, strapped by lack of pipeline capacity. But silver bullet technology solutions often vanish without trace.

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