Your Time is Gonna Come” Is Partially Upgraded Bitumen the Future for the Canadian Oil Sands?

By Dan Cronin and John Auers

“Your Time is Gonna Come” is a Led Zeppelin classic off their debut album.  It is interesting to note that the group was formed in 1968, and this song was performed live on Zeppelin’s 1968 Scandinavian Tour, and then never played live again by the band.  The song is about an unfaithful woman and the belief that all the pain she has caused will come back to her.  Unlike in the song where negative actions lead to negative consequences, in the world of Partially Upgraded Bitumen (PUB) we see the exact opposite occurring, where positive actions lead to positive outcomes.  The concept of PUB is not new, some people have been working on PUB for over 15 years.  We believe all this positive effort will be rewarded as the timing right now for PUB appears to be ideal – “Your Time is Gonna Come.”

This is the last segment in this  four-part blog series on PUB (although we will certainly be addressing this subject in future blogs).  In our first segment, we explained what PUB is and described the inherent advantages of PUB.  In the second blog, we identified some of the PUB players, identified some of the key pricing dynamics, and also assessed the diluent cost savings.  In the third blog, we identified some of the challenges that producers, the midstream, and refineries could face with respect to PUB.  In this, the fourth and final blog installment of this series, we will look at PUB from a more macro level.  We will look at future bitumen production from Western Canada and calculate the call for imported diluent on a “status quo” basis.  We will also identify some key markets for PUB and provide some concluding remarks.

Status Quo on Western Canadian Condensate Imports:  “Made up my mind to break you this time.”

The supply of bitumen that the market receives is bitumen that is either upgraded to synthetic crude or is blended with diluent – condensate to create a DilBit or synthetic crude to create a SynBit (the former being far more prevalent than the later).  By assessing the amount of bitumen forecasted to be shipped to market as a DilBit, we are able to estimate the call on condensate required by Western Canadian producers for blending purposes.  Then by layering in the estimated local supply of condensate, we can determine the amount of condensate that needs to be imported into Western Canada for blending purposes.  The figure below depicts the long-term call on condensate imports.

Source: Canadian Association of Petroleum Producers, Turner Mason & Company

As one can see from the figure above, the amount of condensate required under a status-quo environment (i.e., no PUB) would be substantial.  To put the above figure into context, right now the only two pipelines importing condensate into Western Canada are the Enbridge Southern Lights Pipeline and the Kinder Morgan Cochin Pipeline – a combined capacity of ~275 KBPD.  Importing over half a million barrels/day of condensate by 2030 is a lofty challenge especially considering the difficult environment in which it is to obtain pipeline approvals.  Can we expect future pipelines to be constructed or repurposed/reversed (as was the case for Enbridge and Kinder Morgan) to serve the Western Canadian condensate market?  Can we even expect to have these diluent pipelines in the future as Enbridge has already publicly put forward the idea of putting the Southern Lights Pipeline back into its original configuration to transport crude oil out of Western Canada by 2023.  There must be a better way to move bitumen to market than to import such a large quantity of condensate into Western Canada.  By creating a PUB, one is able to help solve this diluent challenge by reducing or eliminating the need for condensate – such a move would make better use of existing and future pipeline infrastructure for export purposes.

U.S. PUB Market:  Always the same playin’ your game.”

While PUB players continue to move this idea forward, as of yet there are no commercial PUB volumes on the open market.  Due to the lack of publicly available information, it is difficult to assess PUB crude quality and thus determine which crude it will compete against at the refinery gate; however, from what we have ascertained, depending on the PUB process, we expect some PUB to compete against the heavy, sour crudes of WCS and Maya at the heavy end of the spectrum and some PUB to compete against the medium sour crudes of Mars or ANS at the lighter end of the spectrum, and there could even be some lighter and/or sweeter versions as well..

The first country we expect to see Canadian exports of PUB to service is the U.S.  The U.S. is Canada’s primary export market (and currently essentially its only export market of any significance).  At the same time, Canada has become the most significant source of U.S. crude imports (reaching and exceeding 50% of the total in recent months) and is especially important among the heavy grades as Venezuelan and Mexican imports have declined.  As  a result, we will first look at imports of heavy sour and medium crude by PADD to assess the U.S. market – see figures below

 Source: EIA Data

Imports of heavy sour crude into the U.S. have increased from ~3.7 million bbls/day in 2010 to ~4.5 million bbls/day in 2018 (with Canadian barrels leading the way).  The lion’s share of the heavy sour crude imported into the U.S. takes place in PADD II and PADD III representing over 82% of the heavy sour crude imports in 2018.  PADDs II and III would obviously represent a key market where PUB that is similar to WCS or Maya would most likely find a home.

Source: EIA Data

Imports of medium crude into the U.S. have moved in the opposite direction when compared to the imports of heavy sour crude and has decreased from ~3.1 million bbls/day in 2010 to ~2.3 million bbls/day in 2018.  For those PUB players that are going to invest in the necessary capital to produce a PUB with a medium crude quality, PADDs III and V represent strong markets with over 60% of the medium crude imported into the U.S. in 2018 being destined for these areas.  Additional opportunities also exist in PADDs I and II (the obvious challenge for PADD I is that it is not pipeline connected).

Non-U.S PUB Market: “Puttin’ me down for thinkin’ of someone new.”

If the Trans Mountain Pipeline Expansion from Alberta to Burnaby, BC (just outside Vancouver), is constructed, Canadian producers will finally have the necessary capacity to export crude in large volumes from a tidewater facility located in their own country.  This West Coast facility would most likely target PADD V and/or Asia for exports.  With PADD V importing both heavy and medium crude, we see this as great opportunity for PUB; however, we see an even a bigger opportunity for PUB in Asia, more specifically China.

China’s current coking capacity is slightly larger than the coking capacity found in PADD III and can process north of 4 million bbls/day of heavy crude.  While coking capacity in China is significant, all this capacity might not be available to Canadian crude.  Keep in mind, some Chinese refineries have been funded through joint venture agreements with suppliers from the Middle East and as such, crude from the Middle East is expected to be first in line at these refineries.

It is expected that PUB will price off of Arab Heavy in China.  The magnitude of the pricing delta a PUB will garner in China versus Arab Heavy will be a function of the crude characteristic of each PUB.  While limited amounts of crude from Canada does currently find its way to China, the quantity remains relatively minor due to existing pipeline constraints and as a result, Chinese refineries are generally unfamiliar with Canadian crude.  With this lack of familiarity, one could potentially see a steeper and longer introductory discount (vs. the U.S.) for any Canadian crude finding its way across the Pacific, including PUB; however, despite this challenge, Canada needs to diversify its market, and China represents a tremendous opportunity for PUB players.

Conclusion:

We have reached the end of our current PUB blog series.  We have introduced PUB, identified some of the key players, discussed its potential benefits and challenges, and finally we looked at PUB and its potential impact on the Western Canadian condensate balance as well as identified potential markets for PUB.

We continue to believe that PUB represents a tremendous opportunity for producers in Western Canada.  PUB has the potential to dramatically impact the way in which bitumen is delivered to downstream refineries.  As is the case with the introduction of something new, we expect PUB to grow in fits and starts; however, we believe that the benefits associated with PUB are very compelling.  We envision PUB becoming more and more relevant in the future with PUB having the potential to rival or perhaps even surpass WCS as feedstock for deep conversion refiners in the U.S. and beyond – PUB, “Your Time is Gonna Come.”

Due to the time and space limitations of a weekly blog, we have included only a high-level discussion of PUB here.  If you are interested in more information about PUB and how it could/will specifically impact your company’s future plans or strategies, please call or email us at 214-754-0898 or jauers@turnermason.com