Diluent shortage adds to oil sands industry’s wildfire woes

A raging wildfire in Northern Alberta has dealt oil sands operators another complication: local shortages of diluent, the light oil needed to get Canada’s heavy crude flowing.

Statoil ASA said Monday that it shut its Leismer oil-sands plant south of Fort McMurray after diluent deliveries were cut off. Husky Energy Inc. also cited a shortage on May 4 when it cut its Sunrise oil sands site’s output by 20,000 barrels a day.

Alberta’s oil sands operations make bitumen, a type of crude that’s too thick to flow through pipelines. Producers bring in diluent on pipelines, mix it with the bitumen and ship the blended oil back out to market. When workers were evacuated from the area around Fort McMurray last week, some of the pipelines were forced to shut down.

Pipelines that deliver diluent to the area include Inter Pipelines Ltd.’s Corridor System, supplying the Royal Dutch Shell PLC-operated Muskeg River and Jackpine mines. Inter’s Polaris system, which delivers to Husky’s Sunrise site, was shut and then restored last week. Enbridge ships diluent on pipelines out of the Cheecham terminal south of Fort McMurray, which was closed May 4. Pembina Pipeline Corp. said that while its Algar to Cheecham Lateral remains operational, the lines aren’t delivering because downstream operations are shut.

Canadian producers use about 400,000 barrels a day of diluent, which comprises a variety of low-density hydrocarbons including natural gasoline, condensate and synthetic oil. Just over half of it is imported from the United States, according to John Auers, executive vice-president at Turner Mason & Co., an oil industry consultant in Dallas.

“As soon as you start limiting the amount of diluent you can get out there, all of the sudden you can’t blend it up and you can’t transport it,” Mr. Auers said in a telephone interview.

The wildfire that’s obliterated sections of Fort McMurray and forced the evacuation of more than 80,000 people has knocked out an estimated one million barrels of daily production from the oil sands region. Canadian officials said Monday that rain and cooler temperature were helping firefighters battle the blazes, though they still covered an area twice the size of New York City.

Most imported diluent reaches the area through Enbridge’s Southern Lights pipeline and the Cochin pipeline operated by Kinder Morgan Inc. The material arrives at facilities near Edmonton and Fort McMurray, where it’s blended with bitumen. The exact mix varies with different grades of bitumen, but typically about 20 per cent to 30 per cent of any oil sands barrel is diluent, Mr. Auers said.

While the material is still reaching Alberta, “the local distribution, storage and blending operations are not able to function because of the fires,” Auers said. “You add all of those together and you’ve lost production.”