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How to Solve the Problem of the Alberta Oil Sands

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Canada is home to 173 billion barrels of recoverable heavy oil, and 168 billion barrels of that is located in oil sands. Most estimates point toward Canada's oil sands pumping out 5.2 million bpd by 2030, which would be some major growth over the 1.8 million bpd produced last year.  

All this growth sounds great, until you factor in some key points. Canada's oil sands produce bitumen, which is a heavy crude that needs to be diluted before it can travel through pipelines. But that is just a small part of the problem; the bigger issue is that there is a lack of pipeline infrastructure to carry the crude out of the oil sand region, which is causing Canada's heavy crude to trade at a $15-$20 discount to WTI.  

Part of this is due to the higher cost for refiners to refine and process heavy crude, and another part is the lack of pipeline capacity to move WCS (Western Canadian Select), which is the benchmark for oil produced from oil sands. This limits the number of buyers of Canadian heavy crude and harms companies like Suncor Energy (NYSE: SU  )  that are heavily dependent on oil sand projects for future growth.

While major pipeline projects like the Keystone XL pipeline would be able to easily relive transportation constraints, they have a long road ahead before they get completed. Until then rail cars seem to be picking up some of the slack.

Triple in a year?
IHS estimates that the amount of crude moved out of Canada's oil sands by rail car could grow to 450,000 bpd by the end of 2014, versus just 150,000 bpd currently. Rail operators like Canadian Pacific Railway (NYSE: CP  ) and Canadian National Railway (NYSE: CNI  ) are expanding their operations in the area to find growth, growth that will stay with the operators for a century due to the massive reserves in the region.

Canadian Pacific is expecting to move 85,000-90,000 car loads out of the region this year, and Canadian National plans on doubling its operations in the area versus last year to 60,000 car loads. If Canadian Pacific and Canadian National keep expanding their operations, then Suncor's ambitious growth plans will have the necessary transportation capacity in place to move the heavy crude.

Growth plans
Suncor is part of the reason why Alberta is going to be pumping out so much heavy crude. Suncor has several projects going on, one of which is the Fort Hills project.

Fort Hills is expected to start producing at the end of 2017, reaching 90% of capacity within 12 months. Fort Hills is one of Suncor's mining operations, and currently Fort Hills has a maximum capacity of 180,000 bpd.

Oil sands mining is when energy companies dig up tons of oil sand and place it on a conveyor belt. That conveyor belt transports the heavy crude to a processing facility to be separated from the sand and diluted so it can be transported through pipelines.

Suncor has another oil sand mining operation at the Total-operated Joslyn mining project, which is expected to produce 100,000 bpd a day. Suncor has spent billions on these projects, but due to a lack of transportation to carry heavy crude to other, more profitable markets, Suncor is limited as to who it can sell crude to.

If Suncor can utilize rail to circumvent transportation constraints, then it can maximize profitability at these huge projects. While additional pipeline capacity is going to be brought online by Enbridge, it won't be enough without either the Keystone XL pipeline or more rail cars.

Final thoughts
Alberta has plenty of crude, but companies like Suncor want to fetch better prices for their crude. Canadian Pacific and Canadian National are helping connect Alberta to the rest of North America so as many refiners as possible can purchase Alberta's crude. If the Keystone XL pipeline gets completed then less rail cars will be built and brought online, but if it doesn't get U.S. approval Canadian Pacific and Canadian National will have to pick up the slack.

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