Our History
In the beginning...
Altex Energy was created in 2005 to provide access to new markets for Canadian heavy oil producers. At its inception it pursued the development of a grassroots heavy oil/bitumen pipeline from Ft McMurray to a location near Port Arthur, Texas. Port Arthur was chosen because of its proximity to several large heavy oil refineries in the area and its connectivity to other refineries in the Houston area. The line was based on using a new, proprietary technology that did not require the use of natural gasoline as a diluent to thin the bitumen and/or heavy oil (creating a blended product called “dilbit”).
The economic benefit of this technology resulted in a transportation cost, per barrel of bitumen, equal to about ½ that for a conventional dilbit pipeline. This was because the cost of transporting this diluent on conventional pipelines, both to the market and then back again to the bitumen production source, effectively doubled the pipeline cost per barrel of bitumen. For example, assume 6.7 barrels of bitumen are transported in one direction (to the USGC) and 3.3 barrels of diluent are transported in both directions (From the USGC to Alberta, then from Alberta to the USGC). The round trip transportation of diluent effectively doubles the barrel-miles of transport. This round trip transport of diluent was made necessary in the post 2005 world because the volume of diluent required by the producers exceeded Alberta’s indigenous supply. Hence, diluent, primarily in the form of natural gasoline (a mix of pentane and hexane), has been imported into Alberta to meet the bitumen producer’s demand. In very simple terms based on the total supply of heavy oil and bitumen, assuming that heavy oil on average requires a 4:1 blend ratio with condensate, once production exceeded 600 KBPD, the 150 KBPD of existing gas plant condensate was no longer sufficient to meet the demand, and additional condensate had to be imported into the region from places such as Chicago, Conway, Kitimat and the USGC. According to Purvin and Gertz (CHOA presentation December 2, 2009) the volume of diluent being imported into Alberta is about 57,000 barrels per day (“BPD”).
During the course of the discussions with potential shippers over the 2005 – 2007 period, Altex undertook a significant bitumen testing effort at the University of Calgary Shulich School of Engineering. The testing evaluated numerous pipeline technology alternatives. An optimal procedure was ultimately developed and several patents were filed. During these pipeline discussions with shippers, it became obvious to Altex that two issues existed: developing economy of scale and working with parties that did not have sufficient credit to underwrite a major investment.
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The economics
To understand the economy of scale issue, one first of all needs to understand that there is very little raw, undiluted bitumen produced within western Canada. Producers must deploy processes and equipment that deliver dilbit to the pipeline. There are a few sources of raw bitumen in the province, but not enough to support a large diameter pipeline to the USGC. Further, production from new sources does not occur instantaneously. In most cases it takes several years before production targets are achieved by the producers. However, a pipeline when it is commissioned invokes a take or pay commitment on its shippers in which the shipper pays for capacity on the pipeline whether or not the shipper uses the pipeline service. Hence, a process and transportation mechanism must be developed wherein a party that chooses to produce raw bitumen can actually transport it to market it before the new technology pipeline starts up. If not, they will employ the existing pipelines that require a dilbit product.
To understand the credit issue, a company that subscribes to a long-term commitment like pipeline capacity normally would have to include a note on their balance sheet to the effect that a take-or-pay commitment had been made to a pipeline for a certain volume, for a certain term, at a certain fixed cost. For example, a 15 year commitment of 50,000 BPD at a toll of $5/Bbl would involve a $1.37 Billion footnote on the balance sheet. This contractual commitment effectively prevents the company from using some of its credit for other purposes. A typical capital cost for developing a Steam Assisted Gravity Drainage (“SAGD”) project is in the range of $30,000 per BPD, implying that a 50,000 BPD facility would have a $1.5 B cost. The pipeline commitment could effectively double the company’s credit requirement of developing SAGD production.
For a grassroots pipeline of about 2275 miles in length to be economic, it must operate at a volume sufficient to compete with existing systems. In the Altex Pipeline case, this volume was determined to be about 400,000 BPD. By definition, the existing markets and competitor’s pipeline systems are sufficient to process and transport the existing production. Therefore Altex and its shippers concluded new production would be required to fill any new pipeline. Altex undertook a bitumen supply growth analysis near the end of 2007. It determined many of the SAGD and thermal projects were still at a “risky” pilot plant stage, such that extrapolation to 100% success was not warranted. The analysis determined that during the previous 7 years, the growth of bitumen supply had been almost constant, at a rate of about 40,000 BPD per year. If the growth of synthetic oil (as a surrogate for bitumen supply that was available but that had been processed within the province) was included, the total amount of bitumen production should increase at a rate of about 100,000 BPD per year.
Assuming that the future will be like the past, it will take between 4 years and 10 years to fill a new bitumen pipeline to capacity. The period is dependent upon how much upgrading will be done within the province. In either event, the cost of stranding some of the pipeline’s initial capacity while waiting for the bitumen volume to build on a pipeline such as Altex was so significant, that it seriously impacted the producer’s net back economics. Faced with the production risk and credit impact conclusions, Altex undertook to develop a bridging mechanism that could operate during the initial period, allow pure bitumen production to be built up over time and effectively deal with the issue of shipper credit. In addition, this mechanism would also have to allow producers to develop a market presence in the USGC for raw bitumen while achieving a competitive net-back.
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Where we are now
The result of the analysis was to conclude that one could develop a transportation system that can solve the production risk and credit issue by railing bitumen to virtually any market within North America, and that such a transport system could be competitive with new dilbit pipelines (that included the round trip cost of the condensate diluent). As production volumes increase, one could then permit and construct a new technology pipeline to the market (the USGC). Canadian National (“CN”) was the carrier that met all these requirements; it owns the track up to Ft McMurray and the Peace River areas, and the delivery systems to eastern Canada, Chicago, Canada’s West Coast and the USGC (Louisiana). Altex then approached CN in the early part of 2008 to work out the details of such a transport system, and the PipelineOnRail™ idea was born.
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