Canada is getting ready to move a lot more oil. The catch is the oil needs a secret ingredient to flow, and the country does not make nearly enough of it.
That ingredient is condensate, an ultralight oil used to thin out heavy bitumen so it can flow through pipelines. Without it, the heavy stuff from Alberta's oil sands basically refuses to move.
The oil sands in Western Canada are massive.
So when Canada expands its pipeline capacity, it needs more than just oil. It needs condensate, and a lot of it.
The growth would be welcome news for producers, but it creates a problem: the stuff that makes the oil flow.
Grant Fagerheim, CEO of Whitecap Resources, put it plainly to analysts last week. "There needs to be much more condensate if we're going to grow our heavy oil volumes by 1 million to 2 million barrels a day."
Homegrown supply is mostly tied to shale-gas zones such as the Montney and Duvernay formations along the Alberta-B.C. border. Large producers there include Whitecap, Tourmaline Oil, Cenovus Energy, and Canadian Natural Resources.
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Whitecap is already the country's fourth-largest condensate producer, and it sees room to grow. Fagerheim estimated the company's output could eventually rise by up to 50,000 barrels a day from today's 60,000. His colleague, Whitecap president Joey Wong, added that about 70% of its unconventional properties are capable of producing condensate.
Enbridge's president of liquid pipelines, Colin Gruending, told investors on a Friday earnings call that the math does not work without outside help. "Domestic supply condensate will be insufficient and we'll need to import more," he said.
Pembina is taking its own approach, expanding in northeast British Columbia. CEO Scott Burrows said condensate has "fairly significant running room" to grow.
Condensate in Alberta has traded about $1.71 below the monthly average price of West Texas Intermediate, the US benchmark. But in March, when Middle East supplies were disrupted, condensate spiked to a $10-per-barrel premium to WTI.
That is a direct hit to the pocketbooks of oil-sands producers who suddenly had to pay much more for the stuff they need to move their product.
That volatility is shaping how companies behave. Tourmaline has actually postponed some gas output and development because gas prices are weak. But CEO Michael Rose sees the condensate side of the business getting better. "We're seeing much more potential for strength in condensate pricing with the build-out of the oil sands projects and the attention to oil pipelines," he said. He called it a "meaningful cash flow driver."
Cenovus sees the same dynamic from the buyer's side. Jeff Lawson, the company's corporate development chief, said disciplined oil-sands growth would push condensate prices higher to attract more supply. Cenovus CEO Jon McKenzie said the company uses roughly 12 times as much condensate as it produces, which gives you a sense of how dependent the whole system is on this one ingredient.
For everyday investors, the story here is about where the money will flow over the next several years. The pipeline buildout is not a maybe.
That creates two big investment themes. The first is the oil producers themselves, because a wider pipeline means they can sell more product and pay for it with condensate. The second is the condensate suppliers, who are about to become a lot more important in a system that cannot grow without them.
As these new pipelines fill up, watch the companies that make the heavy oil flow. They are not the most obvious names in the energy world, but they are becoming the ones that matter.
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