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* MEG Energy plans diluent recovery unit for late 2015
* Located next to Bruderheim, Alberta, train terminal
* Unit has potential to boost returns per barrel of crude
By Nia Williams
CALGARY, Alberta, Dec 6 (Reuters) - Canadian producer MEG Energy said on Friday it will build Western Canada's first diluent recovery unit, a C$75 million ($70.55 million) facility that could be a crucial step in the quest to ship raw oil sands bitumen by rail.
Diluent is a type of ultra-light oil that is blended with heavy bitumen crude from the Alberta oil sands to dilute it enough to flow through pipelines. The new recovery facility will allow MEG to extract the diluent from the heavy crude that it moves 250 miles (400 kilometres) by pipelines from its Christina Lake project in northern Alberta to a new rail terminal at Bruderheim, Alberta.
The diluent-free bitumen can then be loaded into special rail cars at the Bruderheim crude-by-rail terminal operated by Canexus Corp, the first terminal in the region capable of loading 100-plus-car unit trains. The terminal is due to begin shipping 50,000 barrels per day of crude later this month.
Logistics firms have raced this year to build new oil-by-rail facilities across Western Canada to capitalize on a looming shortage of export pipelines. But the lack of diluent recovery units has raised questions about whether the railway shipments will be economically feasible.
In the absence of any diluent recovery units in Western Canada, other than those used at oil sands production sites, producers such as Baytex Energy that want to ship raw bitumen by rail currently have to truck their product to the rail loading terminal, a more costly mode of transport.
Other producers using rail have to ship partially diluted bitumen all the way to U.S. refiners, another costly option. Much of the diluent is then separated by the refinery and shipped back to Canada.
With a DRU, however, a company can efficiently ship oil from the field to the rail terminal by pipeline, then extract the diluent and put the bitumen onto heated and coiled rail cars, reducing the overall cost of shipping it south by rail.
"We would be looking at shipping undiluted bitumen. That increases our shipping capacity and the value of each barrel," MEG spokesman Brad Bellows said.
He said MEG could see a 50 percent increase in the amount of bitumen it is able to ship in each barrel, translating into improved netbacks.
In theory, pure-bitumen rail shipments may even be cheaper than exporting diluted bitumen by pipeline, analysts say, although complicated logistics make the economics hard to predict.
"Theoretically it's a cost-effective way of doing it but there are a lot of moving parts. MEG is the bleeding edge. If it plays out, they will be ahead of the game and they will be in the money," said Sandy Fielden, an analyst at RBN Energy.
In its raw form, bitumen from the oil sands is too viscous to flow through pipelines, and has to be diluted with around 30 percent condensate per barrel.
Bellows had no estimate for how many barrels per day of diluted bitumen would be processed by the unit.
MEG's new facility will take crude from its 30,000 to 35,000 bpd Christina Lake development and it will be located adjacent to the Bruderheim rail terminal. It is expected to be operational by late 2015 and could pave the way for other oil sands bitumen producers to extract diluent before shipping crude out of Alberta by rail.
"This initiative is the first tangible move toward diluent recovery in the industry, which we expect will be followed by other producers," said RBC Capital Markets analyst Mark Friesen.
The company's shares closed up 3 percent on the Toronto Stock Exchange at C$30.58 on Friday.
MEG will also be able to send the recovered diluent from Bruderheim back to its oil sands operations for reuse, rather than having to source more condensate in the United States.
In 2012 Canadian producers imported 260,000 barrels per day of condensate from areas as far away as the Eagle Ford in Texas, 2,000 miles to the south of the oil sands region.
In an analysis done in September, RBN's Fielden said the netback from moving raw bitumen using unit train terminals - that can load up to 120 cars of crude a day - could be $65 per barrel, versus $51.27 per barrel for shipping diluted bitumen through pipelines.
But logistical challenges remain. Very few refineries or terminals have the heating equipment needed to load and unload raw bitumen, which has the consistency of a hockey puck at around 10C.
To get raw bitumen off a heated and coiled rail car, steam is passed through the coils for up to 24 hours to enable the bitumen to flow. Once unloaded, heated storage is needed to prevent the bitumen from solidifying again.
"You have to heat it up to couple of hundred degrees, so how quickly can you turn these rail cars around. There's an extra cost that no one has figured out yet," Fielden said.