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A Talisman Energy operation in Alberta’s Duvernay shale region.

Oil sands production is surging in Alberta. The stuff that moves it through pipelines, however, is in short supply.

Energy companies operating in Alberta's oil sands need condensate, or diluent – a type of super light oil – to thin the thick, tarry bitumen they produce and allow it to flow through pipelines.

In western Canada, condensate is a hot commodity, in high demand from oil sands companies that can't get enough of it. On Monday, condensate traded for about $108 a barrel, about $15 more than Western Canadian benchmark light oil.

The diluent shortage serves as a risk to Alberta's oil sands growth. The energy industry can boost bitumen production and build all the pipelines it wants, but if enough diluent does not find its way to northern Alberta, bitumen produced from the oil sands will not be able to reach markets.

Energy producers in western Canada churned out about 145,000 barrels of condensate per day in 2013, according to the National Energy Board. However, oil sands companies use about 350,000 barrels of condensate per day, analysts at Desjardins Capital Markets calculate. The difference is made up largely by U.S. producers that ship diluent to Canada via pipeline or rail.

Demand for condensate could hit 1 million barrels per day by 2020, as oil sands production grows sharply.

The diluent shortfall puts a handful of energy companies, particularly those with assets in Alberta's Duvernay region, in an envious spot. Companies with condensate could be takeover targets, or may find eager buyers for certain assets. Trilogy Energy Corp. and Athabasca Oil Corp., for example, are two companies with attractive holdings in the Duvernay. The shale play is still being explored, and so far, early results have caused some stocks to rally when wells spew a healthy amount of condensate.

For the condensate shortage, "the driver here, without any doubt, is the oil sands," analysts led by Justin Bouchard and Kristopher Zack at Desjardins Capital Markets said in a report. "So long as the oil sands continue to grow, condensate demand will grow in lockstep."

Western Canadian condensate will likely be worth $10 to $15 more per barrel than condensate extracted in the U.S., where condensate is abundant but far from the oil sands, over the "near to medium term," the analysts said.

Shane Fildes, global head of BMO Nesbitt Burns' energy group, believes geography, as well as geology, plays to the Duvernay's advantage for condensate, which is typically associated with natural gas liquids production.

"Everyone is trying to add liquids to their portfolio, and the fact that you've got this resource play with a high condensate percentage right next to one of the biggest condensate users in the world – the oil sands – there's a lot of traction to that," he said. "I just continue to be amazed at the profile the Duvernay play is getting on a global scale. You look at Chevron, Shell, Exxon and when they hold their global quarterly calls, the Duvernay is highly featured."

Trilogy serves as an example of how investors are excited about the Duvernay's potential. The company released surprisingly healthy drilling results September 26. The next day, its stock jumped 11 per cent to $28.73 a share. Royal Dutch Shell PLC, which has massive holdings in the oil sands, is known to be Trilogy's partner.

Athabasca Oil also has 142,000 hectares of land in the region. The company is looking for a partner to help develop these assets. Yoho Resources Inc., Vermilion Energy Inc., and privately-held Bounty Developments Ltd. are also among those with Duvernay assets. Talisman Energy Inc., the major Canadian oil and gas firm trying to reshape itself, has already put some of its Duvernay assets on the block.

Potential acquirers must tread carefully. "Results from the Duvernay so far have been all over the map. There have been some outstanding wells with phenomenal condensate yields, but there have also been results that have not been so good," Mr. Bouchard and Mr. Zack wrote in their report. "Clearly, it is still early days for the Duvernay but as industry continues derisking the plays, this could ultimately become a meaningful source of local condensate supply for oil sands and heavy oil producers."

Some big oil sands outfits are making it clear they would rather shop in their own neighbourhood. Cenovus Energy Inc., a large oil sands player with plans to grow, uses about 100,000 barrels of condensate per day, spokeswoman Jessica Wilkinson said, and about half of that amount is imported. As Cenovus' production grows, so too will its need for diluent.

"Our team is looking at adding more capability to import although we're always assessing supply," she said. "If we can source it locally, we will."

With files from Jeffrey Jones

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