The move, the first of its kind, is significant because it should allow railroads to participate in Canadian oil on a consistent, long-term, and profitable basis.
The deal with energy companies US Development Group, Gibson Energy, and ConocoPhillips Canada is expected to solve the boom-and-bust nature of conventional shipments of Canadian crude by rail.
What’s unconventional is the companies’ plan to remove diluent, which is added to raw bitumen from the Canadian oil sands before shipment. The process creates a viscous, heavy bitumen designed to move in tank cars.
The product, dubbed DRUbit, will satisfy demand for heavy Canadian crude oil on the U.S. Gulf Coast and in other markets at a cost that is economically competitive to the crude oil that is transported by pipeline, the companies say.
US Development and Gibson will build and operate a diluent recovery unit near Hardisty, Alta., where ConocoPhillips will send 50,000 barrels per day of inlet bitumen. Other producers may send an additional 50,000 barrels per day to the facility, which will be built over the next 18 to 24 months.
Initially, CP will take two unit trains per day of DRUbit to Kansas City, where they will be interchanged with KCS and hauled to a new terminal in Port Arthur, Texas.
The volumes could double if growth opportunities pan out, CP CEO Keith Creel told an investor conference on Wednesday.
CP is excited about the deal, which Creel says will provide a long-term revenue stream and move Alberta oil at much lower risk because bitumen is not considered a hazardous material.
“A safer railroad is a better railroad,” Creel says.
“Our DRU technology provides a sustainable, long-term solution for shipping Canadian crude oil to the U.S. Gulf Coast. DRUbit offers safety and environmental benefits in transportation, provides greater take-away capacity, and improved economics for all parties,” US Development CEO Dan Borgen said in a statement.
The new terminal in Port Arthur will be built, owned, and operated by US Development. It will have capability for rail unloading, barge dock loading and unloading, tank storage and blending, and will be pipeline connected to Phillips 66’s Beaumont Terminal. ConocoPhillips will re-blend the DRUbit with a variety of diluents to create blends that better meet the needs of its customers.
“People have been trying to get DRU technology right for many years. This has been an idea since 2014 at least but nobody could do it,” Graham Brisben, CEO of PLG Consulting, tells Trains News Wire. “USD is a very respected company. If this was some fly by night startup I would be full of doubts. But USD being involved tells me this is real and probably the game changer they are selling it as. It would also reduce the need to ship condensate to western Canada, which is the current source of diluent.”
Canadian railroad executives expect the traditional crude by rail window to close in two to three years after new and expanded pipelines are built to allow more Alberta oil to flow out of the province.
The bitumen is expected to start moving by the middle of 2021.
Other companies are exploring similar diluent plants and Canadian National is involved in a pilot program that would turn bitumen into inert pucks that would be shipped to ports in hoppers, much like coal.