CP, KCS, USD, Gibson Energy, ConocoPhillips Canada Forge Diluent Recovery Deal

Canadian Pacific photo.

US Development Group, LLC (through wholly-owned affiliate USD) and Gibson Energy Inc. (Gibson) jointly announced this week an agreement to construct and operate a diluent recovery unit (DRU) near Hardisty, Alberta, Canada. ConocoPhillips Canada has contracted to process 50,000 barrels per day of inlet bitumen blend through the DRU to be shipped by Canadian Pacific and Kansas City Southern to the U.S.

USD and Gibson are currently in commercial discussions with other potential producer and refiner customers to secure long-term, take-or-pay agreements for an additional 50,000 barrels per day at the proposed DRU.

USD’s patented DRU technology separates the diluent that has been added to the raw bitumen in the production process. “This meets two important market needs: It returns the recovered diluent for reuse in the Alberta market, reducing delivered costs for diluent, and it creates DRUbit™, a proprietary heavy Canadian crude oil specifically designed for rail transportation,” CP said. “DRUbit™ is crude oil or bitumen that has been returned to a more concentrated, viscous state that creates safety and environmental benefits when transported by rail in Canada and the U.S. DRUbit™ is a market access solution that 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 today.”

Following separation at the DRU, the DRUbit™ owned by ConocoPhillips Canada will be railed by CP and KCS from the existing Hardisty Rail Terminal to a new terminal in Port Arthur, Tex., under a long-term contract with CP, subject to standard conditions. The new terminal in Port Arthur will be constructed, owned and operated solely by USD. 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, providing customers access to a large network of refining and marine facilities. ConocoPhillips said it will re-blend the DRUbit™ with a variety of diluents “to create higher-value customized blends that better-meet the needs of customers.”

“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,” said USD CEO Dan Borgen. “USD is a company that provides solutions for energy infrastructure, and our patented DRU technology is another valuable solution. We are thrilled to work with ConocoPhillips Canada, our JV partner Gibson, and both CP and KCS to deliver this DRU and DRUbit™ solution as part of a networked system that provides direct market access for Canadian producers.”

“The DRU process is an innovative solution that competes with pipeline economics and secures improved netbacks across the seasonality and widely varying differentials experienced in the Western Canadian spot market,” said ConocoPhillips Canada President Kirk Johnson. “It helps address a critical challenge to Canada’s oil producers — constrained market access — to the benefit of all Canadians.”

“We expect DRUs to be a critical part of solving the egress [problems] Western Canadian producers are facing, both today and over the long-term,” said Gibson President and CEO Steve Spaulding. “Improved net-backs for producers will drive increased oilfield and related business activity, create new jobs and help revive communities as well as positively benefit all levels of government through increased royalties and other levies.”

“From an innovation, sustainability and safety perspective, this is a game changer,” said CP President and CEO Keith Creel. “This process removes diluent from the crude-by-rail supply chain, and as a result, we end up moving a non-hazardous commodity. This will further increase the safety of crude-by-rail, to the benefit of the communities we operate in and through.”

“KCS is pleased to be a strategic partner in this innovative solution to improve the economics and safety of moving crude oil,” said KCS President and Chief Executive Officer Patrick J. Ottensmeyer. “It’s also a great opportunity to grow our business in the Gulf Coast area and develop our Port Arthur asset.”

Construction of the DRU is expected to take approximately 18 to 24 months and is subject to certain conditions, including obtaining agreements to underpin the economics of the project and receipt of required regulatory approvals, including from the Alberta Energy Regulator. The DRU could be placed into service as early as the second quarter of 2021.