Houston — The US Development Group is nearing a mid-year completion of its rail terminal network from Alberta to the Texas Gulf Coast that would move more heavy Canadian crude specifically designed for long-haul rail transport, the company said March 4.
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The USD Group-Gibson Energy joint venture includes building a diluent recovery unit at its Hardisty terminal hub and a new Port Arthur terminal in Texas that would receive the oil sands crude by rail. The diluent recovery unit is designed to remove the diluent from the Canadian bitumen. The resulting crude is called DRUbit, a proprietary heavy Canadian crude oil specifically designed for safer rail transport.
The remaining diluent, which is mostly condensate, then goes back to the mining and processing facilities to be blended with the heavy oil sands to prepare crude for pipeline transport.
USD CEO Dan Borgen said March 4 that construction would be finished by the end of the second quarter, but that commissioning and startup could extend into early in the third quarter.
"We are progressing on schedule and on budget," Borgen said on the company's earnings call. "We are pleased to see the industry begin to get behind the program."
The diluent recovery unit would start out by processing 50,000 b/d that is contracted with ConocoPhillips and eventually ramp up to at least 100,000 b/d, he said. The crude would move to the USGC along the Canadian Pacific and Kansas City Southern railway networks. Apart from the new Port Arthur terminal, crude volumes also can ship to USD's existing Texas Deepwater hub in Houston.
"The return to normal in Canada is actually happening at a faster rate than in the US," Borgen said. "We are now moving into where crude-by-rail matters."
Indeed, Canadian oil production has recovered from its pre-pandemic volumes of about 5 million b/d of crude oil, condensate and diluent, while US production is still down by at least 2 million b/d from its pre-COVID-19 volumes.
Heavy crude fundamentals
Imports of Canadian crude to the US Midwest and USGC combined are expected to recover to around 2.9 million b/d in March from less than 2.6 million b/d in May 2020, according to S&P Global Platts Analytics.
However, crude-by-rail volumes are not yet recovered and may take quite some time.
Canadian crude-by-rail exports plunged from an all-time high of 411,991 b/d in February 2020 to an eight-year low of 38,867 b/d in July as the pandemic took hold. Exports have since rebounded to 190,454 b/d in December, according to the Canada Energy Regulator.
But, since December, the price spread between Western Canadian Select at Hardisty, Alberta, and the USGC has narrowed to levels that make most spot rail shipments uneconomical.
While that spread briefly rose to above $13/b in January, it has narrowed to an average just above $9/b for February and March and is currently at around $8.60/b, S&P Global Platts data show.
Shipping crude by rail from Hardisty to the USGC can cost anywhere between $12/b and $18/b, traders say.
Crude-by-rail exports out of Western Canada are currently under 150,000 b/d, according to analysts, down from the latest official government numbers in December.
The crude-by-rail networks are buoyed by pipeline shortages, including President Joe Biden's de facto cancellation of the Keystone XL Pipeline project.
However, by the end of 2021, new Canadian crude pipeline capacity is still expected to come online through Enbridge's Line 3 Replacement project, which is currently under construction in Minnesota, and through optimization expansion efforts in TC Energy's base Keystone system.