Thicker Canadian crude to move on rail amid full pipelines

WINNIPEG, Manitoba (Reuters) - Some of Canada's sludge-like heavy oil will move in an even thicker form on railways in an effort to avoid pipeline bottlenecks and reduce risks.

Gibson Energy Inc and US Development Group (USD) said on Tuesday they would build a diluent recovery unit at Hardisty, Alberta in a joint venture.

The unit will remove the ultralight oil that is used to dilute bitumen for movement in pipelines. That diluent can then be reused, while the thick, concentrated crude that remains - to be named DRUbit - can move on rail with less spill risk.

"We expect DRUs to be a critical part of solving the egress challenges Western Canadian producers are facing, both today and over the long-term,” said Steve Spaulding, Gibson’s chief executive. 

Congested pipelines in Western Canada have prompted Alberta to curtail oil production and shaken investor confidence. Other companies are developing similar ideas to move Canadian crude in safer form, including as pellets or pucks.

Canadian Pacific Railway Ltd and Kansas City Southern Railway Company will move the DRUbit to the U.S. Gulf Coast, where USD plans to build a terminal in Port Arthur, Texas.

U.S. oil producer ConocoPhillips has contracted to process 50,000 barrels per day of its Canadian crude through the DRUbit unit.

The cost of the project was not disclosed. The diluent recovery unit will take 18 to 24 months to build, subject to regulatory approvals. It could be in service by the second quarter of 2021.

(Reporting by Rod Nickel in Winnipeg, Manitoba; editing by Grant McCool)