Canada’s Trans Mountain (TMX) Oil Pipeline Expansion

By Nicole Jao

NEW YORK (Reuters) – Canada’s expanded Trans Mountain (TMX) oil pipeline, which commenced commercial operations in May, has so far had little impact on crude costs at refineries on the U.S. West Coast, according to companies operating there.

The expansion, which tripled pipeline capacity from Alberta to Canada’s Pacific Coast to 890,000 barrels per day (bpd), increased access to Canadian heavy crude oil for West Coast refiners and opened a new route to Asia.

U.S. West Coast refiners, primarily importing crude by ship, were expected to be main recipients of the Canadian barrels. However, in the first three months since TMX began operations, most of the barrels have been exported to Asian markets, according to Brian Mandell, executive vice president of marketing and commercial for Phillips 66 (NYSE:PSX).

“About two-thirds of the incremental TMX barrels have been going to Asia, which has been a bit of a surprise for us,” Mandell commented during a recent investor call.

Phillips 66 indicated that access to lower-cost heavy barrels from Canada would help boost earnings in its West Coast refining operations, particularly in California and Washington. However, independent refiners are facing weaker-than-expected fuel demand, which has negatively impacted margins in the second quarter.

Phillips 66’s realized margins fell to $10.01 per barrel from $15.32 a year earlier. Meanwhile, Marathon Petroleum (NYSE:MPC) reported its refining margins for the second quarter at $17.37 per barrel, down from $22.10. Valero Energy’s refining margins also dropped nearly 28% compared to last year.

Analysts initially assumed that shipping barrels to Asia would be logistically challenging and costly compared to the accessible U.S. market, and thus projected that TMX crude would mainly reach the West Coast first, as noted by Scotiabank’s analyst, Paul Cheng.

“But it turned out that was not what happened,” Cheng added.

The expectation was that the new crude oil flow would replace heavy oils imported to the West Coast from Latin America or the Middle East, providing savings on shipping costs. Analysts had predicted that the differential on Western Canada Select (WCS) versus U.S. crude would gradually narrow due to TMX’s expanded export capacity. However, this additional capacity did not boost Canadian crude prices in the first three months.

Marathon’s Los Angeles refinery, the largest on the West Coast with a capacity of 365,000 bpd, would be among the primary destinations for TMX’s heavy sour crude grades. Other facilities on the West Coast, including Valero’s Benicia refinery and Chevron (NYSE:CVX)’s El Segundo refinery, also receive TMX crude.

The U.S. West Coast has roughly 2.5 million bpd of refinery capacity, according to the Energy Information Administration (EIA).

ANS Under Pressure

Refiners could begin to see crude costs decrease in the coming months as the additional Canadian heavy barrels compete with Alaskan North Slope (ANS) and other crude types commonly used by West Coast refiners, executives stated.

“What has changed that is significant and quite helpful to us is as these incremental Canadian barrels have come into the market, it has put pressure on the ANS barrels,” said Marathon’s Chief Commercial Officer, Rick Hessling.

Average ANS prices dipped to around $85 per barrel from about $90 in April, as reported by General Index data. Lower ANS prices are expected to further reduce crude costs for West Coast refiners, according to Valero’s Chief Operating Officer, Gary Simmons.

ANS and other crude types will remain part of the West Coast refining slate as refiners continue to evaluate whether using Canadian heavy sour crude might cause inefficiencies in their refining processes over time.

“Over time as you test that grade, you will see what type of natural oils you need to use to blend (with Canadian heavy crude) so it gives you the best yield in your configuration,” explained Scotiabank’s Cheng. “That process will take months.”