Canadian oil sands producers look west with TMX nearing completion

Americas Crude reporters Scott Phillips and Sam Duffy look ahead to the long-awaited completion of the Trans Mountain Expansion (TMX) pipeline project, which will give producers in Canada’s oil sands access to new markets at the US west coast and Asia-Pacific.

The podcast also looks back at the record discounts established for heavy crude in the US and Canada last year, exploring the factors contributing to wider spreads, and provides a more recent update on the more typical discounts seen in recent weeks.

Transcript

Sam: Absolutely. So, the Trans Mountain Expansion project was first proposed in 2013 by Kinder Morgan. It's a new pipeline that's gonna combine with the existing 300,000 barrel-per-day Trans Mountain Pipeline to create a total capacity of 890,000 barrels per day, between Edmonton, Alberta in the heart of the Canadian oil sands and Burnaby, British Columbia. The project was sort of stalled in the regulatory process. So, in 2018, Kinder Morgan voted after a 29-month review. Was nullified by a court of appeal to sell the pipeline to the federal government for 4.5 billion CAD. The government has the intention of finishing the line and making sure it's operational, and then they plan to divest. They plan to sell the line. Right now we're hearing that the line is 82% complete. It should be operational in the first quarter of 2024. And we're expecting the line fill of 4.4 million barrels to start about a month before it becomes fully operational. But in this time, the cost for the line has ballooned from Kinder Morgan's original estimate of 7.4 billion to a total cost of 30.9 billion CAD. One of the ways too that this pipeline's gonna sort of differ from the normal way Canadians transport crude on Enbridge's mainline is that 80% of the capacity on TMX is available on a committed basis. So, these are long-term contracts of 15 to 20 years.

Scott: That is interesting. So, how do we expect this new infrastructure project to impact the heavy crude market, both in Canada and I guess also in the U.S.?

Sam: Yeah, so the first thing we're gonna see is that flows on Enbridge's mainline, which is 3 million barrels per day, and right now is the main way Canadians transport crude to the United States. We're expecting flows on there to drop by 5% to 10% for the first couple of years as crude flows west, to the west ridge marine terminal instead. And once that crude gets to the terminal, we're expecting markets first to emerge in the west coast of the U.S. with refiners in California, and then slowly an Asian market should develop as well. One of the advantages of shipping from the west coast of Canada is that it only takes about 17 days to reach Asia from there instead of the about 36-day voyage it takes from the Gulf Coast of the United States to Asia. And the implication of this is gonna be tighter differentials for Canadian heavy sour crude like Western Canadian select as there is more demand from refiners in California and these new Asian markets.

Scott: That is very interesting, and we have seen prices for our WCS assessments firm to more typical levels recently after we saw record discounts established in October of last year. There were a wide range of issues pressuring heavy crude in the U.S. and Canada. First off was the release of about 180 million barrels from the U.S. SPR or Strategic Petroleum Reserve, most of which was sour crude. Also, the demand environment was less favorable. There were some refinery outages like the Toledo, Ohio Refinery, which can run about 90,000 barrels a day of heavy crude, being shut after a September fire. The Wood River Refinery, which is the largest importer of Canadian crude, was shut after a December fire. Also worth mentioning is that Russian Urals crude flows were redirected to India, which was depressing demand in that country for Canadian crude, or heavy Canadian crude exports, which typically are exported from the U.S. Gulf Coast. And Chinese oil demand was lower as the country was still under some COVID-19-related restrictions. So, we saw all three of our Argus WCS assessments in Houston, Cushing, Oklahoma, and Hardisty, Alberta falling to record discounts. Houston, it was around $22 per barrel. Cushing was around $25 per barrel, and Hardisty was around $32 per barrel. But as those refineries have restarted, as the sour crude releases from the SBR have ended, and as Chinese oil demand has picked up after those COVID-19 lockdowns have ended, we have seen prices for heavy crude firm quite a bit to more typical levels. So, most recently, WCS in Houston was about a $5 and 30 cents per barrel discount. Cushing was $6 and 50 cents per barrel discount, and the discount in Hardisty was around $13 and 50 cents per barrel. It's also worth noting that we've added some refinery capacity for heavy crude processing in the Houston area, such as the Valero Port Arthur Refinery adding a new coker.

Sam: Yeah, and just to touch on the supply side as well, we have seen those differentials for Canadian crude in Hardisty tighten as well. A lot of the producers in the Canadian oil sands go into seasonal maintenance in the second quarter. So, that's a lot of the heavy sour crude projects, as well as some of the synthetic projects up here. And producers do tend to have that maintenance coincide with a downstream refinery maintenance as well. So, that would be something on the supply side also tightening those differentials.

Scott: So, we have covered a lot of information here today. And listeners, if you're in need of more in-depth daily coverage of America's crude oil markets, consider subscribing to Argus Americas crude. That's where you'll find daily price info for the WCS assessments in all three locations, as well as other pipeline assessments like the WTI Houston assessment. And it's where you're gonna find more insights and more analysis on infrastructure projects like TMX. Thanks for tuning in, and we look forward to you joining us on the next episode of "The Crude Report."