Tom: Welcome to "The Crude Report," the TMX series, the latest in a series of Argus podcasts focused on shipments of crude out of Canada's Trans Mountain Pipeline Expansion, TMX Pipeline, from the Pacific Coast. In this episode, we are gonna drill down into how it's affecting Asian and specifically Chinese crude buying patterns and the sorts of effects that it's having on global crude pricing. And we're also gonna touch on the implications of recent comments by U.S. President-elect Donald Trump and he would like to tax U.S. imports of Canadian crude. My name's Tom Reed, I'm the VP for crude and products in China, and today I'm joined by our senior crude analyst in Beijing, Bella Moore. Hey, Bella.
Bella: Hi, Tom.
Tom: Our colleagues in the Americas have done some great podcasts on the logistics of this, on the evolution of the pipeline, but our interest is very much in where it's going and in particular it's going to China. But let's hit the headline first, Bella. Trump said that he will impose a 25% tariff on all imports from Canada, including the 5 million barrels of their crude that it sends to the U.S. when he takes office on the 20th of January. That's about $16 a barrel. That's big, big money. On the face of it, this sounds like good news for China, right?
Bella: Yeah. I think a lot of people were really surprised by the idea that his administration could tax Canadian and Mexican crude imports at 25%, given the very high dependence of the U.S. refiners on the Canadian heavy sour crude. And let's not forget the growing demand we're seeing for TMX exports in California. I think the discouraging U.S. demand for Canadian crude could possibly push down prices and making the crude buying from TMS crude more attractive. The trouble is, the TMX Pipeline is simply too small to accommodate more than a fraction of Canada's U.S. exports. It's a 500 KBD pipeline that's running at around 400 KBD and of that half of the cargoes go off to China. The TMX could divert another 100 KBD to Vancouver and maybe the portion of the TMX export now going to California will sell to Asia instead. That doesn't solve the problem for either the Canadian producers or the U.S. refiners, but it will certainly be a benefit to the refiners in Asia.
Tom: The laws of unintended consequences. Quite surprising, that. Of course, whether it becomes law remains to be seen, but I suspect it won't be the last tariff bombshell that President Trump drops. Anyway, you mentioned that half of these TMX exports from Vancouver are going to China. So tell me about that. What is China buying and how is it buying it?
Bella: So basically TMX exports two grades. One is the low TAN [inaudible 00:03:16] that's popular in California and another is the high TAN Access Western Blend that's mostly going to China. A lot of major Chinese refineries are buying high TAN TMX crude now, PetroChina, Sinopec, and [inaudible 00:03:32] are the main ones. We saw some purchases early on by Sinochem, but those have dried off because Sinochem shut down their refiners in Shandong Province. So in theory, Chinese companies can buy the TMX crude either delivered or the FOB at the Vancouver. Why they do that will largely depend on the freight economics. If they can secure cheap freight, they would rather buy it at the Vancouver and arrange their own chattering. If they cannot, they can just wait for the sellers' offers on a deliver basis.
Tom: Right. And of course your team launched a delivered [inaudible 00:04:13] assessment for high TAN TMX crude on Aframaxes into East China. So is that the main way in which TMX crude gets to China on these little Aframax vessels?
Bella: Actually no. And it gets even more complicated because depending on how strong the refrigerates are for Aframaxes or the VLCCs in the Western Pacific, they can base more parcels of TMX crude and then combine four Aframaxes onto a 2-million barrel VLCC at the Pacific area lettering point of offshore California. They can even now look at the price in the Vancouver, the price at the Jinjiang, and the price at the U.S. Gulf and then buy there onto a VLCC. This is all about optionality as far as the buyers are concerned.
Tom: Wow. So they can buy it at Vancouver, they can buy it at Jinjiang, delivered China, or they can take it at Houston in the U.S. Gulf in the form of WCS. But you mentioned the TAN, the total acid number of these TMX exports. That sounds like a thing. How much of a thing is it? What are the challenges and the implications of a high TAN crude for refiners?
Bella: There are two key points here. The first is that the refining margins in China are super bad. So refiners lead a super cheap crude. The TMX high TAN crude is now trading at around $4 per barrel and the brand making it pretty much the cheapest unsanctioned crude in the Chinese market. The reason why it's so cheap is that the TMX high TAN stream has a TAN of 1.6 and that's very acidic. The high TAN crude corrodes the refining [inaudible 00:06:07] unless you can blend it down with something with similar residue distillation years. So a lot of refiners would just not run a crude with that kind of TAN. But the Chinese crude itself is quite high TAN and the refines there tend to be pretty forgiving in terms of the TAN they can accept. So once they blend it down with a very low TAN grade like Russian ESPO Blend, they can get the acid number down to acceptable level.
Tom: Wow, 1.6, that is very, very acidic and ESPO blend would be that kind of low TAN blend. But this kind of does beg the question, I think, ESPO blend isn't sanctioned?
Bella: Effectively, no. Actually, the G7 price cap applies to Russian crude at loader port, but EPSO traced to China on the deliver basis. So the risk is born by the seller, not the buyer.
Tom: Right. And that G7 price cap rule, of course, allows for the sanctioning of any transaction using Western finance and logistics over $60 a barrel. So they are blending high TAN TMX, low TAN ESPO, and they get a grade that is acceptable in the refinery. You mentioned that Chinese refining margins are bad and we are all aware at this point that oil demand is shrinking. So I guess this blend is pushing something out rather than just growing the pool of imports into China.
Bella: Yes, this is very interesting. So we saw, for example, the Chinese imports from Oman and UAE, which it tends to buy on the spot basis in the Middle East, really dropped in October. That's just a single data point, but if we look at the ship tracking data, it seems to be a bit of trend. This blend appears to be displacing the spot Middle East and medium sours like Oman and Upper Zakum maybe to a larger degree than it's pushing out other heavy sours like Iraqi Basrah Heavy or Castilla blend from Columbia.
Tom: Right. And what sort of effect is that having on pricing?
Bella: Well, Oman and Upper Zakum are both grades that can be delivered into the partial markets to determine the Dubai market price. So when demand for those grades fall or China sells those grades, it probably does put extra pressure on the Dubai price and that has a low count effect in terms of the global pricing. This may be why, even at the time when OPEC is limiting the production of medium sour crude, you don't see any upward pressure on the Brent Dubai EFS. In fact, the EFS has been pretty steady at about $1.50 per barrel for several months.
Tom: Right, right, right, because of course if you've got tight supply of sour crude, then that should reduce the premium of sweets to sour crude. And do you see much scope for further demand for TMX crude out of China? I mean, could they absorb whatever extra barrels Canada sends in the event of U.S. import tariffs?
Bella: I would say yes, if Canada increase or is forced by the U.S. tariffs to grow exports, then I would expect to see more Canadian exports shipping to China.
Tom: Wow. Fascinating. Bella, thank you so much. I think that's all we have time for, but I hope you all enjoyed listening to this episode of "The Crude Report" as much as I've enjoyed recording it. Do please tune in soon for the next episode. If you want any more detail on the prices or the points raised, check out the Argus International Crude Report and Argus China Petroleum. I'm Tom Reed. Thanks again to my colleague Bella Moore, and goodbye.
