Canada’s TMX crude grows in popularity in China

Canada has become China's cheapest source of crude that is not under sanctions since the Trans Mountain Expansion (TMX) pipeline opened in May, potentially cementing the country's role as a supply source at a time when Chinese refiners' margins are feeling the pressure.

China has boosted imports of Canadian heavy crude since May — 170,000 b/d of TMX-shipped crude left the west coast port of Vancouver in June for China, data from oil analytics platform Vortexa show. TMX has allowed more output from Alberta's oil sands region to reach Vancouver — 300,000 b/d was exported from the port in June, TMX's first full month of operation. This was well up on the 34,000 b/d exported in April and 36,000 b/d in June 2023, and, strikingly, over double the 145,000 b/d of Canadian crude exported from the US Gulf coast last month.

Chinese importers — state-controlled Sinopec, PetroChina and Sinochem, and private-sector Rongsheng — are becoming more comfortable with TMX exports. Heavy sour grade Cold Lake made up 90pc of the firms' purchases in June, while Access Western Blend (AWB) — also heavy sour but with a higher total acid number (TAN) — represents the fastest-growing source of supply from Vancouver. This, and Californian buyers' preference for lower-TAN crude, is keeping spot differentials for TMX-shipped AWB under pressure and boosting its appeal in China.

Acidic grades corrode crude units at high temperatures, forcing sellers to offer them at discounts. Chinese firms secured $6/bl discounts to Ice December Brent for AWB delivered to China in October, while Cold Lake was offered $0.50-1.00/bl higher and no cargoes have been bought by China for October. AWB is far cheaper than Colombian Castilla and costs less than Cold Lake delivered to China from the US Gulf coast (see graph). Castilla is heavier than AWB, at 22.5°API, but far less sour.

Slow demand is hitting Chinese refiners' profits and spurring them to look for cheaper feedstock. AWB is around $6/bl pricier than Venezuelan heavy Merey but only Shandong independent refiners typically buy Merey. State-run firms expect TMX-shipped crude to partially displace their imports of Iraqi heavy sour Basrah Heavy and Latin American grades Napo, Oriente, Castilla and Vasconia.

Sinopec has become a consistent buyer of AWB for its 470,000 b/d Maoming and 540,000 b/d Zhenhai refineries. PetroChina is buying AWB for its 400,000 b/d Jieyang plant. Rongsheng bought 2mn bl of September-delivery AWB and the same again for October delivery to its 800,000 b/d ZPC refinery. But Sinochem has shut at least two of its Shandong facilities and paused all crude purchasing for its refineries in the province. "We take cheap AWB crude from the TMX pipeline to enhance our profits, despite its lower gasoline and diesel yields," a Chinese buyer says. Blending AWB with lighter crudes produces higher amounts of naphtha and fuel oil but lower amounts of middle distillates.

Pay PAL

Chinese buyers are still experimenting on how best to import Canadian crude. Vancouver port restrictions mean that shippers can load vessels no larger than an Aframax, and then with only 500,000-550,000 bl. Sinopec bought four Aframaxes in June before transferring their cargoes to a 2mn bl very large crude carrier (VLCC) in the Pacific Area Lightering (PAL) zone off California. The difficulty of aligning the arrival of the Aframaxes and a VLCC off California raises significant demurrage risks. And ship-to-ship transfers are only allowed during daylight hours, which shrink in the winter. The alternative is to ship crude to China on an Aframax, a 17-day voyage. But this has been $0.70/bl cheaper on average than the cost of putting together a VLCC for China delivery since early June.

Crude marker time structure

China's Canadian crude imports

China's heavy sour crude imports