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Bill Coming Due for Refiners as TMX Nears Completion

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As the Trans Mountain Pipeline Expansion (TMX) moves closer to start-up, the cost to US refiners and midstream operators is coming into sharper view. Refiners are set to pay $20MM more a day, or $1.8B per quarter, for Canadian imports as a result of the project.

The forward curve for Western Canada Select (WCS), a Canadian heavy sour barrel, has increased by $6/bbl vs WTI prices in 2024 due to the expected start of TMX (see chart). The tightening spread reflects more competitive pricing for Canadian barrels as TMX opens more access to Pacific markets.

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In the Crude Hub Model, East Daley models the 590 Mb/d pipeline expansion from Alberta to British Columbia will come online by the end of 1Q24. We expect TMX to initially displace about 470 Mb/d of heavy sour crude imports to the US market, lowering throughput at several pipelines and terminals. Just as important will be the project’s impact on Canadian crude prices. Futures are pricing in a gut punch for US refiners once prices increase for Canadian barrels.

US refiners import about 3.8 MMb/d from Canada. Assuming diversions to TMX are not replaced, the recent increase in WCS prices would force US buyers to pay $20MM more a day for the remaining ~3.3 MMb/d of imports from Canada, or $1.8B per quarter.

Historically, Canada has been a virtually captive market for Lower 48 crude oil buyers. TMX will loop the Tran Mountain line to the Westridge Marine Terminal out of Vancouver Bay, BC, opening the door for Canada’s industry to expand export markets. Two of the 11 committed shippers at the terminal expansion are Chinese companies, so we anticipate some deliveries to China. However, East Daley believes a significant portion of West Ridge’s exports will also ship to refiners on the US West Coast.

The price for a WCS barrel is typically heavily discounted to other crude oils of similar quality, including Mars and Poseidon (heavy sour barrels from the Gulf of Mexico), and Maya (Mexico heavy sour crude), as shown in the figure. The WCS barrel has a long journey to market, roughly 1,700 miles to reach PADD II area refiners in the Midwest, and another 300 miles to the Gulf Coast. Additionally, the lack of spare pipeline egress from Canada creates congestion and contributes to the heavy discounting of WCS. That advantage for US refiners will be curtailed once service begins on TMX. – Kristy Oleszek.



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