U.S. crude oil imports landscape is about to undergo a significant shift with the upcoming completion of the Trans Mountain Expansion Project (TMX) in early 2024. The expansion aims to facilitate the transportation of heavier varieties of crude from Alberta’s oil sands to British Columbia (BC). As we move closer to the project’s operational date, it is essential to understand its far-reaching implications on both the Canadian and international energy markets. The TMX will lead to a shift towards the BC export market, primarily exporting crude oil to Asia rather than the U.S. West Coast, which will result in a narrower price gap between Western Canadian Select (WSC) and West Texas Intermediate (WTI) crude. This shift will cause refineries taking Canadian oil to face higher prices, with the effects persisting until 2025 as the market adapts to the new demand for Canadian crude.
Shifting directions
TMX will nearly triple the existing pipeline’s capacity, from around 300,000 barrels per day (bpd) to 890,000 bpd. This increase allows for greater export volumes, enabling Canadian producers to transport more crude oil from the Alberta oil sands to the BC export facilities such as Westridge Marine Terminal. With the expanded pipeline, Canadian oil producers can access new markets in Asia, reducing their dependence on U.S. refineries to which they sell crude at traditionally discounted prices. Exporting more oil to Asia allows Canadian producers to achieve better prices and expand their customer base.
The TMX and the 2021 startup of Enbridge’s Line 3 have temporarily removed pipeline capacity constraints that have long hampered the oil sands industry. This improvement allows producers to more efficiently transport their heavy oil to market, increasing the potential for higher profits. The expanded pipeline capacity may enable oil sands companies to boost production, as they will have greater access to transportation infrastructure. For example, Imperial Oil expects to finish a 15,000 bpd expansion of its Cold Lake facility ahead of schedule, and the company is considering restarting paused expansion projects in the area as pipeline constraints ease.
The TMX is expected to benefit even those producers that do not directly ship on the line. As volumes shift to the Trans Mountain pipeline, capacity on other existing infrastructure may be freed up, leading to better pricing differentials and market dynamics for Western Canadian crude.
The TMX is set to transform the Canadian crude oil transportation landscape, with implications for Enbridge’s Mainline and Keystone pipelines, which serve refineries such as the BP Whiting Refinery in Indiana and the Marathon Petroleum Refinery in Detroit. As the expanded Trans Mountain pipeline enables higher export volumes and access to new markets in Asia, a shift in the utilization of Enbridge’s Mainline and Keystone pipelines is expected. This may lead to reduced oil flow toward Midwest refineries, as producers take advantage of diversified export opportunities provided by the Trans Mountain pipeline.
Reducing the gap
Increasing interest in Canadian crude will result in a narrower price gap between WCS and WTI crude. As the price difference between WCS and WTI decreases, Canadian oil producers will receive higher prices for their product, leading to increased revenues and improved profitability.
Many U.S. refineries are designed to process heavier varieties of crude, such as WCS. As the price gap narrows, these refineries will face higher costs for importing Canadian crude, which could impact their profitability. As Canadian crude becomes more expensive due to the narrowing price gap, U.S. refineries may seek alternative sources of heavy crude, such as from Latin America. The narrowed price gap between WCS and WTI might influence decisions regarding developing or expanding pipelines and other transportation infrastructure, as the economic incentives to transport Canadian crude to U.S. markets change. Finally, with a smaller price difference between WCS and WTI, traders may adjust their strategies, potentially leading to changes in oil trading patterns and shifts in the global oil market dynamics.
The shift towards the BC export market and the resulting narrower price gap between WCS and WTI crude will have far-reaching consequences, impacting refineries in the United States and beyond. As the market adapts to the new demand for Canadian crude, industry players will need to adjust their strategies and operations to remain competitive in the ever-evolving energy landscape. The TMX heralds a new era for Canadian oil exports, with broad implications for the sector and the global energy market at large.
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