West Coast refiners miss out on TMX pipeline growth as crude heads to Asia

The long-awaited expansion of the Trans Mountain (TMX) pipeline was supposed to be a game-changer for refiners on the US West Coast. By tripling the capacity of the pipeline from Alberta to Canada’s Pacific Coast, TMX was expected to flood the US West Coast with heavy Canadian crude, lowering input costs and boosting margins. But three months into its commercial operations, the impact was far less than anticipated.

Instead of sending most of its barrels south to the US, TMX diverted about two-thirds of its production to Asia. This unexpected move left West Coast refiners facing the same tightening margins they had hoped to avoid.

What happened?

When TMX went live in May, it was expected to provide West Coast refiners with a steady supply of Canadian heavy crude at lower prices. For companies like Phillips 66 and Marathon Petroleum, this looked like a golden opportunity to replace more expensive imports from Latin America and the Middle East with Canadian barrels, thereby reducing transportation costs and increasing margins. But the reality was far from that.

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Most of the TMX barrels ended up in Asia, driven by strong demand in the markets there. Phillips 66’s Brian Mandell pointed out that this diversion was unexpected and complicated their operations. Instead of benefiting from the anticipated influx of Canadian crude, Phillips 66 saw its margins slip to $10.01 a barrel in the second quarter, down from $15.32 a year earlier, Reuters reported. Marathon and Valero experienced similar margin squeezes, with Marathon’s margins falling to $17.37 a barrel from $22.10 and Valero’s down nearly 28% from last year.

Higher margins still possible

The ripple effects of TMX’s Asian detour are beginning to be felt elsewhere. The influx of Canadian crude, while not as strong as expected, has begun to put downward pressure on prices for Alaskan North Slope (ANS) crude, a staple for West Coast refiners. ANS prices fell from around $90 a barrel in April to around $85 in July, General Index reported.

Marathon’s Rick Hessling noted that this drop in prices is significant and could lead to lower crude oil costs for West Coast refiners in the long term. However, this potential benefit remains theoretical for now as refiners are still evaluating the compatibility of WCS with their existing operations. Refining Canadian crude requires precise blending to optimize yields, and this process could take months, if not longer.

Long road ahead

While TMX has undoubtedly increased Canada’s export capacity, it has yet to deliver the anticipated benefits to US West Coast refiners. The focus on Asian markets, driven by higher prices and demand, has limited the crude oil available to US refiners, who now face a more complex and competitive landscape.

In the near term, West Coast refiners could see some relief as additional Canadian barrels begin to put more pressure on ANS and other competing crudes. But the hoped-for margin boost from lower crude costs has yet to materialize, leaving refiners in wait-and-see mode. They are carefully testing Canadian crude waters, trying to discover the best blending strategies to maintain or improve their production without incurring additional costs.

For now, the promise of TMX remains largely unfulfilled for US West Coast refiners. TMX’s long-term impact on West Coast margins remains an open question. Will Canadian crude eventually become a mainstay in the refining mix or will it continue to find a more profitable home in Asia?

By Julianne Geiger for Oilprice.com

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