US West Coast refiners still await TMX margin growth By Reuters

By Nicole Jao

NEW YORK (Reuters) – Canada’s expanded Trans Mountain ( TMX ) oil pipeline, which began commercial operations in May, has so far had little impact on crude oil costs at U.S. West Coast refineries, according to companies that operate there .

The expansion, which tripled the capacity of the pipeline from Alberta to Canada’s Pacific Coast to 890,000 barrels per day (bpd), increased access for Canadian heavy crude to West Coast refineries and opened a new route to Asia.

Refineries on the U.S. West Coast, which mainly import crude oil by ship, were expected to be among the main waste for Canadian barrels.

In the first three months of TMX operations, however, most TMX barrels were exported to markets in Asia, said Brian Mandell, executive vice president of marketing and sales for Phillips 66 (NYSE: ).

“About two-thirds of the incremental TMX barrels went to Asia, which was a bit of a surprise to us,” Mandell said during a call with investors last month.

The Houston-based refiner said in April that access to lower-priced heavy barrels from Canada would help boost earnings at its West Coast refining operations in both California and Washington.

Independent refiners are facing weaker-than-expected demand for fuel, which squeezed margins in the second quarter.

Phillips 66’s realized margins fell to $10.01 a barrel from $15.32 a year earlier. Marathon Petroleum’s (NYSE: ) refining margins for the second quarter were $17.37 per barrel, compared with $22.10 per barrel a year ago. Valero Energy (NYSE: ) said its refining margins were nearly 28% lower than last year.

With shipping barrels to Asia more complicated and logistically expensive compared to the readily available U.S. market, many investors believed the majority of TMX crude would head to the West Coast first, said Scotiabank analyst Paul Cheng in an interview.

“But it turned out that wasn’t the case,” he added.

The fresh flow of crude was supposed to replace heavy oil imported to the West Coast from Latin America or the Middle East and allow refineries there to save on transportation costs, Cheng noted.

Many analysts had predicted that the gap between Western Canada Select (WCS) and would gradually narrow due to the additional export capacity provided by TMX. But the pipeline’s spare capacity failed to boost Canadian crude prices in the first three months.

The Marathon refinery in Los Angeles, the largest on the West Coast with a capacity of 365,000 bpd, would be among the main destinations for TMX’s sour crude.

Other West Coast facilities, including Valero’s Benicia refinery and Chevron (NYSE: ) El Segundo refinery, also takes TMX crude.

The US West Coast has a capacity of about 2.5 million bpd, according to the Energy Information Administration (EIA).

ANS UNDER PRESSURE

Refiners could begin to see crude oil costs fall in the coming months as Canadian heavy barrels compete with Alaskan North Slope (ANS) and other crudes that are widely used by West Coast refiners, executives said.

“What’s changed, which is significant and very helpful for us, is that as these incremental Canadian barrels have come into the market, they’ve put pressure on the ANS barrels,” said Rick Hessling, Marathon’s chief commercial officer.

Average ANS prices fell to the $85 per barrel range from around $90 in April, according to data from General Index.

Lower ANS prices are expected to begin reducing crude oil costs for West Coast refiners, said Gary Simmons, chief operating officer at Valero.

ANS and other crudes will continue to be on West Coast refiners’ slates as refiners are still testing whether tapping Canadian heavy crude will create problems or inefficiencies in their refining systems.

“Over time, as you test that grade, you’ll see what type of natural oils you need to use to blend (with Canadian heavy crude) to give you the best performance in your setup,” said Cheng from Scotiabank. “This process will take months.”