The expansion of the Trans Mountain pipeline (TMX) was eagerly anticipated by U.S. West Coast refiners. The pipeline, which was set to triple its capacity from Alberta to Canada’s Pacific Coast, was expected to deliver a significant amount of Canadian heavy crude to the U.S. West Coast. This increase in supply was hoped to reduce input costs and enhance profit margins for refiners. However, three months into its operation, the results have been disappointing.
Instead of sending most of its output south to the U.S., TMX has redirected about two-thirds of its shipments to Asia. This unexpected shift has left West Coast refiners facing the same tight margins they were trying to avoid.
What Went Wrong?
When TMX began operations in May, it was anticipated to provide a steady flow of lower-cost Canadian heavy crude to West Coast refiners. Companies like Phillips 66 and Marathon Petroleum saw this as an opportunity to replace more expensive imports from Latin America and the Middle East with Canadian crude, thus reducing shipping costs and increasing margins. However, this expectation has not materialized.
The majority of TMX’s output has gone to Asia due to high demand in those markets. Phillips 66’s Brian Mandell noted that this diversion was unforeseen and has complicated their operations. Instead of benefiting from the expected influx of Canadian crude, Phillips 66 saw its margins shrink to $10.01 per barrel in the second quarter, down from $15.32 a year earlier, according to Reuters. Marathon Petroleum and Valero also experienced margin squeezes, with Marathon’s margins falling to $17.37 per barrel from $22.10, and Valero’s dropping nearly 28% from last year.
Potential for Future Gains
The diversion of TMX’s barrels to Asia has had some indirect effects. The increased supply of Canadian crude, though less than anticipated, has begun to put downward pressure on the price of Alaskan North Slope (ANS) crude, which is a key input for West Coast refiners. ANS prices fell from around $90 per barrel in April to about $85 in July, as reported by General Index.
Marathon’s Rick Hessling observed that this price drop is significant and might eventually lead to lower crude costs for West Coast refiners. However, this potential benefit remains speculative for now. Refiners are still evaluating how to best blend Western Canadian Select (WCS) with their existing inputs. This process, which involves careful blending to maximize yields, could take several months.
The Road Ahead
While TMX has increased Canada’s export capacity, it has yet to deliver the expected benefits to U.S. West Coast refiners. The focus on Asian markets, driven by higher prices and demand, has constrained the supply available to U.S. refineries, making the refining environment more challenging.
In the short term, West Coast refiners might experience some relief as additional Canadian crude begins to affect ANS and other competing crudes. However, the anticipated margin improvement from lower crude costs has not yet been realized. Refiners are currently exploring how to integrate Canadian crude into their operations without incurring extra costs.
For now, the promised benefits of TMX remain largely unfulfilled for U.S. West Coast refiners. The long-term impact of TMX on West Coast refining margins is still uncertain. Whether Canadian crude will eventually become a key component of the refining mix or continue to be diverted to more lucrative Asian markets remains to be seen.