The much-anticipated expansion of the Trans Mountain pipeline (TMX) was supposed to be a game-changer for U.S. West Coast refiners. By tripling the pipeline's capacity from Alberta to Canada's Pacific Coast, TMX was expected to flood the U.S. West Coast with Canadian heavy crude, lowering input costs and boosting margins. But three months into its commercial operations, the impact has been far less than anticipated.
Instead of sending the bulk of its barrels south to the U.S., TMX has diverted about two-thirds of its output to Asia. This unexpected move has left West Coast refiners grappling with the same tightening margins they were hoping to avoid.
What Happened?
When TMX came online in May, the expectation was that it would provide West Coast refiners with a steady supply of lower-cost Canadian heavy crude. For companies like Phillips 66 and Marathon Petroleum, this seemed like a golden opportunity to displace more expensive imports from Latin America and the Middle East with Canadian barrels, thus cutting down on shipping costs and boosting margins. But reality has been far from this.
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The majority of TMX barrels have ended up in Asia, driven by strong demand from markets there. Phillips 66's Brian Mandell highlighted that this diversion was unexpected and has complicated their operations. Instead of benefiting from the anticipated 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, Reuters reported. Marathon and Valero experienced similar margin squeezes, with Marathon's margins dropping to $17.37 per barrel from $22.10, and Valero's by nearly 28% from last year.
Higher Margins Still Possible
The ripple effects of TMX's Asian detour are starting to be felt elsewhere. The influx of Canadian crude, although 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 dropped from around $90 per barrel in April to about $85 in July, as reported by General Index.
Marathon's Rick Hessling noted that this price drop is significant and could, in the long run, lead to reduced crude costs for West Coast refiners. However, this potential benefit remains theoretical for now, as refiners are still assessing 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.
The Long Road Ahead
While TMX has undeniably increased Canada's export capacity, it has yet to deliver the anticipated benefits to U.S. West Coast refiners. The focus on Asian markets, driven by higher prices and demand, has limited the crude available to U.S. refineries, which are now facing a more complex and competitive landscape.
In the near term, West Coast refiners may see some relief as the additional Canadian barrels begin to exert more pressure on ANS and other competing crudes. But the hoped-for margin boost from lower crude costs has not materialized yet, leaving refiners in a wait-and-see mode. They are carefully testing the waters with Canadian crude, trying to figure out the best blending strategies to maintain or improve their output without incurring additional costs.
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For now, the promise of TMX remains largely unfulfilled for U.S. West Coast refiners. The long-term impact of TMX 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 lucrative home in Asia?
By Julianne Geiger for Oilprice.com
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