The Crude Report: The TMX series - Canadian heavy crude flows hit the Pacific markets

The new 590,000 b/d Trans Mountain Expansion (TMX) pipeline has the potential to shift export patterns for heavy sour Canadian crude away from the US Gulf coast by adding new capacity out of Vancouver’s Westridge terminal, but some obstacles persist. Join Argus’ crude and LPG editorial manager Gus Vasquez and deputy editor Amanda Hilow in discussing the new pipeline, its purpose and early trade patterns surrounding its deliveries.

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Key topics covered in the podcast:

  • Canadian crude buyers seek a more efficient route to market
  • Lingering logistical constraints after the commencement of TMX
  • Crude grades being delivered via the pipeline



Amanda: Welcome to the Argus "Crude Report, the TMX series," a podcast dedicated to Canadian heavy crude flows now hitting Pacific markets. In this series, we'll delve into the newly commenced Trans Mountain Expansion Pipeline, or TMX, its evolution, and the impact of the pipeline's operation on global markets. My name is Amanda Hilow. I'm the deputy editor of the Americas Crude Markets based in Houston, Texas. And I'm joined by our Editorial Manager, Gus Vasquez. Gus, this is a relatively large line with a capacity of 590,000 barrels per day. Why don't we go ahead and start with why this line was needed in the first place considering all of the capacity that is already in place out of Canada?

Gus: I think that's a great place to start actually because perhaps our friends in Europe and Asia don't follow pipeline markets nearly as closely as we do here in the U.S. And what we have known here for a long time is that there is a bottleneck in Canada that is preventing the crude from leaving as quickly as they would like. So, what you're going to have with this new line is really increased efficiency. At least that's the goal, right? We're trying to get Canadian crude exports out faster and in bigger volumes. So, up to now, and this hasn't changed in probably over a decade, there hasn't been any real increase in the capacity to export crude out of Canada. And the way that you would do it is you would move the crude down from Hardisty to Cushing, from Cushing to the Gulf Coast. There, some refiners along the coast would buy it. And if there was anything left after that, that would then be exported to another destination, be it Asia or India or whatever. But it was just a really long way to go about it. And especially if you were trying to go West into the Asian markets, going to the Gulf Coast first was kind of counterintuitive and just added a lot of time to that process. So, what you're doing here is you're trying to release this bottleneck in the first place, but also by going directly West onto the Western shore of Canada, you can then go straight from there to Asia, you can go into the West Coast, California, and Washington state. You could go down to Panama. It just gives you optionality and it is a much faster way to get the crude on the Western side of Canada.

Amanda: Now, some people have been expressing concerns that this could create a shortage of heavy Canadian crude at the U.S. Gulf Coast. I think it's a good idea we go ahead and nip this in the bud as a misconception. Like you said, there's been this large bottleneck of crude coming out of Canada that has caused discounts to Gulf Coast rates of up to $20 per barrel for the heavy grades. Now that this flow is available to Vancouver and out that way, I personally believe that it's just simply going to alleviate the bottleneck. I don't see a disruption to Gulf Coast refiners as a direct result of this pipeline. And additionally, from what we've gathered in the industry so far, it seems like Vancouver exports may not be quite as efficient as the market had been hoping for. What do you think, Gus?

Gus: Yeah, I think that's fair to say that. Even the most optimistic folks don't really see a big drop off in availability of Canadian crude at the Gulf Coast. Now, you did mention this idea of not being quite as efficient as expected. So, that is a conversation that needs to happen because I don't think anybody doubts that the line can run at almost 600,000 barrels per day. That's not an issue. The issue is once you get to the terminal, and then you have to transfer those barrels from a pipeline to a ship. Now, as part of this project, they did expand the terminal at Burnaby, and that went from having one berth to having three now where you can load three ships at the same time. But what has not changed is really the amount of storage and there's less than six million barrels of storage available at the terminal. If you think in terms of the line, that means that that's about 10 days worth of flow through the line would fill that storage. Anybody who's in shipping will tell you that you need storage to have flexibility because things happen when you do shipping. And this terminal is going to be no different. In fact, it's actually one of the trickier ones because the terminal is in a channel, so it's not open water, and that means that there are things to consider like traffic on the channel, which there already is. There's quite a bit of shipping that goes through there. You have to consider things like navigation. Not everybody can navigate these channels. It can get quite narrow. So, you have to have a special crew to kind of guide you through. You have to have tugboats. You have other things. Also, you are very far north. So, the weather is going to play into that. The swells or, I guess, the difference between the low and high tide can be up to 15 feet, 16 feet to put that in context that the Gulf Coast is only 2 feet. Things like that are going to make your shipping trickier. Because of the draft of that channel, you can only load Aframaxes partially up to 550,000 barrels. So, there are constraints that are going to make it hard to get a full 600,000 flowing through the pipe every day. In order to do that, you would need about 34 Aframaxes per month. And people in shipping just don't think that that's realistic given the conditions that they will have to deal with.

Amanda: The numbers I've been hearing are much closer to maybe 20 cargoes per month. There were just a few sold for May loading. We had the first one actually last week. It started on the 20th of May. But for June, we're hearing between 20 to 22 are expected to load. However, even that may be a little bit optimistic. For this market to work the way that it was intended to work, the price at Vancouver is going to need to be competitive to the price at the Gulf Coast because the industry is already used to taking these heavy-sour Canadian grades at the Gulf Coast. For them to justify taking a smaller quantity and more sporadically out of Vancouver, it's going to need to be cheaper out of Vancouver. However, that's just not what we've been seeing so far, even despite its closer proximity to its origin point. The two most active grades I've been seeing trade out of the Vancouver area so far are Access Western Blend and Cold Lake. These grades are also very actively traded at the U.S. Gulf Coast. I've been doing a price analysis between the two markets, and it's looking like AWB and Cold Lake are averaging about parity to the FOB Gulf Coast rate so far. That average goes back until about the 10th of April when we first started really hearing these cargoes trade actively. I even have one Chinese refiner that I've been talking to lately that has said that his Canadian purchases of crude are more frequently bought at the U.S. Gulf Coast for August delivery, which is what's selling now. Whereas for July delivery, the early TMX cargoes, those were purchased out of Vancouver. Yet you have your sellers telling us that the early cargoes out of Vancouver, a lot of that is trading for bragging rights. So, the seller or the buyer might be willing to take a different price that's not necessarily competitive just to be the first to take it, whereas now we're starting to see the real market fundamentals come into play. And due to the extensive costs that we have to ship on this pipeline from Edmonton, it's not necessarily the most economic. So, it'll be interesting to see if we do still hit that 20 cargo per month count that some people are expecting.

Gus: Yes, definitely a lot of questions remain as we start to see operations, etc. So, there's definitely a lot more to talk about, and we will want to do that. But for today, I think we have covered quite a bit of information. So, if you would like to know more about Argus' view on TMX, we are planning on releasing a new podcast probably in a couple of weeks. If you are looking for more in-depth daily coverage of what's going on in the Americas Crude Oil markets generally, subscribing to Argus Crude is probably your best bet. You will gain access to daily price information for the crude assessments globally, including pipeline assessments like WTI at Houston. Plus, you'll get exclusive insights on TMX, and perhaps you'll be able to brag as well. So, don't miss out on this valuable resource. Thanks for tuning in, and we look forward to having you with us on the next episode of "The Crude Report, TMX series."