By Nicole Jao
NEW YORK (Reuters) – Canada’s expanded Trans Mountain (TMX) oil pipeline, which commenced commercial operations in May, so far has had little impact on crude costs at refineries on the U.S. West Coast, according to companies operating there.
The expansion, which tripled pipeline capacity from Alberta to Canada’s Pacific Coast to 890,000 barrels per day (bpd), increased the access to Canadian heavy crude oil to West Coast refiners and opened up a new route to Asia.
U.S. West Coast refiners, which mainly import crude by ship, were expected to be among the main outlets for the Canadian barrels.
In the first three months since TMX began operations, however, most of the TMX barrels have been exported to markets in Asia, said Brian Mandell, executive vice president of marketing and commercial for Phillips 66 (NYSE:).
“About two-thirds of the incremental TMX barrels have been going to Asia, which has been a bit of a surprise for us,” Mandell said during a call with investors last month.
The Houston-based refiner said in April the access to lower-cost heavy barrels from Canada would help boost earnings in its refining operations on the West Coast, both in California and Washington.
Independent refiners are grappling with weaker-than-expected fuel demand, which dampened margins in the second quarter.
Phillips 66’s realized margins fell to $10.01 per barrel from $15.32 a year earlier. Marathon Petroleum (NYSE:)’s refining margins for the second quarter came in at $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.
Given that shipping barrels to Asia is logistically more complicated and costly compared with the readily available U.S. market, many investors believed the majority of TMX crude would head to West Coast first, said Scotiabank analyst Paul Cheng said in an interview.
“But it turned out that was not what happened,” he added.
The assumption was the fresh flow of crude oil would displace heavy oil imported to the West Coast from Latin America or the Middle East and allow refineries there to save on shipping costs, Cheng noted.
Many analysts had forecast the differential on Western Canada Select (WCS) versus would gradually narrow due to the additional export capacity offered by TMX. But the spare pipeline capacity failed to boost Canadian crude prices in first three months.
Marathon’s Los Angeles refinery, the largest on the West Coast with a capacity of 365,000 bpd, would be among the main destinations for TMX’s heavy sour crude grades.
Other facilities on West Coast, including Valero’s Benicia refinery and Chevron (NYSE:)’s El Segundo refinery, also take TMX crude.
The U.S. West Coast has around 2.5 million bpd of capacity, according to the Energy Information Administration (EIA).
ANS UNDER PRESSURE
Refiners could start seeing crude costs go down in the coming months as the incremental Canadian heavy barrels compete with Alaskan North Slope (ANS) and other crudes which are widely used by West Coast refiners, executives said.
“What has changed that is significant and quite helpful to us is as these incremental Canadian barrels have come into the market, it has put pressure on the ANS barrels,” said Marathon’s Chief Commercial Officer Rick Hessling.
Average ANS prices fell to the range of $85 per barrel from around $90 in April, according to data from General Index.
Lower ANS prices are anticipated to start cutting crude costs for West Coast refiners, said Gary Simmons, chief operating officer at Valero.
ANS and other crudes will continue to be part of the West Coast refinery slate as refiners are still testing whether running Canadian heavy sour crude will create issues or inefficiencies in their refining systems down the line.
“Over time as you test that grade, you will see what type of natural oils you need to use to blend (with Canadian heavy crude) so it gives you the best yield in your configuration,” said Scotiabank’s Cheng. “That process will take months.”