Western Canadian crude on a roll
As TMX pipeline start-up provides a new outlet for Canadian crude exports, we explore what it means for crude flows and freight on the West Coast.
Trans Mountain Expansion (TMX) has been the buzz over the past quarter here in North America and for the right reasons. Since its start-up in May, the pipeline provided a new outlet for Western Canadian producers to put their barrels on the water – they had to rely on the US Gulf Coast to do so earlier. But is all going as well as it seems or are rougher waters ahead?
TMX exports remain in the limelight
This pipeline wasn’t without its own challenges, facing delays and cost overruns before finally starting up in May this year. At that time we did a detailed investigation into the challenges this pipeline faces in terms of port and terminal infrastructure and how much crude is expected to be exported from Vancouver in an earlier blog. So we won’t go over these details again.
Seaborne Western Canadian crude exports from Vancouver by destination country vs exports from the USGC (kbd)
We shall discuss the positives that have taken place since this pipeline started and the biggest is actually the amount of crude exports that we have seen over the past four months. Preliminary data for October (days 1-15) suggests exports are crossing the 400kbd mark, after a small decline in September. These volumes have been supported by US West Coast refiners taking in more Canadian crude, more than double they have processed historically. The short haul nature of the voyages has kept PADD 5 buyers interested. What it has also managed to do is reduce the apportionment issues faced by other long haul pipelines such as the Enbridge mainline system and the Keystone pipeline, which were the earlier outlet to bring Western Canadian crude to the export markets of the US Gulf Coast.
If we compare these Vancouver exports with Canadian crude exports from the USGC as seen in the chart above, a clear shift in flows to Vancouver is visible. Especially barrels going to the Far East, notably China, have switched the outlet to the Pacific coast. Spanish refiners still continue to import Canadian heavy sour barrels from the Gulf Coast and so does India’s Reliance. The latter buyer did load a VLCC from the West Coast but have since returned to buying from the US Gulf Coast. The reason behind this is mainly the transportation costs – which includes the pipeline as well as the vessel freight costs.
From a pipeline tariff perspective, the delays and cost overruns have meant that the TMX pipeline is only slightly cheaper to the Enbridge mainline when it comes to shipping crude from Alberta to the export terminals. With proposals to increase the TMX tariff further to recover the capex, buyers might shift back to the USGC Coast route. And then there is the seaborne freight element which we shall discuss in the next section.
Aframax voyages increase as a result
Vancouver-origin crude voyages by Aframax voyage destination (no. of voyages)
Focussing on freight, the start-up of TMX has led to an increase in Aframax voyages from Vancouver – as that is the only vessel class the Westridge terminal can handle. This has also led to the development of a dedicated pool of Aframaxes moving into the Americas West Coast from Asia to specifically cater to these growing exports. Then there is also the question of STS transfers on to VLCCs, which is only possible in the Pacific Lightering Zone off Los Angeles, California. This adds further costs in shipping to Asia and might also be the reason behind Indian buyers sticking to the Gulf Coast.
Then you might ask, why are East Asian buyers still loading cargoes from Vancouver. Chinese buyers have also moved away from loading VLCCs after experimenting in June/July and now mainly utilize Aframaxes for voyages to East Asia and ballasting back to Vancouver. We wonder whether some of these movements are just materializing due to long term contracts on the pipeline (which are generally accompanied by take or pay agreements) and Aframax time charters. Some re-evaluations of the economics may not be favorable.
Chinese demand slowdown could spoil the party
Now let us address the elephant, or rather the dragon in the room which is Chinese demand. October imports of crude into China are expected to remain below the 10mbd mark. Imports have lagged for most part of this year compared to 2023, raising pronounced concerns about underlying demand. 2025 demand forecasts from IEA, OPEC and the US EIA also seem to paint a bearish picture for Chinese demand.
PetroChina which was a committed shipper on the TMX pipeline has assigned its firm contracts to another entity and is no longer a committed shipper (Bloomberg). Demand concerns along with high costs of shipping from Vancouver might have been behind this decision. Some cargoes have also been resold by Chinese offtakers to South Korea and Brunei, a pattern that could be repeated.
In the short term, there may still be more potential for US West Coast demand, especially into the peak winter season. But Chinese demand may remain lackluster, both on limited domestic demand and inferior shipping economics. And the persistence of refineries on the US West Coast is also not a given, as illustrated by the fresh announcement of P66 to shut down its Los Angeles refinery at the end of next year.
