Canada's Trans Mountain Pipeline

Trans Mountain Pipeline: Canada’s Oil Export Revolution

In a transformative move for Canada’s oil sector, the nearing completion of the Trans Mountain pipeline expansion is poised to redefine the nation’s standing in the global market. This expansion, set to transport an additional 600,000 barrels of crude oil daily, equivalent to Azerbaijan’s daily output, will connect the vast oil sands of Canada to a Pacific Coast port.


For Canadian producers, this government-backed initiative offers a pivotal opportunity to diversify their export destinations, moving away from a heavy reliance on the US market and securing more favorable prices for their crude. On a broader scale, the Trans Mountain expansion presents a fresh supply of the heavy, high-demand oil needed by advanced refineries in India and China for transportation fuels and asphalt production.


Originally slated to commence operations in the first quarter of the upcoming year, technical complexities encountered during a 1.3-kilometer tunneling phase have prompted the company to seek modifications that could potentially delay the startup. This setback adds to a series of prior delays, accompanied by escalating costs, largely attributed to opposition from environmental groups and indigenous communities.


The Trans Mountain pipeline, spanning 715 miles, weaves through the sprawling pine-covered landscapes of the Canadian Rockies, linking landlocked Alberta to Vancouver on the west coast. The original pipeline, now 70 years old, has been the primary conduit of oil to refineries in British Columbia and Washington State. The twinning of this line is set to triple the current capacity, increasing from 300,000 to 890,000 barrels daily.


Since its initial approval seven years ago, the project has faced numerous hurdles, including opposition from environmental advocates concerned about heightened ship traffic’s impact on killer whales and indigenous communities apprehensive about potential land contamination.


Following a 2018 threat of cancellation by original owner Kinder Morgan Inc., Prime Minister Justin Trudeau intervened by purchasing the system for C$4.5 billion ($3.3 billion), preventing its abandonment. Subsequently, natural disasters, labor shortages, fatalities, and the Covid-19 pandemic have collectively quadrupled the project’s costs to nearly C$31 billion, leading to a two-year delay in its launch.


The ultimate destination for Trans Mountain’s crude remains uncertain. While initial intentions focused on supplying Asian markets, some experts suggest that the primary recipients may be the dozen refineries along the US Pacific Coast, owned by industry giants like Chevron Corp., BP Plc, and Marathon Petroleum Corp. These facilities currently rely heavily on feedstock from Saudi Arabia or Iraq, with a 30-day transit time, compared to just four days from Vancouver.


Wood Mackenzie Ltd.’s research director, John Coleman, emphasizes the US West Coast’s favorable fit for the majority of initial volumes. In the short term, penetrating the Asian market, already saturated with Russian oil, may pose a challenge. However, the Vancouver terminal’s capacity constraints may limit supertanker shipments, potentially altering the flow of oil within the US and impacting regions like the Midwest and Texas.


Ten prominent companies, including BP Plc and PetroChina Co., have committed to shipping approximately 710,000 barrels daily through Trans Mountain, accounting for 80% of its total capacity. This commitment is binding, necessitating payment regardless of usage, and could lead to a diversion of oil from pipelines lacking contractual space.


With the current tolls soaring due to construction overruns, the project’s original promise of providing a cost-effective route to Asian markets faces a hurdle. Companies, including Canadian Natural Resources Ltd., are advocating for regulatory assessment of these fees. The high tolls may deter uncommitted shippers, potentially resulting in less than 70% of the new capacity being effectively utilized.


In light of the developments regarding the Trans Mountain Pipeline, Canada’s oil sector, primarily concentrated in the remote northern Alberta oil sands, stands poised for expansion. The Trans Mountain project is set to exceed industry needs, catalyzing plans by companies like Canadian Natural and Cenovus Energy Inc. to ramp up production. According to the Canada Energy Regulator, Canada’s daily oil production could surge by over 900,000 barrels by the decade’s end.


As Trans Mountain Pipeline prepares to initiate service, the significant discounts that Canada’s oil currently endures are anticipated to narrow. The current $17 per barrel discount to benchmark US crude may dwindle to single digits, potentially reshaping pricing dynamics in the industry.


The Edmonton terminal in Alberta, where the pipeline originates, could emerge as a pivotal new pricing center for crude, underscoring the growing influence of Trans Mountain in Canadian exports.

Source: Bloomberg

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