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Desulphurisation capacity constraints will limit TMX flows to US West Coast

After numerous delays, cost overruns and regulatory wrangles, the Trans Mountain Pipeline Expansion (TMX) is finally poised to commence operation in May.  It will provide an additional 590 kbpd of egress for Western Canadian crude, paralleling the existing 300 kbpd Trans Mountain Pipeline (TMP) from Alberta to British Columbia.  This is a welcome a relief for Canadian producers, who have long sought an alternative to the US Midwest and US Gulf Coast refiners that dominate current exports.

Even before the first barrel flows, the start-up of TMX has prompted a vigorous debate in the tanker markets about where the crude will land.  Given the heavy/sour quality of TMX crude, the only viable destinations are those refineries with coking and other resid upgrading capacity, and even these will need to contend with the crude’s high acidity.  As a practical matter, this means China and the US West Coast (USWC), although media coverage has tilted towards the USWC as the most frequently-mentioned sure thing.  Refinery desulphurisation constraints, however, should limit the amount of TMX crude that USWC refiners can take, sending the balance to Asia.

• Declining regional crude production is a key structural issue — The loss of Alaskan and Californian crude production has boosted USWC (PADD5) crude import demand, but has also created crude quality issues for refiners.
• PADD5 refining is heterogenous, with five disparate regions — Their differing refinery configurations drive varied crude selection criteria and import patterns. For TMX crude, there is no “PADD5” as a destination.
• TMX is an LA Story — In fact, the coking refineries of the Los Angeles (LA) area are the only meaningful destination for TMX heavy/sour crude grades within PADD5, and their constraints will determine the volume of TMX imports.
• Additional vac resid from TMX crude is welcome; its sulphur, not so much — High vacuum residuum (vac resid) yields from TMX grades will help ease a growing shortfall for coker feed, but their 3.75% sulphur content is a problem.
• Desulphurisation constraints should limit TMX imports to 130 kbpd — Lower-sulphur Ecuadorian and Colombian heavy grades remain necessary, but 3% sulphur Basrah Medium may become a high-sulphur extravagance.
• New short-haul imports to have a predictable impact on PADD5 tonne-mile demand — Emergence of TMX crude and displacement of medium/sour Mideast grades would slice PADD5 crude tonne-miles by 15% through 2027.

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