Trans Mountain Pipeline – An Aframax Opportunity?

In 2018, the government bought the troubled Trans Mountain pipeline project from Kinder Morgan with an intention to complete it and sell it after its completion.

Canadian Trans Mountain Pipeline

The project has been facing strong environmental opposition and many regulatory obstacles which influenced the delays and raised the total costs. The project was proposed more than a decade ago, and the total cost ballooned to more than 4 times the original projections, coming in at around C$30 billion, while the pipeline is estimated to be worth around C$15 billion once completed, according to a recent report in Reuters. The Canadian Trans Mountain Pipeline expansion project received further financial support from the Canadian government recently, and considering the total cost of the projects, the government’s eagerness to finalise the project sooner rather than later, does not come as a surprise. Current expectations are that the pipeline expansion may be finished during Q1 next year.

Once the expansion is completed the pipeline capacity is expected to almost triple from the current capacity of around 300 kb/d to around 890 kb/d, adding further 590 kb/d. The current pipeline carries crude oil and products from Edmonton to the West Coast of Canada (Vancouver), where the crude oil is used for refining in British Columbia and Washington States. Some is also exported from Westridge Terminal down the coast to California and, occasionally, to Asia. The expansion project involves twinning the current pipeline infrastructure, but also adding further storage and export facilities, including building new pump stations, storage tanks and terminals. An additional 14 storage tanks will be built at the Burnaby Terminal, which currently has 13 tanks, with a current combined capacity of 1.6mbbls. The Burnaby Terminal is used as a distribution point for crude going to Parkland Refinery and Westridge Marine Terminal. Westridge Terminal is also undergoing an expansion, with three additional berths being built, and a plan to remove the old berth, which effectively means that the Terminal will be able to triple its current capacity for Aframax loadings. 

Current Rail infrastructure capacity in Canada is estimated to be able to carry around 1 mb/d, and it is estimated that around 148 kb/d of crude oil mainly from West Canada is exported by rail infrastructure to the USA, as per 2021 estimates. On top of that around 48 kb/d has been shipped through Westridge so far this year. This reflected on some stronger Aframax activity compared to last year, as 12 Aframaxes loaded in the first 5 months of the year, compared to 19 loaded for the whole of 2022. The majority of cargoes have been destined for the USA discharging ports down the Californian coast with one cargo scheduled for China that loaded at the beginning of June. Unlocking the Canadian oil sands for seaborne exports is one of the strategic reasons for the whole expansion project, and its completion will mean that Canada will be able to export considerably more crude oil from West Canada, targeting markets farther afield in Asia.

The predominant grade produced and exported is Cold Lake, which is expected to find its way to refining systems that are in need of heavy and sour crude oil grades and will aim to replace similar grades from other regions. With regards to US crude oil seaborne imports, Latin American grades seem more likely to be replaced, with Mexican Maya grade being an obvious candidate. 

Last year Mexico exported around 1.8 million tonnes of crude to the Californian coast, with a significant amount of the crude being Maya graded crude, mainly exported from Salina Cruz. Furthermore, some of the heavy and sour crude oil exports from the Middle East may be affected as US refineries in Midwest and US Gulf are still configured for heavy crude oil processing, and most of the US crude production is light crude oil grades.  

The largest amount of Canadian crude oil exports to China via Westridge Terminal was recorded during 2018, when total annual exports averaged around 60 kb/d, with 30 Aframax cargoes altogether for the year, of which 12 were destined to China during the second half of the year almost exclusively, averaging 2 cargoes per month.

Clearly, the Canadian crude has potential to replace some of the heavy crude oil imports into Asia as well. The distance travelled to some of the North China ports, Japan and South Korea from Vancouver does not differ much from the distance travelled from some of the Middle Eastern ports, which makes Canadian exports economically competitive. However, due to vessel size limitation, meaning that the largest vessel loaded is an Aframax tanker, the Westridge Terminal may face hard competition against some of the larger fleet counterparts such as VLCC’s and Suezmaxes, with clear economies of scale advantage, making other exporting regions more competitive in pricing. The dynamic may be somewhat changed with eventual lifting of Venezuela sanctions, as that would potentially allow for Venezuelan heavy grades to target closer markets such as the USA, while some exports to Asia might be replaced by the Canadian exports. 

It is important to note that the Aframax earnings have been outperforming their larger fleet counterparts in terms of freight rates for the last 18 – 24 months, mainly because of the crude oil trade dislocations and the sector involvement into the Russian related trades that are commanding premiums. The fleet growth for Aframaxes is expected to be very low over the next couple of years, especially considering the ageing of this segment potentially offering demolition candidates, which is further expected to hinder the fleet availability. 

Rival pipeline operators, such as Enridge the operator of Mainline, the pipeline that moves oil and refined products from West Canada to East Coast Canada and US Midwest, seem to be intensifying competition in recent days, reaching fresh agreements with shippers on lower tolls. Finally, the rail infrastructure is certainly a more expensive way to move Canada crude oil exports to the USA, however, it is important to note that it is a flexible way of transportation, that at one point averaged north of 400 kb/d of exports per month, which was compelled by strong differential between WTI and Canadian crude oil prices. (Although the 10-year average is closer to 150 kb/d.)

Without any doubt, with the further terminal upgrades at the Westridge Terminal, Vancouver has the potential to significantly push seaborne exports, both to the USA and Far Eastern refiners in need for heavy and sour crude oil grades, which can see the traffic from the terminal multiply. However, the amount of crude exports will be influenced by economics of the freight market and the fleet availability at a time of tightening fleet supply and competition with alternative exporting locations, pipeline systems and means of transport.