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Trans mountain expansion

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Drivers in the Midwest may soon have to pay a bit more at the pump. The reason? Cheap Canadian oil will soon have a new set of buyers. 

For years, Canada’s booming oil fields have had few choices but to funnel the country’s thick, tar-like crude oil through pipelines snaking through the Midwest to the Gulf Coast. That has pushed down prices paid by many U.S. refiners and, in turn, gas stations and airports from Minneapolis to Chicago to Detroit.

Those days are numbered. Canadian oil companies will soon have the option to ship crude through a long-delayed, 715-mile pipeline expansion to the Pacific Ocean. That will allow traders to sell more oil to the U.S. West Coast and to fast-growing Asian economies.

The Trans Mountain expansion, which will nearly triple the capacity of an existing pipeline to 890,000 barrels a day, promises to give Canadian companies more pricing power and boost the country’s position as a global energy powerhouse. 

“This is a big deal that’s been 10 years in coming,” said Kevin Birn, an analyst with S&P Global Commodity Insights. “It does allow Canada, for the first time in its history, as the fourth-largest oil producer in the world, direct access to international markets.”

That could come at the expense of Canada’s largest trading partner. Americans guzzled Canadian oil even as U.S. crude output ballooned in recent years, turning Canada into an export juggernaut. Imports from north of the border surpassed 4 million barrels a day some months last year, U.S. officials say, nearly two-thirds of total shipments.

Those supplies have come at a bargain, as the price of Canadian oil accounts for transport costs, differences in crude quality and a limited pool of buyers. Benchmark Canadian crude cost about $18 a barrel less than its U.S. counterpart Tuesday. That differential reached $47 in 2018, forcing the government of Alberta to curtail production to support prices. 

Traders are already anticipating markdowns to shrink by a few dollars a barrel. Forward Western Canadian Select discounts for the second quarter traded at $13.80 a barrel Monday, according to Platts, part of S&P Global.

“That’s a huge hit,” said Kristine Oleszek, an analyst at East Daley Analytics, adding that the total annual impact on the U.S. could reach billions of dollars. “The refiners aren’t going to eat that themselves. It’s going to be passed along [to consumers].” 

The project cleared its last major regulatory hurdle in mid-January, and workers are laying the final stretch of pipe that will carry Canadian crude from Alberta’s oil sands to the Pacific. Traders are now trying to time the startup of the project, which faces last-minute construction challenges before it can shake up the North American market.

Canadian companies have ramped up production in anticipation that more supplies may soon reach an export terminal and pipeline hookups to Washington state. November output in the prolific oil-producing province of Alberta rose to a record 4.16 million barrels a day, according to government figures.

Kinder Morgan initially proposed an expanded pipeline in 2013, expecting to spend the equivalent of $4 billion to twin a pipeline that now winds southwest from Edmonton to the Vancouver suburb of Burnaby, British Columbia. But regulatory delays and opposition from environmentalists frustrated the Houston-based company so much that it sold the project to the Canadian government in 2018 for $3.5 billion. 

Prime Minister Justin Trudeau vowed to finish the expansion, calling it “vital” to Canada’s strategic interests. The pipeline in January appeared to have cleared its last obstacle when the Canada Energy Regulator approved a change in the pipeline’s thickness during the final stretch of drilling.

Construction snarls, regulatory hurdles and court cases have run up government spending on the project to about $25 billion, according to the latest estimates.

The project is meant to boost a Canadian industry whose growth over the past 15 years in many ways reflects that of its hulking counterpart down south. While America’s hottest oil field in West Texas and New Mexico pumps out light, sweet crude, Alberta’s oil sands dish out heavier supplies that are generally costlier to refine. 

Companies across much of the U.S., including some owned by Canadian companies, have responded by adding capacity or honing operations to turn Canadian crude into fuel, chemicals or asphalt. The Midwest, the country’s largest importing region, hasn’t received foreign shipments from anywhere but Canada in years, according to the Energy Information Administration.

“The Midwest is held captive by Canadian crude oil,” said Martin King, an analyst at RBN Energy. Farther south, where refineries and export terminals dot the shores of Texas and Louisiana, traders have more alternatives in the form of heavier crude produced in Mexico or Venezuela. 

U.S. refining officials have played down the impact on American consumers and the domestic fuel-making industry, saying the sector can tweak plant-by-plant operations based on what crude is available. But some have warned that it could siphon off supplies from the arcane business of sending tankers-full of Canadian crude to countries such as China. 

North of the border, the project represents a much-needed correction for energy companies and investors after years of discounted commodity prices. Until those companies’ production levels outstrip Trans Mountains’ expanded capacity, “they’re going to have the leverage,” said Jacques Rousseau, an analyst at ClearView Energy Partners.

Assuming that crude actually begins flowing. On Monday, Trans Mountain said drilling issues in the final section of construction would delay the project’s startup to the second quarter. Canadian oil prices fell 5.5% that day in response.

Write to David Uberti at [e-mail] and Vipal Monga at [e-mail]

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