Key Points:
- Trans Mountain pipeline expansion (TMX) is expected to triple capacity, reducing crude differentials.
- TMX expansion is set to increase total takeaway capacity but may be insufficient to accommodate the growing supply.
- Canadian producers are expected to add significant supply, potentially leading to renewed bottlenecks.
- Uncertainties remain regarding the utilization of TMX capacity and future pipeline development prospects.
Canadian oil producers are looking forward to a significant reduction in the discount on their crude as the Trans Mountain pipeline expansion (TMX) nears completion this year. However, the relief may be short-lived as the rapid rise in oil sands production threatens to exceed the country’s pipeline capacity in the coming years.
Once operational, the TMX project will triple the existing capacity to Canada’s Pacific Coast, allowing for an additional shipment of 590,000 barrels per day (bpd) of crude. This expansion, valued at C$30.9 billion ($22.8 billion), is expected to narrow Canadian heavy crude differentials to around $10-$12 a barrel under U.S. benchmark crude, significantly reducing the current discount of over $19 a barrel.
Analysts anticipate the TMX expansion will increase Canada’s total takeaway capacity to 5.2 million bpd, leaving approximately 220,000 bpd of unused space on pipelines. However, the rapid increase in oil sands production could lead to a shortage of pipeline capacity in less than two years, raising concerns among market players.
According to estimates by industry experts, Canadian producers are expected to add up to 500,000 bpd of supply in the next two years alone. This prospect of increased supply could result in renewed bottlenecks and widen the discount on Canadian crude, potentially deterring long-term investments in further production growth.
While the rising production poses challenges, existing pipeline operators stand to benefit from strong demand for capacity. Enbridge Inc. indicated that it may continue to ration space on its Mainline pipeline system even after the TMX expansion, ensuring steady volumes and revenues.
Most of the new capacity on TMX will cater to heavy crude producers, offering them the flexibility to access markets in the U.S. West Coast, Asia, Midwest, and Gulf Coast. This flexibility is expected to enhance the value of heavy crude for the entire Canadian oil industry.
Despite the potential benefits, uncertainties remain regarding utilizing TMX’s capacity. Factors such as pricing differentials and market demand will influence producers’ decisions on route selection, with some barrels likely to be directed toward the Gulf Coast for higher pricing.
TMX is anticipated to be Canada’s last major export pipeline due to regulatory hurdles, environmental opposition, and evolving oil demand dynamics. The completion of TMX underscores the importance of infrastructure investments in supporting the Canadian oil industry’s growth and competitiveness.
