Western Canada’s crude oil industry is preparing to embrace global markets, a turn that could leave the U.S. industry fighting for supply in 2024.

After years of delay and cost overruns, the Trans Mountain Pipeline expansion (TMX) is nearing completion. The 715-mile looping of Trans Mountain, Canada’s only liquids pipeline to the Pacific Coast, through Alberta and British Columbia will nearly triple maritime access for Western Canadian producers, increasing from 300,000 bbl/d to 890,000 bbl/d.

The estimated CA$31 billion expansion will have consequences for markets across North America, according to East Daley Analytics’ Crude Hub Model, affecting crude oil flows to refiners and terminal operators from Louisiana to the Midwest. We believe the project will be the most transformative for the U.S. market since the 2019-2021 period, when the industry built 4 MMbbl/d of new pipelines out of the Permian Basin.

Owned by the federal government, Trans Mountain is targeting the start-up of the TMX expansion in first-quarter 2024. A recent dispute over a 0.8-mile section of the route through British Columbia had threatened that timeline. Citing technical challenges, Trans Mountain had sought permission from the Canada Energy Regulator to move the pipeline route and use open-trench and horizontal drilling for construction, rather than a trenchless method involving micro-tunneling.

Canada's crude takeaway chart
Crude oil flows and pipeline egress capacity from Western Canada. (Source: East Daley Analytics)

The Stk'emlupsemc Te Secwepemc Nation (SSN) had contested the request, citing surface disturbances on the land native to the First Nation. However, the CER granted the Trans Mountain request in late September, avoiding a potentially long delay. 

Once TMX starts flowing from Edmonton, East Daley anticipates about 470,000 bbl/d of heavy Canadian sour production will be immediately displaced on competing pipelines like Enbridge’s Mainline and Express pipelines and TC Energy’s Keystone pipeline. Rail terminals, which predominantly export heavy sour production into the Midwest (PADD 2), also will see volumes decline, according to EDA’s Crude Hub Model.

Another group that will feel the effects is Gulf Coast refiners, particularly buyers in the St. James, Louisiana, market. Western Canada oil production currently moves south via ENB’s Mainline and Southern Access Extension pipelines, then to the Capline Pipeline (Plains All American Pipeline, 54%; Marathon Petroleum, 33%; BP 13% and terminates at St. James. Since its reversal in December 2021, Capline has become a key supplier of cheap barrels for Louisiana refiners priced at Western Canadian Select. Barrels from Canada compete with higher-priced heavy sour barrels produced from the Gulf of Mexico.

Historical and Projected Flows on Capline Pipeline. (Source: East Daley Analytics, Crude Hub Model)

Recent data from Louisiana regulators show Capline’s imports from Patoka, Ill., averaged over 200,000 bbl/d in the spring, or more than double the pipeline’s firm commitments of about 102,000 bbl/d. Flows from Patoka remained strong at about 150,000 bbl/d in August. The data supports comments from Plains All American that Capline has become a preferred shipping route since the reversal. However, East Daley thinks there is near-term risk to half these volumes, particularly to flows over the commitment level.

According to financials filed with the Federal Energy Regulatory Commission (FERC) and EDA’s asset-level Capline Pipeline model, Capline will generate about $170 million in EBITDA for 2023. Assuming long-haul shipments of Canadian crude fall back to commitment levels (102,000 bbl/d) in 2024, this would pose downside risk to earnings of about $64 million for the pipeline. As the majority 54% owner in Capline, Plains All American Pipeline would be subject to the biggest earnings impact of about $35MM, net to its 54% share.

TMX will open new competition for Canadian barrels, and Lower 48 refiners using Western Canadian Select as a feedstock will need to pay more to continue attracting supply. East Daley estimates the Western Canadian Select discount to WTI could fall below $10/bbl once TMX is online. Alternatively, refiners could replace those barrels with heavy sours from the Gulf of Mexico, which are priced at a premium. In either scenario, U.S. crude oil exports are likely to take a hit until Canadian producers can expand oil output to fill the new export capacity.