TMX Is Coming And What It Means For Our Heavy Oil Producers
Note: Dollar references are to Canadian dollars unless otherwise specified.
At long last, the Trans Mountain pipeline expansion (TMX) is nearing the finish line. On January 12, the Canada Energy Regulator approved a request for a change in the construction that will allow the pipeline’s developer to complete the project.
The project has faced a litany of challenges since the Canadian government bought it from Kinder Morgan in 2018, ostensibly to ensure its completion. A partial list includes successive regulatory hearings, numerous court decisions, hundreds of compliance reports, changes of regulators from the National Energy Board to Canada Energy Regulator, different conditions imposed by different regulators, unexpected engineering challenges and snafus, route changes, Trans Mountain’s CEO removal, and internal Trans Mountain issues.
The constant setbacks caused the project’s cost to soar from Kinder Morgan’s initial $7.4 billion estimate in 2017 to what is likely to be more than the Canadian government’s most recent estimate of $30.9 billion.
TMX’s developers expect the project to be completed by the end of March. Shortly thereafter, crude oil linefill is likely to take three to four months, at which point the pipeline will start delivering crude to the West Coast of Canada for export.
The price difference between the Western Canada Select (WCS) heavy oil grade and WTI—known as the WCS-WTI differential—will begin to narrow once linefill begins. We assume the differential will fall from our long-term expectation of $15 per barrel to $12 per barrel. Heavy oil differentials are likely to remain lower and more stable than they have been for years until Western Canadian production increases to the level at which pipeline egress nears capacity.