Oil refiners raise quality concerns over TMX pipeline shipments

U.S. oil refiners and West Coast traders are flagging concerns about the quality of crude shipped on thenewly completed Trans Mountainpipeline expansion (TMX), warning that high vapour pressure and acidity limits could deter purchases of Canadian heavy barrels.

The $34 billion expansion started operations last month and has nearlytripled shipping capacityto Canada's Pacific Coast to 890,000 barrels per day (bpd).

The roughly 2.5 million bpd U.S. West Coast refining market is expected to be a major outlet for Canadian heavy oil shipped via Trans Mountain but questions over crude quality could dampen demand for the barrels. That could weigh on prices or push more oil onto rival Canadian export pipelines with lower vapour pressure and acidity limits.

Several West Coast refiners have raised concerns in recent weeks about the initial volumes' high sulphur content, acidity and vapour pressure, conditions that could damage refining equipment or increase air pollution, according to regulatory complaints and three people familiar with the matter, though thus far, it has not affected demand.

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The Trans Mountain pipeline historically has had higher vapour pressure limits than other export pipelines because it shipped refined products as well as crude oil. Although the expanded line mainly ships heavy crude it carried over the same limits.

Ten companies and industry associations, including Canadian Natural Resources Ltd,Chevronand refiner Valero Energy, have written to the Canada Energy Regulator (CER) to complain about high vapour pressure limits andasked for the pipeline's technical specifications to be narrowed.

Trans Mountain said its current vapour pressure and acidity specifications were developed through a shipper consultation process and have been in place since March 2023.

"Prior to the filing of the current complaint, Trans Mountain was aware of newly raised shipper concerns and had engaged in an updated consultation process with shippers which is ongoing," the company told Reuters in an email.

Vapour pressure limits, which measure the volatility of crude, are "wholly inappropriate" for West Coast refining markets, Valero wrote to the CER last month. It and other West Coast refiners are expected to be top buyers of TMX barrels.

Chevron separately told the CER the vapour pressure limit exceeds the regulatory limit set for storage tanks at both its California refineries. High pressures cause more vapours to leak from tanks into the atmosphere.

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The higher vapour limit also means more lower-value light oil could be blended into Trans Mountain crude, reducing its value, wrote oil producer Canadian Natural, a major shipper on the pipeline.

The TMX crudes are more acidic, Chevron wrote, a trait that can corrode processing equipment and cause damage.

"Refiners are still trying to figure out the new paradigm. Lot of uncertainty, and folks are running (operational) models," a West Coast crude trader said.

Limited investment appetite

Refiners are unlikely to spend the money to modify their equipment to accommodate the unusual characteristics of the TMX crude.

There is limited appetite for the investment required to add new units or make upgrades at (West Coast) refineries, said RBN Energy analyst Robert Auers, citing regulatory hurdles.

Trans Mountain said in May a review of the pipeline's technical specifications is underway, prompting Canadian Natural to ask the CER to pause considering the complaint for 45 days. Last week, the CER agreed, meaning there will be no regulatory decision on the issue before July 8.

Canadian heavy crudes are also sour, containing high amounts of sulphur, which will strain the existing sulphur removal capacity and limit how many barrels can be imported by West Coast refiners, said Jeffrey McGee, managing director of marine advisory firm Makai Marine Advisors.

Los Angeles area refineries are the only significant destination for TMX's heavy sour crude grades along the West Coast as Washington state, Hawaiian and Alaskan refineries prefer lighter and sweeter crudes, McGee noted.

Costs trump concerns

The low cost and proximity of Canadian barrels have so far, however, trumped the quality concerns. The vessel Aqualeader discharged about 290,000 barrels of crude last month at Marathon Petroleum'sAnacortes, Wash.,facility, becoming the first TMX cargo to arrive on the West Coast, refinery ship tracking data showed.

Chevron'sEl Segundo, Calif., and Phillips 66'sFerndale, Wash., refineries also took shipments in recent days.

The purchases will displace some South American crudes, such as Ecuador's Napo and Oriente, and Colombia's Vasconia. Iraqi Basrah could also be replaced due to their higher shipping costs, traders and analysts noted.

Crude oil from California and Alaska North Slope crude, however, is expected to continue to be part of West Coast refinery slates due to its superior quality.