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Securing the Alberta Advantage

Source: Oilweek Magazine

Alberta Energy is expected to release details of a program this month to assure the worried petrochemical sector that it will have adequate feedstock.

Melanie Collison

Natural gas is expensive and becoming scarce locally, and the industry in Canada is already buffeted by increasing competition from the Middle East and Asia, where natural gas is much cheaper.

The province got into petrochemicals in the 1970s to diversify the economy. Petrochemical facilities can add up to 40 times the value of the natural resource by cracking natural gas molecules into their components and processing them into the building blocks of plastics and finished goods.

After decades of incubation, the sector successfully embraced market forces at a time when there was more natural gas than pipe capacity to export it. But times have changed and the industry needs help to secure a stable future.

Alberta’s plants are the simplest kind, using only ethane as feedstock. Ethane is one of the natural gas liquids (NGLs) extracted at straddle plants positioned on TransCanada PipeLines routes in Cochrane and Empress. Natural gas liquids are the components of natural gas which liquefy first when it’s cooled—among them, ethane, propane, and butane.
Petrochemical facilities at both Joffre and Fort Saskatchewan have unused capacity. While rising and erratic prices of natural gas have boosted input costs, the Western Canadian Sedimentary Basin is mature, and prices haven’t risen enough to encourage drilling in more difficult zones. Furthermore, what gas is being supplied is predominantly dry and simply does not yield much ethane.

In addition, the Alliance Pipeline, which came on stream in late 2000, was built with high-pressure pipe that can transport volatile natural gas liquids as well as the methane which flows in all gas pipelines. The richer mix carries more British thermal units for the same shipping cost, creating alternative market demands and commanding a higher export price.
Alberta Energy’s program to address the feedstock shortfall is intended to attract greater ethane extraction from any source. It will return royalties as consumption credits to petrochemical facilities, based on the amount of incremental ethane they use. The program cap is set at $35 million, the total royalties collected on extracted ethane.

The consumption credit is expected to generate incremental supplies of ethane by increasing productivity at existing straddle plants; or stimulating investment in infrastructure, whether a new plant on the Alliance line or technology that makes capturing off-gases of coking operations at bitumen up-graders economic.

Alberta Energy has consulted extensively with industry on exactly how to implement the program, which was first announced in September.

“Long-term serious problems have become apparent over the past couple of years. The industry has unused capacity today. Most [ethane] supplies are just too expensive to extract, hard to get at, or are being exported via Alliance,” says Gerry Goobie, a Calgary analyst with international oil and gas consultants Purvin & Gertz Inc. “The government is a little nervous because they would like to see broad industrial economic development through everything, not just oil sands.

“The issue that’s come up is, ‘Is there a way we can make it more attractive to extract or produce incremental ethane?’ Most of the money for expansion [of the petrochemical industry] has gone to the Middle East and Asia. If you take the position of taxing [multinational petrochemical companies] more, they’ll just go elsewhere. Government looked at this and said the only real lever we have to play with is royalties.”

The province initially proposed a reduction of royalties on incremental production from big gas plants, but industry didn’t like the mechanics of it, so the energy department struck a task force to incorporate the feedback.

“It’s a pretty good success story and the government should be patting themselves on the back more,” Goobie says. “They got this many people moving in more or less the same direction on a very complicated issue.”

“Thanks to [Energy Minister Greg Melchin], we have had excellent cooperation among sectors to find a solution to the ethane shortage problem—a problem that is limiting the ability of the petrochemical industry in Alberta to grow or even maintain existing operations,” Richard Paton, chief executive officer of the Canadian Chemical Producers Association (CCPA), told the 10th annual Canadian Energy Research Institute (CERI) Petrochemicals Conference as talks on the program progressed.

“Outside of the Middle East, there is no larger energy play on the planet than Alberta. In addition to natural resources, sound policy ideas and strong relationships with government do matter.”

Nobody’s shedding a tear for the multinational petrochemical companies. They are currently making money because of generally high crude oil prices and relatively cheap gas prices. But until Mackenzie Delta and Alaska gas become available—assuming they do, and assuming Alberta can make itself attractive to northern gas producers as an upgrading destination—Alberta’s struggle is intensified by muscular international competition that is pulling the global investment plans elsewhere.

“In general, western Canada’s petrochemical industry has had the Alberta Advantage—cheap gas—which has allowed them to make very competitive products and sell them into the North American market. Joffre is huge—it has big economies of scale. They can compete in North America…but North America is disadvantaged against offshore petrochemicals,” Goobie says. The industry historically depended on its resources being low-cost and freely available to counterbalance the high cost of transporting its products to distant markets.

“Natural gas liquids’ prices are core to the survival and prosperity of the North American petrochemical industry. With [Canadian] feedstock at two to three times the price in the Middle East, petrochemical producers, governments, and suppliers need to adopt aggressive strategies to continue survival, let alone profitability,” says George Eynon, vice-president of business development and external relations for CERI, which hosts the annual petrochemicals conference.

Based at the University of Calgary, CERI is an independent, interdisciplinary think tank that works with industry, government, and academia to find solutions to energy- and environment-related issues.

CERI’s own paper at the conference examined the critical issue of introducing substitute fuels for oilsands upgrading to spare natural gas for more valuable uses, including petrochemicals feedstock. If nothing changed and all steam and electricity were produced from gas-fired cogeneration for projects planned to 2020, the amount of natural gas required would triple from the current one billion cubic feet per day. If some combination of syngas from coal, petroleum coke or asphaltenes, bitumen emulsion, or nuclear power were substituted, demand could be reduced to somewhere in the range of 575 million cubic feet per day to 815 million cubic feet per day.

The issue is considered critical because burning high-quality natural gas to process low-quality bitumen wastes value, especially compared to the alternative of processing it into petrochemical building blocks and finished products.
The government is determined to keep value-added activity in the province. Alberta is Canada’s leading producer of petrochemicals with a production capacity of 8.6 billion pounds of ethylene per year; production of more than $9.6 billion per year in chemicals and chemical products; and more than $5 billion in exports.

The chemical industry is “a keystone or a linking industry, an important bridge between Canada’s resource base—the raw materials—and the chemicals which eventually make up everyday goods for Canadians,” Paton said in his keynote address at the conference.

But the Alberta Advantage has diminished. “Other areas that have huge resources of gas are beginning to develop their petrochemical industries,” Eynon says. “While we always looked at the Gulf of Mexico as the benchmark or competitor, both the Gulf Coast sector and our own Canadian sector—in Alberta, Ontario, and Quebec—are now seeing the Arabian Gulf being a major competing element in the world market. There’s been a huge shift in emphasis from the very local to ‘How does North America compete with the rest of the world?’ ”

Qatar, Saudi Arabia, and Iran have quit flaring, to divert their natural gas to petrochemicals. China and other Asian nations are already a formidable presence. Eynon notes consumption patterns of the final products made from petrochemicals are also changing globally. “There’s a shift in demand patterns because we in North America re-import a lot of the plastics. China makes an enormous quantity of widgets and gadgets plus the wrappings. So we’re competing with other consumption areas.”

“There are strategic reasons for a petrochemical presence in North America, and one of the world’s largest energy plays right here in Alberta also means petrochemical opportunities,” Paton says.

“[But survival will require] new technologies, new processes, and innovative plans for adding product value, building a stronger, more inventive business, and maintaining a competitive position for this multi-billion-dollar Canadian and U.S. industry,” Eynon adds.

The Canadian chemical industry brands itself as “the best resource upgrader economically and environmentally in the world,” and the CCPA’s economic vision to 2015 is to build on its global leadership in the Responsible Care codes of practice and its participation in the voluntary Accelerated Reduction/Elimination of Toxics program, which has seen eight industry sectors reduce their release of targeted toxic emissions by 28,000 tonnes per year. Canadian plants are highly productive, Paton says. “Our productivity is 11 per cent above the U.S. for the whole of the chemical sector and historically about 30 per cent above for petrochemicals.”

But labour and construction costs have risen in Alberta relative to other petrochemicals centres, and transportation costs remain high. Both have contributed to a slow but steady erosion of the Alberta Advantage.

The provincial government clearly hears the warning bells and is concerned about the future of the industry. In addition to the energy department’s short-term ethane extraction policy, it is working with Alberta Economic Development (AED) on long-term strategies, including partnering with industry on the Hydrocarbon Upgrading Task Force (HUTF).

“To be competitive, the industry needs to cooperate to find new feedstocks,” says Justin Riemer, executive director for industry development at AED.

HUTF points to the oilsands, calling it “a potential long-term supply of competitively priced refining and petrochemical feedstock.” Formed in 2004, HUTF is a group of nearly 100 government and industry people who are setting the direction of development for the upgrading sector.

HUTF has begun investigations into the use of bitumen and other resources as feedstocks. It has in hand a technical design it commissioned for a conceptual complex that integrates upgrading, refining, and petrochemicals based on technologies in use today, which was produced by chemical engineer David Netzer. It is carrying out research into best practices and identifying the labour, infrastructure, and logistical challenges.

“The prime thing that keeps coming from the industry people is that if we expect investment to be made here, we need to make a good business case,” says Ed Condrotte, director of chemicals/petrochemicals for AED.

“All the studies show that integrating value-added development—the petrochemicals side—into facilities that refine heavy oil or oilsands makes economic sense in the long term,” Riemer says. “You have to start with the market fundamentals and [determine] what the government can do to help. We’re building a case that we will provide enough market-based economic incentives.”

An integrated complex would probably be located in the Alberta Industrial Heartland northeast of Edmonton. Members of HUTF toured integrated facilities in Taiwan and Singapore, researching best practices and talking to potential investors, on their way to Beijing for the world’s first Heavy Oil Conference last November. AED organized the conference together with the China National Petroleum Corporation, with which it has a joint venture relationship.

“People and companies came from around the world,” Condrotte says. The department was involved in meetings with the state-owned oil and gas companies that have invested in Alberta oilsands. “We told them we want upgrading and manufacturing in Alberta based on our resources, not just to ship our raw resources,” Condrotte told Oilweek.

“Singapore is a good example of best practices,” he added. To build its petrochemical industry, which is dependent on merchant oils, that is, purchased feedstock, Singapore “co-invested with companies when necessary.” It has a site with a number of companies side by side sharing infrastructure, using each other’s products. They have a couple of state-owned companies, but prefer to rely on free enterprise. Singapore now has the second-highest GDP in the world.

“If we could emulate some of their practices and successes, we’d be miles ahead, because we do have the resources. We don’t have to rely on merchant oils.”


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