Canada’s petrochemical industry is doing its happy dance with low gas costs … – Oilweek Magazine

Smiley faces

Canada’s petrochemical industry is doing its happy dance with low gas costs and abundant feedstock supplies

Daniel Lippe, a petrochemical industry expert who is president of Houston, Texas–based Petral Consulting Company, is more bullish on the future of the North American petrochemical industry than he has ever been in his 30-year-long career—and he is anything but alone.

“The availability of abundant, low-cost natural gas is truly a game changer for the petrochemical industry,” he says. “In my career I’ve never seen it this good. Maybe it was like this in the 1950s, when the United States and Canada had no real competition, but nobody in the petrochemical industry I talk to is unhappy today.”

The associations that represent the petrochemical and fertilizer sectors in the U.S. and Canada are, if anything, even more bullish on the prospects for the industry.

Dave Podruzny, vice-president, business and economics for the Ottawa-based Chemistry Industry Association of Canada (CIAC) and John Margeson, manager of business and economics with the CIAC, are both as optimistic as Lippe about the sector’s prospects.

Citing recent statistics on the shale gas potential in Alberta produced by the Alberta Geological Survey and confirmed by the Alberta Energy Resources Conservation Board, they say the reserve potential in just those areas—and particularly the liquids potential to support petrochemical plants—is unprecedented.

That report, released last November, shows the potential in six shale and siltstone formations in the province, including the Duvernay, Muskwa, Montney, Banff/Exshaw, Wilrich and Nordegg, is 423.6 billion barrels of oil, 3,424 trillion cubic feet of natural gas and 58.6 billion barrels of natural gas liquids (NGLs).

“Why isn’t anyone saying anything about this?” Podruzny asks. “In adding up the fields, let’s say 70 per cent of that number [of NGLs] is ethane [a key building block of the chemical industry]. That means there would be enough NGLs to support 15 world-scale plants for 50 years.”

And that’s just ethylene plants, which are the kind that exist now in Alberta and Ontario, where NOVA Chemicals Corporation and Dow Chemical Canada ULC have world-scale plants.

Margeson says that doesn’t include other feedstock, such as propane, now being derived from oilsands off-gases and leading to the birth of a new propane-based petrochemical industry in Alberta, as propylene and likely polypropylene are produced as spin-offs in Alberta.

The estimates of the natural gas, oil and NGL potential resources in those six shale and siltstone formations is largely in addition to unconventional gas and liquids estimated reserves in Canada and the United States.

A study released last spring by the Canadian Society for Unconventional Resources, which retained consultants PetrelRobertson to analyze the marketable gas, concluded Canada has as much as 1,300 trillion cubic feet of gas in place, triple what was estimated in 2006. The consultants estimated U.S. shale gas resources at 1,900 trillion cubic feet.

A century (or more) of supply
Since gas demand in North America is now at 75 billion to 80 billion cubic feet daily, that means there are enough reserves, not even counting new finds like those in the six Alberta zones, to supply North America for hundreds of years.

The chemistry industry in Canada, which uses about seven per cent of the country’s natural gas (as does the industry in the U.S.), is already a significant economic force. According to the CIAC, its member companies, which generate $46 billion a year in sales, employ 83,000 Canadians directly and support another 417,000 jobs in Canada.

In addition, they say low-cost and abundant NGLs will lead to growth in Canada’s already large fertilizer sector (natural gas is a key component of most fertilizers). The sector is responsible for 12 per cent of world fertilizer supplies (Canada is the globe’s largest exporter of potash and elemental sulphur) and contributes $12 billion to the country’s economy and employs 12,000 people directly.

There have already been some announcements of petrochemical plant expansions in Canada.

NOVA is spending over $900 million to add a world-scale polyethylene reactor to its existing plant at Joffre, Alta., where it already has two reactors. That plant is designed to add about 1,100 billion pounds of linear low density polyethylene, a 40 per cent increase in the plant’s capacity. The project is creating 500 peak construction jobs and adding 60 permanent jobs at the plant, which already employs 700 people permanently and 400 contract workers. The expansion is to go into operation by 2016.

In addition, NOVA is spending $250 million in Corunna, Ont., near Sarnia, Ont., to convert the site, which previously used crude-based naphtha and gas-based ethylene as feedstock, to a 100 per cent gas-based plant. It spent $360 million there in 2007 on a “flexicoking” facility, allowing it to use both naphtha and ethane. That allowed the once threatened plant to maintain its permanent workforce of 950.

NOVA is also considering adding a polyethylene reactor to that plant, which would involve an investment of more than $1 billion.

Imperial Oil Limited also has a petrochemical plant in the Sarnia area, which it converted last year to run on ethylene.

And Vancouver-based Methanex Corporation, the world’s largest supplier of natural gas–based methane to industrial markets, three years ago announced expansions and plant openings in Louisiana and Alberta. It is spending US$550 million to relocate a one-million-tonne-per-year methanol plant from Chile to Geismar, La., the second one-million-tonne plant it has located there. In 2010, it announced it would reopen a shuttered plant in Medicine Hat, Alta., which has been idle since 2001.

John Floren, Methanex’s president and chief executive officer, said in late April, when the company announced it would relocate the second plant to Louisiana, “the global demand outlook for methanol is very favorable and demand is expected to outpace capacity additions in the industry for the next several years.” He credited the “competitive natural gas price environment in North America” with its decision to shift assets to the continent.
The CIAC’s Podruzny says North America’s gain is the rest of the world’s loss.

Europe on the ropes
He says naphtha-based plants in Europe are closing down, and even in the Middle East, where low-cost oil is abundant, there is unlikely to be as much expansion in the petrochemical sector as in North America.

Historically, crude oil has traded on a seven to one ratio relative to natural gas. When gas prices reached a peak of slightly more than $15 per thousand cubic feet in the early part of this decade and oil was at US$90 for West Texas Intermediate (WTI), the ratio was six to one. However, gas prices have been at less than $5 for the last two or three years, while oil prices have been at $80 to slightly above $100 WTI, making the ratio closer to 20 to one.

Because natural gas is the most important cost input in the chemical industry, more than labor and transportation, Podruzny says this competitive advantage means a wholesale shift of the petrochemical industry to North America is underway.

“And it’s not just petrochemicals,” he says. “We’re talking about a reshaping of the manufacturing sector.”

Indeed.

The only study that has considered the impact of cheap and plentiful natural gas on key industrial sectors in North America—although the study was focused on the United States—was released in May 2012 by the Washington, D.C.–based American Chemistry Council (ACC).

Martha Moore, an economist with the ACC who helped research and write the study, says she was astounded by the conclusions reached in the report.

“Not in my experience of 20 years of involvement in the chemical industry have I seen anything like this,” she says. “Until recently, we were talking about jobs going overseas, but now they’re coming back to North America.”

The report, Shale Gas, Competitiveness and New U.S. Investment: A Case Study of Eight Manufacturing Industries, is based on extensive consultation with industry associations representing eight sectors, including chemicals, paper, plastic and rubber products, glass, iron and steel, aluminum, foundries and fabricated metal products.

Changing the game
It repeats an often-enunciated refrain about the development of large new shale gas reserves, calling it a “game changer.” It follows an earlier report the ACC released in March 2011 that looked at the impact of more and cheaper gas supplies, specifically on the petrochemical sector.

The new report forecast there will be 200,000 new direct jobs created in the eight manufacturing sectors between now and 2020, with an additional 979,000 jobs created in the supply chain and elsewhere in the economy. That’s a total of almost 1.2 million new jobs—and that doesn’t include the direct and indirect jobs created in the energy production sector and the spin-off employment.

In addition, the study forecasts another 1.1 million jobs will be created in the construction, capital goods manufacturing and their supply chain areas between now and the next decade.

This will prove to be a windfall for governments in the United States, generating $26.2 billion in annual federal, state and local tax revenue as a result of the growth in output and new jobs created.

The new investment will also generate a $121-billion increase in the output of paper, chemicals, plastic and rubber products, glass, iron and steel, aluminum, foundries and fabricated metal products.

The study’s authors cite another study of the impact on the U.S. economy of the shale gas boom, one that is even more bullish. It was conducted by Boston Consulting Group and was released last fall.

That study, U.S. Manufacturing Nears the Tipping Point: Which Industries, Why and How Much?, examined the impact on other sectors, including computers and electronics, appliances and electrical equipment, machinery, furniture and transportation goods, none of which were covered in the ACC study. It also looked at the impact on plastic and rubber products and fabricated metal products, which were included in the ACC study.

Bring jobs back home
Boston Consulting’s report said the shale gas boom would lead to a “re-shore” of manufacturing to the United States, creating $80 billion to $120 billion of added output and two to three million new jobs.

Moore says only if natural gas prices rise consistently above $5 per thousand cubic feet, something few experts expect anytime soon, would the trend towards the “re-shore” of manufacturing to the U.S. (and Canada) be jeopardized.

And ironically, in an economy recently beset by a collapse of the residential housing sector, high unemployment and a retrenchment of consumer spending that led to the most serious recession since the 1930s, she says the biggest danger going forward is that there will be a shortage of workers in the construction and manufacturing sectors.

“There is a skilled labor shortage on the horizon,” she says. “There will only be so many welders and pipefitters and other craft workers for this build out. There has been a lack of interest in those sectors and they have an aging demographic.”

Those same concerns have been expressed by associations representing skilled trade workers in Canada.

The ACC’s Moore pointed out that both its forecast and the Boston Consulting forecast don’t include the direct jobs that are expected to be created in the production, processing and transportation of the new natural gas bounty in the United States.

A study released last June by IHS Global Insight forecast that the sector, which supported one million jobs in 2010, will grow to support 1.5 million jobs by 2015.

IHS said there would be $3.2 trillion in cumulative investments in the unconventional gas sector between 2010 and 2035, and the annual contribution to the U.S. gross domestic product (GDP) would be $197 billion, with governments seeing $1.5 trillion in additional revenue by 2035.

A comparable study on the impact of unconventional gas development in Canada, released by the Conference Board of Canada in mid-December, projected unconventional gas development in this country could generate over 260,000 jobs a year and add almost $1 trillion to Canada’s economy through to 2035. The natural gas industry already produces $24.5 billion a year in output and employs 130,000 people.

The Conference Board, in its report The Role of Natural Gas in Powering Canada’s Economy, said much of the direct impact would affect Alberta and British Columbia, but the entire country would benefit, with governments collecting $5.3 billion in additional tax and royalty revenues.

A similar study, produced by Informetrica Limited for the Canadian Natural Gas Initiative, a coalition of the Canadian Association of Petroleum Producers, the Canadian Gas Association and other industry groups, forecast similar impacts.

That study, Economic Benefits to Canadian Households of Increased Natural Gas Supply, released last October, covered the same time period to 2035 and included broader economic benefits, such as how lower cost gas will benefit consumers. Under different scenarios, for instance, it saw annual savings for consumers reaching as much as C$4.8 billion by 2035.

However, that study, which focused on the increase in disposable income for Canadians as a result of lower gas prices, did not look at the benefits to Canada’s industrial sectors, as did the ACC report in the United States.

One study that did look at the impact of plentiful and low-cost gas on industry was produced by Calgary-based Schlenker Consulting Ltd. for Alberta’s Industrial Heartland Association (AIHA), a group that promotes industrial development in the Edmonton region.

The AIHA commissioned Schlenker to estimate the potential economic impact of expanding local processing of Alberta resources such as NGLs, raw natural gas and bitumen from the oilsands (including bitumen off-gases).

The study focused particularly on the potential for growth in Alberta’s petrochemical and fertilizer industries, where it forecast expansions could generate $2.4 billion a year in additional Alberta GDP over the next decade. This would be larger than the existing petrochemical industry in the province, creating 8,500 new jobs, contributing $240 million a year to government revenues and $800 million a year in wages (those statistics exclude the benefits accruing to the construction sector).

Fostering new industries
Ron Schlenker, an economist at the University of Calgary, says the study didn’t include the spin-off that would accrue from the development of a polypropylene plant in Alberta (see related story).

“That could lead to the creation of a whole new industry,” he says.

The study concluded that the manufacturing sector in Alberta only represents about seven per cent of its GDP, with about 12 per cent of that coming from the petrochemical and fertilizer sectors (oil and gas extraction is responsible for about one quarter of Alberta’s GDP). However, highlighting the value-added strength of the sector, it is responsible for about one-quarter of the net corporate taxes paid by the manufacturing sector as a whole.

Schlenker believes the best days of the petrochemical and fertilizer industries are yet to come, which is good news for the Alberta government, which has seen royalties from natural gas production decline from more than $8 billion a year in 2005–06 to a projected $965 million this fiscal year.

“It will help stabilize government revenues by reducing the reliance on resource revenue,” he says.

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