Bulldozers digging in on petro projects
Five long years of investment going elsewhere
•In recent months, bulldozers have begun digging up fields in northern Alberta where ma- jor new petrochemical projects are planned in the province for the first time since the 1980s.
For Canada’s petrochemical sector, the activity is happening none too soon.
Since 2012, companies have invested just $ 1 billion in Canadian petrochemical projects, money that has been used to expand existing sites. In contrast, during that time projects worth US$ 185 billion have been built or started in the United States — a figure that Canada Kuwait Petrochemical Corp. commercial manager Kevin Jagger calls a massive missed opportunity.
Jagger said investment dollars have gone to Pennsylvania and the U.S. Gulf Coast while projects in Canada have been paused. “Canada and Alberta are on everyone’s radar,” he said. “We just keep coming in No. 2 or No. 3, which is the same as coming in 50th. It’s zero investment.”
Despite missing out on tens of billions in direct foreign investment, however, activity is finally picking up. Executives in Canada’s petrochemical industry say there are opportunities for $12 billion in “shovel-ready” projects in Canada.
“We’re starting to feel the momentum and the tide turning,” Jagger said.
The bulldozers and earthmovers rumbling around fields north of Edmonton are preparing for one of those potential projects, a $3.8-billion to $4.2-billion propaneto- polypropylene plastic facility that Calgary- based Pembina Pipeline Corp. has partnered with Canada Kuwait Petrochemical to develop. A final investment decision (FID) is expected by the end of the year.
Nearby, more site preparation work is underway at another $ 3.1- billion propane- to- plastics facility proposed by Inter Pipeline Ltd.
“There’s more than earthwork. We’re putting in deep underground piping,” Inter’s senior vice-president, petrochemical development David Chappell said, adding, “We’re in construction even though we’re not at FID.”
Pembina and Inter have yet to sanction their respective projects, but executives at both companies say there are abundant opportunities for petrochemical investment in Alberta, and in Canada more widely. “We believe there are opportunities for another world- scale ethane cracker in the province,” Chappell said.
Nova Chemical and Dow Chemical Canada ULC own ethane- cracking facilities in the province that produce ethylene, which is an input for plastic manufacturing. Methanex Corp. also owns a methane- to- methanol facility here and has publicly discussed more investment given t he abundance of methane production.
Stephen Zinger, Wood Mackenzie senior vice-president, chemicals, said there’s both a cyclical and structural trend in the energy sector toward more investment in petrochemicals. Cyclically, many companies will look to petrochemical and downstream investments when oil and gas prices crash. “We’re in that period right now,” Zinger said, adding that companies consider petrochemical investments as counter-cyclical methods for diversification.
Structurally, he said, some oil and gas players are forecasting more scrutiny for burning fossil fuels, especially in cars and trucks, as electric vehicles become more affordable and penetrate more of the car market. “All of these things, point to land transportation demand for oil will peak at some time,” Zinger said.
He said most of the planned petrochemical investments in Canada are for projects that turn natural gas into building blocks for plastics manufacturing but, given the size of the country’s oil reserves, there is also an opportunity for projects that would convert oil into plastic.
Major energy companies see petrochemicals as a growth sector within the industry. Royal Dutch Shell PLC updated i ts growth strategies following its blockbuster US$ 60- billion acquisition of BG Group and identified chemicals as one such opportunity. Shell decided in 2016 to build a US$ 6- billion chemical complex, including an ethylene cracker, in Pennsylvania.
Similarly, Chevron Corp. has spent incrementally more of its capital in petrochemicals, especially in the U.S. Gulf Coast. Along with joint- venture partner Phillips 66 Co., Chevron is spending US$6 billion to expand its Cedar Bayou chemical project in Texas.
“If you look at the history of hydrocarbon- based products, when a significant segment of its business is under threat, it seeks to diversify into other areas,” ARC Energy Research Institute executive director Peter Tertzakian said, adding the threat of electric cars is increasingly forcing major oil and gas companies to invest in petrochemicals.
“People are going to petrochemicals because that will continue to grow as the global economy grows,” he said.
Zinger said that petrochemical facilities currently account for only 10 per cent of oil demand globally compared with land-based transportation ( like gasoline- or diesel- burning cars), which accounts for 50 per cent of global oil demand. However, Zinger said demand for petrochemicals is outpacing the growth of the global economy. For example, there is enough demand for ethylene for “three new worldscale crackers” every year after 2019, he said.
Stu Taylor, Pembina senior vice- president, natural gas facilities, said the company’s research shows demand f or polypropylene is outpacing GDP and believes the market will be big enough for its own facility, proposed north of Edmonton, and another propane-topolypropylene facility.
Inter Pipeline’s Chappell said there are also advantages to building in Alberta that could result in his company’s project being built. “Feedstock costs are by far the biggest cost in running petrochemical plants,” Chappell said, noting there is an abundance of low- cost natural gas in Canada that is full of additional chemicals — like butane, ethane, propane — that petrochemical companies are looking for.
Taylor said part of the reason that petrochemical investment has flowed to the States rather than Canada is because governments there have aggressively offered tax breaks — including US$ 1.6 billion in incentives for Shell in Pennsylvania — and because construction costs are cheaper.
However, he sees both of those advantages in Alberta now as well.
The Alberta government recently announced t ax credits worth $ 500 million for petrochemical projects in the province and picked Pembina’s and Inter Pipeline’s projects to receive the credits. David Podruzny, Chemical Industry Association vice-president, business and economics, said that more than a dozen other companies applied, indicating there is more opportunity.
Those tax credits were sharply criticized by economists in Alberta for not creating enough jobs, given their size, but Podruzny said Statistics Canada data shows that for every petrochemical job there are five jobs induced in industries like manufacturing.
Taylor also said the business case for building the company’s massive plastic pellets facility is improving as construction costs have dropped in Alberta following the collapse in oil prices. “We might hit the cycle very favourably,” he said, adding, “Once the first ( project) is built, I think many will follow.”