Petrochemicals in race for growth

Calls for incentives as some fear Canada failing to meet potential for big projects

CALGARY Petrochemical producers are calling for more customtailored incentive policies to drive investment in Canadian megaprojects, as projected demand for plastics and chemicals derived from oil and gas continues to rise.

Canada’s petrochemical sector, which provides basic materials for manufacturing everything from tablets to tires, has failed to meet its full potential in recent years, according to industry members. Meanwhile, investors are funnelling capital into major projects in the U.S. amid the growing supply of light oil and gas feedstocks in the region.

“We are absolutely losing the race,” said David Tulk, a principal at consultancy Gas Processing Management Inc., during an industry event hosted near Calgary on Tuesday.

Tulk and others argue that Canada, and individual provinces, should negotiate specific investment terms in order to attract major capital. Currently, provinces, like many European jurisdictions, have general policy incentives that apply evenly to all investors.

McKinsey & Co. expects that demand for oil to develop petrochemicals will grow by 1.4 per cent a year between 2017 and 2050, and Tulk said Canadian policy-makers are at a critical juncture if they are to take advantage of global petrochemical demand.

He used the Louisiana Economic Development as an example of a government department that shapes its tax negotiations and subsidies according to the specific needs of individual companies.

“It’s about having that negotiation mechanism where governments can say: ‘Let’s talk,’” he said.

In Alberta, the provincial government unveiled a royalty tax credit of up to $500 million in early 2016 in a bid to lure would-be petrochemical producers.

It announced in December 2016 that two Canadian pipeline companies would be eligible for the tax credit.

Calgary-based Pembina Pipeline Corp. and its Kuwait-based partner Petrochemical Industries Co. could receive $300 million in tax credits to build a roughly $4-billion facility north of Edmonton that will convert propane into propylene and then into polypropylene. Inter Pipeline Ltd. could receive $200 million to build its nearly $2-billion propylene facility east of Edmonton. Neither has yet made a final investment decision for the projects, though Pembina has moved ahead with early-stage design work.

The calls for more customized policy incentives come amid a broader debate over the extent to which governments should subsidize industrial development.

Several economists and other industry observers argue that offering subsidies to petrochemical plants represents a “race to the bottom” for policy-makers, pushing subsidies higher and reducing capital gains for governments.

Pennsylvania spent US$1.65 billion to incentivize Royal Dutch Shell PLC to build a massive ethane facility about 50 kilometres northwest of Pittsburgh, the largest tax break in U.S. history.

Meanwhile, oil producers have dumped huge amounts of capital into petrochemicals in recent years as part of a diversification strategy away from the transportation sector.

Slightly more than half of the oil produced globally is turned into transportation fuels, while the other half is used in the manufacturing of plastics, chemicals and other materials.

Policies aimed at improving fuel efficiency in motor vehicles, as well as the looming threat of electric vehicles as an alternative mode of transportation, have caused analysts to reduce their demand outlook for oil. Producers are doubling down on chemicals as a result.

Much of that available capital has already flowed to the U.S. Gulf Coast.

While Canadian petrochemical producers have access to cheap feedstocks, slower regulatory approvals and uncertain tax regimes have so far hindered major new developments.

It’s about having that negotiation mechanism where governments can say: ‘Let’s talk.’