Canada’s ul­tra-cheap nat­u­ral gas drives hopes of petro­chem­i­cal boom

Land­locked Al­berta offers in­cen­tives in bid to em­u­late Gulf Coast in­vest­ment jack­pot

Calgary Herald - - FINANCIAL POST - ROD NICKEL

WIN­NIPEG Al­berta is look­ing to recre­ate the build­ing boom spread­ing along the U.S. Gulf Coast, where in­ex­pen­sive nat­u­ral gas gen­er­ated bil­lions of dol­lars in in­vest­ment by petro­chem­i­cal com­pa­nies.

The adop­tion by drillers of frack­ing tech­nol­ogy to un­lock oil and gas from shale rock ex­panded U.S. pro­duc­tion dra­mat­i­cally start­ing a decade ago. That abun­dance has gen­er­ated $194 bil­lion (all fig­ures US) since 2010 in an­nounced cap­i­tal in­vest­ment to build or ex­pand U.S. chem­i­cal plants that use gas to make plas­tics, fer­til­izer and fuel, ac­cord­ing to the Amer­i­can Chem­istry Council.

Al­berta hopes to do the same thing, turn­ing prices that are about one-third those at the U.S. Gulf Coast into a com­pet­i­tive advantage to at­tract petro­chem­i­cal com­pa­nies. Such in­vest­ment would pro­vide a badly needed mar­ket for oil and gas within the land­locked prov­ince, where en­ergy com­pa­nies strug­gle to reach buy­ers far­ther away.

Al­berta in 2016 launched in­cen­tives to di­ver­sify its oil­based econ­omy. Two projects, in­clud­ing In­ter Pipe­line Ltd’s planned $2.7 bil­lion petro­chem­i­cal plant near Ed­mon­ton, have been approved to share $500 mil­lion in roy­alty cred­its.

Al­berta so­licited bids for a sec­ond sub­sidy round in June.

“They’re get­ting all kinds of ex­pres­sions of in­ter­ests,” David Po­druzny, vice-pres­i­dent of busi­ness and eco­nom­ics at the Chem­i­cal In­dus­try As­so­ci­a­tion of Canada, said in an in­ter­view.

As at­trac­tive as cheap gas is, skep­tics say Al­berta’s in­cen­tives fall short of those in the U.S. Gulf, and the prov­ince also has the dis­ad­van­tages of higher costs and in­ad­e­quate in­fra­struc­ture.

But com­pa­nies are chas­ing op­por­tu­ni­ties even without gov­ern­ment help.

CF In­dus­tries Hold­ings Inc is boost­ing am­mo­nia fer­til­izer pro­duc­tion by 150,000 short tons an­nu­ally at its Medicine Hat plant start­ing later this year. The lower cost al­lows it to ship far­ther than usual, to farm­ers in the corn-grow­ing state of Iowa.

“At times it’s free,” said Bert Frost, CF’s se­nior vice-pres­i­dent of sales, of Al­berta’s gas. “We have the low­est-cost gas in the world to­day.”

Fer­til­izer pro­ducer Nutrien Ltd. has be­gun an­a­lyz­ing a po­ten­tial ex­pan­sion in Al­berta, CEO Chuck Ma­gro said. He ex­pects the abun­dance of cheap gas to per­sist, even if the $40 bil­lion LNG Canada ter­mi­nal for liq­ue­fied nat­u­ral gas is built in com­ing years, cre­at­ing a new ex­port out­let.

“Our anal­y­sis is you would need to build sev­eral (LNG ter­mi­nals) be­fore we would see much higher gas prices,” he said in an in­ter­view this month. “I’m quite bear­ish for nat­u­ral gas in Western Canada for the fore­see­able fu­ture.”

Methanex Corp., which makes methanol, is con­sid­er­ing a sec­ond plant in Medicine Hat, said Paul Daoust, vice-pres­i­dent for North Amer­ica.

Canada is the world’s fifth­largest gas pro­ducer, but much of the gas it used to sell into the North­east­ern United States has been dis­placed by ex­pand­ing U.S. sup­plies.

An in­cen­tive pro­gram span­ning up to a decade and com­pet­i­tive with what is avail­able along the U.S. Gulf Coast is nec­es­sary to off­set Al­berta’s higher cap­i­tal costs, said Lori Kent, ex­ec­u­tive di­rec­tor of Re­source Di­ver­si­fi­ca­tion Council.

In­suf­fi­cient pipe­line in­fra­struc­ture is also hold­ing the prov­ince back, said John Rogers, se­nior vice-pres­i­dent at credit rat­ings agency Moody’s.

Low prices have been a hard­ship for gas pro­duc­ers, and pro­longed weak­ness could force them to re­duce sup­plies.

Crew En­ergy Inc has al­ready shut in dry gas wells this year, said chief ex­ec­u­tive Dale Sh­wed.

“If com­pa­nies are not go­ing to make money pro­duc­ing gas and sell­ing it, they’re not go­ing to drill for it,” Sh­wed said.

JOHN LU­CAS/POST­MEDIA NEWS

Im­proved tech­nol­ogy to un­lock oil and gas from shale rock has ex­panded pro­duc­tion dra­mat­i­cally.

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