Low gas prices may yet boost petrochemicals
The Canadian petrochemicals industry is wellplaced to benefit from low natural gas prices, if only it had access to new markets, exports to the United States were not falling and one of its most crucial feedstocks was not in short supply. Sound familiar? In many ways, the Canadian petrochemical industry is tracking the fortunes of the country’s natural gas industry: an expected bonanza of riches in long-term gain, but pain in the short term.
Unlike Asia and Europe where petrochemical producers use oil derivatives as their main feedstock, Canadian and U.S. chemical producers use natural gas derivatives as their primary raw material.
So the dramatic collapse in natural gas prices in North America should mean a windfall for Canadian producers, right?
The Chemistry Industry Association of Canada estimates that its members’ aggregated operating profit fell 21% last year, while overall sales declined 3%, or were flat in constant dollar terms.
In fact, the Canadian petrochemicals industry is short on ethane — a key natural gas component and vital ingredient for chemicals producers.
“We have actually been liquids short in the Alberta petrochemicals industry for the last few years,” says David Podruzny, vice-president and board secretary at CIAC, which has 60 members that make up two-thirds of the country’s industry.
Natural gas drilling activity was down 23% in Canada, which meant the industry is short on ethane, while ethylene-based derivative units are also running under capacity.
Worryingly, Canadian petrochemical exports to the U.S. — its biggest market — are estimated to have fallen 9% last year, and are forecast to decline a further 4% this year as the U.S. chemicals industry rises once again.
After decades of high and volatile natural gas prices that “destroyed industrial demand,” shale gas offers a new era of U.S. competitiveness that will lead to greater investment and employment, says the American Chemistry Council.
Dr. Thomas Kevin Swift, chief economist and managing director of the ACC, says the council’s members are working on more than 60 projects with a value of US$43-billion in capital investment. “It is a game changer,” he said.
But as with the natural gas industry, will the United States’ gain lead to Canada’s pain?
“I absolutely do not see that happening,” said Grant Thomson, president of olefins and feedstock at Nova Chemicals Corp. in Calgary.
Indeed, while the industry waits for the pipelines to ship natural gas liquids to petro- chemical hubs i n Ontario and Alberta, green shoots of recovery are sprouting up.
Fixed capital expenditures over the past two years have shot up considerably, and are expected to hit $2.7-billion in 2013, the highest investment outlay the industry has seen in well over a decade.
Companies are getting innovative and importing ethane from North Dakota and Marcellus shale, and recovering off-gases from bitumen upgraders, according to CIAC.
Nova’s Mr. Thomson says all of the multinational company’s polyethylene investments are in Canada. “Relative to the type of capital we have been spending over the last number of years, we have plans here [in Canada] that would look at $1.5-billion to $2-billion of capital into this business over the next few years.”
These include a $1-billion polyethylene project expansion near Red Deer, Alta., and a $250-million conversion of its Corunna cracker facility in Ontario to natural gas liquids to take advantage of the lowgas environment.
“We are also starting to do preliminary engineering for some of our eastern assets looking at the expansion of our ethylene facility and there is potential for more derivative production down east.”
Meanwhile, domestic sales for the industry were up 13%, while the number of employees rose 12% during 2012, compared to the year before.
“It is important to recognize that lead times in the industry are significant,” says Mr. Podruzny, adding that Canadian companies are “kicking the tires” on investments of $5-billion to $10-billion over the next few years.
“You can seize the opportunity or you can miss it. And whether that happens or not is entirely — just as in the U.S. — a consequence of the efforts that are made to pursue the opportunities.”
While domestic growth is important, access to new markets for the export-oriented Canadian industry will determine future investments.
“The government policy environment has been about as positive as it has been in a long time,” says Richard Paton, president and chief executive of CIAC. “The government certainly understands what resource development means and is very supportive of it. It has the most active trade agenda we have seen in decades.”
The free trade agreements being negotiated with Europe are estimated to add 5% to 6% to the profitability of companies, Mr. Podruzny says.
“There are currently negotiations underway in TransPacific Partnership that will open up certain markets. There are also negotiations with India .... China is the world’s largest chemicals producer, but they are also the world’s largest chemical importers.”
Mr. Thomson says the future is “as bright as ever,” especially as producers tap into the liquids-rich shale plays in Alberta and British Columbia.
“North America is going to be an advantaged place in the world to make petrochemicals. We will be getting close to being on par with the Middle East in terms of costs.”