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Canada's turn? New incentives could spark a petrochemical boom

August 24, 2018
Energy & Chemical Value Chain

It may finally be Canada’s turn to win a proper share of North America’s petrochemical investment boom. Two major projects are well underway, a third is expected to get a green light, and with the province of Alberta taking applications for its second Petrochemical Development Program, two or three more world-scale projects could be announced in 2019. Meanwhile the federal government has allotted billions of dollars to upgrades in infrastructure, and it also seems to be considering more investment-friendly tax policies.

Bob Masterson, president and CEO of the Chemistry Industry Association of Canada (CIAC), is optimistic. “We missed the first wave of investments in North America, but I think all signs are very positive that we are well positioned for the next one,” he says.

Canada’s share of North American chemical investment has historically been about 10%, says CIAC, but in recent years that has dropped to about 2%—not because investment in Canada has declined, but because investment in the United States has exploded. According to a recent count by the American Chemistry Council, 325 projects valued at $200 billion have been announced, with most of the investment coming from abroad. Even Nova Chemicals, a keystone of Canada’s petrochemical industry, is participating. In February, Nova will join with Borealis and Total to build a steam cracker and polyethylene plant on the US Gulf Coast.

All of these investments have been motivated by access to the cheap energy and feedstocks provided by the shale-gas revolution. Indeed, in 2013, long before Nova made its first foray into the US Gulf Coast, the company arranged for ethane from the Marcellus region of the US Northeast to be piped into Canada for its Corunna steam cracker in Sarnia, Ontario. The unit has since been converted to run on pure ethane. Likewise, Nova has included ethane piped from the Bakken region of the US Midwest on the feedslates of its crackers in Joffre and Fort Saskatchewan, Alberta, since 2014.

The Corunna cracker will soon be consuming even more US ethane. Late last year, Nova announced a C$2 billion ($1.5 billion) project to expand the unit’s capacity, currently about 816,000 metric tons/year of ethylene, by 50%, and to build downstream a 450,000 metric tons/year polyethylene plant employing the company’s Advanced Sclairtech technology. Nova expects to complete both projects in late 2021.

Unrealized potential
In principal, the ethane could be produced in Canada, which has its own vast shale deposits. However, these have not yet translated into the level of petrochemical investment seen in the United States for two reasons. First is market access. Greater natural gas liquids (NGL) production means greater natural gas production, but while Canada has historically been able to export excess natural gas to the United States, that is no longer the case. US NGLs are cost-advantaged because US natural gas producers have been able to push out Canadian supply as needed, and instead of growing, Canada’s exports to the United States have generally declined (chart). Until Canada can expand its capacity to export liquefied natural gas (LNG) by sea, NGL production will be constrained.

Second are the energetic efforts of regional government in US states such as Texas, Louisiana, and Pennsylvania to attract chemical investment, augmented by more favorable federal tax policy enacted by the US Congress as the Tax Cuts and Jobs Act (TCJA) of 2017. “The US tax overhaul has lowered the marginal effective tax rate (METR) on capital investment from approximately 35% to 19%,” CIAC notes in a document submitted this month to the House of Commons’ Standing Committee on Finance and Economic Affairs. “While Canada used to enjoy a METR advantage necessary to overcome construction, utility, labor, and logistics disadvantages, that is now gone.” US tax changes also lower upfront capital costs by setting a 100% immediate depreciation rate for capital equipment.

CIAC has asked the federal government to consider including several proposals aimed at leveling the playing field in the 2019 budget. At the top of the list is a 7-year, 100% accelerated capital cost allowance (ACCA), potentially expandable to cover site preparation and acquired property awaiting use. Other proposals are investment in programs to make Canada a leader in the commercialization of technologies for plastics recycling, renewed investment in rail and ports through the National Trade and Transportation Corridors Initiative, and expansion of the Rail Safety Improvement Program.

Similar proposals were ignored in last year’s budget, but Canada’s Minister of Finance subsequently announced that competitiveness was his top priority, says Masterson. “The broad business community has rallied together and delivered a very strong message to the government that we are unhappy with its focus on competitiveness,” he explains. Masterson is optimistic that the ACCA will improved, but he is uncertain about the prospects for a lower corporate tax rate.

Alberta builds on success
Meanwhile the province of Alberta continues to show what can be done at the local level, not only renewing its Petrochemical Diversification Program (PDP), but also expanding its scope and announcing a related program aimed upstream, the Petrochemical Feedstock Infrastructure Program.

As introduced in February 2016, the PDP offered C$500 million in feedstock royalty credits to support worldscale petrochemical projects based on methane or propane. The program received 16 proposals representing C$20 billion in potential investment, and in December 2016, two winners were announced. Inter Pipeline was awarded royalty credits totaling C$200 million for a propane dehydrogenation (PDH) project, and Pembina’s received credits totaling C$300 million for a PDH/polypropylene (PP) project.

Inter Pipeline added a PP plant before greenlighting the C$3.5 billion project in December 2017. Construction in Strathcona County, Alberta, began in early 2018. The PDH and PP plants will each have a capacity of 525,000 metric tons/year. Pembina has meanwhile partnered with Kuwait’s Petrochemical Industries Companies on the project through a new joint venture, Canada Kuwait Petrochemical Company. The project would be located adjacent to Pembina’s Redwater complex near Edmonton. A final investment decision is expected in early 2019.

The renewed program, PDP2, was announced in June and is accepting proposals through 1 October. It offers the same C$500 in royalty credits as the original PDP, but with a key difference: the range of eligible feedstocks has been broadened to include ethane, meaning steam cracker projects can also apply. Alberta aims to select 2–3 new projects totaling C$12–15 billion of investment.

Whereas methane and propane are oversupplied and very inexpensive in Alberta, ethane is not, and it was even in short supply several years ago. The completely new Petrochemical Feedstock Infrastructure Program (PFIP) addresses this problem by offering another C$500 million—C$300 million in grants and C$200 million in loan guarantees or equity ownership—to support field extraction facilities, straddle plants, and fractionation plants, or other infrastructure projects that will increase ethane supply. The trend is currently positive. Recent data from Alberta’s Energy Regulator show recent gains in domestic ethane production that are projected to continue into the next decade.

One land-locked province can do only so much, however. Alberta could produce enough ethane for multiple new steam crackers if it had a way to sell the associated natural gas overseas, but neighbor British Columbia has doggedly resisted construction of the pipelines and LNG terminals that would make this possible. “A lot of this stems from some serious concerns about moving oil, so it muddies relationships down the line,” notes Dave Podruzny, VP/business and economics at CIAC.

Several LNG projects have been proposed, but none have been gone forward, and last year Petronas abandoned its C$36 billion Pacific NorthWest LNG project blaming the “extremely challenging environment.”

Masterson is pessimistic. “The current government of British Columbia seems to be fairly challenging to work with, not only for business, but also for the province of Alberta,” he observes. “I think the only way things get better from a government-to-government standpoint is if there is a court decision, BC [British Columbia] loses, and the government can say it put up a good fight but lost. That might be an opportunity to normalize relations. But the relationship is very strained, and those used to be two of the closest-working provinces in the federation.”

The situation could become critical. According to a recent report by the Canadian Energy Research Institute (CERI), natural gas production in Canada could decline by 15% over the next 20 years unless construction begins soon on a Pacific coast LNG terminal. “In the long term, if Canada cannot get gas to market, the outlook for the chemistry sector will be very challenging,” says Masterson.

All is not lost. Shell continues to pursue its LNG Canada project, and Petronas offered a vote of confidence by joining it in May.

Gerry Goobie, principal at energy consulting firm GoobieTulk, believes prospects for an LNG terminal in British Columbia are improving. “There is a lot less opposition to LNG,” he says. “Everyone seems to understand that natural gas is a much cleaner burning fuel, and you avoid the fear of a new oil spill. Take that fear away, and the debate is around economic development, jobs.” Shell has very actively engaged with the public to promote its project, he notes. “They’ve done a tremendous job.”

A cure for hiccups
Business conditions more broadly are good. CIAC estimates that sales of industrial chemicals reached C$27.1 billion in 2017, a year-over-year (YOY) increase of 7%. Volume increased about 1% YOY, and operating profits increased about 2%. For 2018, CIAC expects sales to increase 7%, volume to increase 9%, and operating profits to decline 2%, while remaining historically strong. “There was a bit of weakness in basic chemicals production in Quebec during the first half of 2018, and in Alberta in the spring,” says Podruzny. “We’re confident that has to do mainly with weather and transportation hiccups we had this year.”

Canada’s producers of industrial chemicals rely on rail to deliver 80% of their shipments. This year a particularly harsh winter stretched the system past its limits, drawing a public reprimand of the country’s two Class I railroads from the Minister of Transport. Eight chemical producers had to curtail operations. In May, a brief labor action at Canada Pacific Railway created additional problems. “Service has been fairly poor across the country,” says Masterson. “Our members have seen late cancellations of pickups or deliveries, missed or partial switching, and increased transit times.”

The Transportation Modernization Act, passed in May, will help improve the situation, says Kara Edwards, director/transportation at CIAC. Key elements of the law include granting the Canadian Transportation Agency the power to conduct investigations on its own initiative, allowing reciprocal penalties between shippers and carriers, and promoting greater transparency for better forecasting. “One of the key challenges during this process has been helping those making regulations and policies understand what captivity means for many of our members, and how they can’t just switch over to road transport,” Edwards says.

Shared interests bind shippers and carriers
Just as importantly, however, the rail system needs capital investment. “When you have an economy running at or near capacity, and railways running at peak, you are going to need a significant increase in rail infrastructure,” Masterson says. The C$10 billion, 11-year Trade and Transportation Corridors Initiative can play a significant role, but the problem is ultimately not so different from that confronting Canada’s chemical industry, he notes. “We have to create conditions where the railways will want to make their next major investment in Canada.”

With the Transportation and Modernization Act officially on the books, it may be time for shippers and carriers to focus on their common interests. “We are now in a position where the railways and the key resource sectors like chemicals can sit down and come up with a coherent message to the government of what we need to do to attract investment so that we don’t run into these capacity constraints in the future,” says Masterson. The anticipated Canadian petrochemical investment boom would bring the issue to a head. “Those plants will take 4–5 years to build, but we already have trouble moving the material we produce now,” Masterson notes. “You’re probably looking at 400–500 additional railcars per day just from the chemistry sector. Where is that going to come from? So we are especially concerned whether infrastructure will keep up with demand.”

By Clay Boswell

Source: Chemical Week

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