An increase in the number of import and export terminals, combined with an expanded transportation fleet, is creating a global market for natural gas liquids (NGLs) for use in petrochemical production, according to experts at two recent conferences in Calgary.
Canada is well positioned to provide NGLs to this growing industry, but to be more than a raw supplier of feedstock for the global industry, it will need to provide incentives for petrochemical development like its major competitors in the U.S. and Middle East have already done.
The NGL market is no longer terminal- or freight-constrained, Marko Ljuboja, NGL business manager for Lukoil, told the recent Argus Canadian NGL Summit in Calgary. “And that has really connected the dots around the world and made the market much more geographically connected and also connected across different uses of NGLs and what end users are willing to pay for that product.
“There’s really no North American market; there’s no Canadian market,” he said.
But not only is geographic competition increasing, said Ljuboja, competition is also increasing between liquid petroleum gas (LPG) feedstocks like propane and butane and naphtha from refining crude oil. And market cycles are gaining speed as a result.
“We are going to be moving much quicker from oversupply to undersupply as now we have opened the whole world,” he said. “We are not just looking at Canadian inventories, U.S. inventories and how to barrel shuffle. If we have too much, we’ll make the whole world have too much. If we don’t have enough, the whole world is not going to have enough.”
Over the next three to five years, the biggest bottleneck likely will be matching the growth of LPGs with the receiving infrastructure, he said.
While there has been a lot of growth in LPGs, “there has not been a lot of investment in infrastructure globally in developing markets,” he said. “That has to catch up, and I think that it will over the next two to three years with all the projects that are going on.”
Over the last four or five years, the global LPG/naphtha market has grown at double the rate of the energy market with an annual growth rate of four to six per cent. That’s partially due to the creation of a global middle class that is demanding more plastics, said Ljuboja.
Globally, the petrochemical industry accounts for about 25 per cent of demand for NGLs. The two key operations for NGLs are steam crackers used to make ethylene and propane dehydrogenation (PDH) used to make propylene.
Ljuboja said the two propane export terminals planned for Canada’s west coast are well positioned to gain a share of the global market. He expects that product to go to Asia.
The biggest factor in the growth of propane exports has been China, which uses it for petrochemicals, said Paige Morse, vice-president of propylene and derivatives for Argus.
As China has grown its economy, it has become more dependent on propylene and its derivatives than on ethylene, she said. It currently has 11 PDH units, and a 12th will come on this year, but they have been very irregular in their operations.
“They have been very hard to run; it’s a challenging technology,” she said. Finding itself short of propylene, China also has invested in making on-purpose propylene, creating a huge demand for propane.
In Alberta, the provincial government under its Petrochemical Diversification Program has approved two projects representing three facilities that will create a propane value chain in Alberta.
Pembina Pipeline and Petrochemical Industries Company will receive up to $300 million in royalty credits for two integrated facilities—a PDH unit and a polypropylene facility—to consume 22,000 bbls/d of propane and be built in Sturgeon County for $3.8 billion to $4.2 billion.
Inter Pipeline’s project will receive up to $200 million in royalty credits for a PDH unit in Strathcona County for approximately $1.85 billion.
“It really makes a lot of sense, I think, to try to get all the business up here and retain as much margin,” said Morse. “The further downstream you go, the more margin you can retain. You could do propane to propylene to polypropylene and then develop more derivative businesses down from there.”
Incentives needed to add value to NGLs
More economic incentives will be needed if Alberta and all of Canada hope to be part of the emerging global petrochemical market.
“It is a very competitive environment around the world, and economic incentives are a huge part of the decision of any company that makes a multibillion-dollar investment,” says Gerry Goobie, a principal at Gas Processing Management.
“We have had it very good for a long period of time, but the world has changed, and people are not investing in western Canada, but they are investing in the U.S. on the Gulf Coast,” he says.
That area has attracted about US$200 billion in petrochemical investments in recent years.
“In Texas, Louisiana and Pennsylvania, where they have attracted industrial investments, those governments are providing huge tax breaks, loan guarantees, all sorts of incentives,” says Goobie. “The good news is that Alberta is recognizing that they have to compete and they have to attract investment.”
Goobie points out that it took a loan guarantee from the federal government to kick-start the Hibernia project offshore Newfoundland and Labrador. It took 20 years to get Hibernia going, and it was the federal loan guarantee to ExxonMobil that got them over the hump and got the project built.
“It wasn’t Hibernia so much that generated the economic value but the projects that followed—White Rose, Terra Nova and Hebron,” Goobie says. “It wasn’t the loan guarantee Ottawa never paid a nickel on. It was all the other stuff.”
It’s important that people understand the need for incentives and “there’s lots of ways to do it that don’t cost a lot but provide a huge benefit, and that’s what we’re missing,” he adds.
Economic incentives from the federal and Alberta governments also played an important role in spurring development in the Alberta oilsands, says Pam Cholak, director of stakeholder relations for Alberta’s Industrial Heartland Association. The Alberta government initiated the Alberta Oil Sands Technology Research Authority to produce SAGD technology, for example.
“But it takes some commitment to be able to do that, and it takes some money upfront, but you also get that in return over many decades,” she says. “You can’t look at it as an upfront cost or a sunk cost but as an actual investment and a return.”
Cholak says that for her association, which is an alliance of municipalities that are home to major resource projects, it’s a matter of adding value.
“As a player in North America, we have to look at how the Gulf Coast has actually taken away some of our own competitiveness, and we haven’t even paid attention,” she says.
While the provincial government is extremely focused on development, “we are facing global problems that affect our ability to make decisions,” Cholak says. “We face the same problems as that of Canada, the environment versus how we want to develop our resource sector.”