Alberta’s petrochemicals are a long-term path to economic diversification
By ATB Financial 17 March 2021 6 min read
“The low price of natural gas liquids—or NGLs—has been the main driver for petrochemicals in Alberta,” says Nate Heywood, Director, Equity Research, Energy Infrastructure at ATB Capital Markets. “A lot of companies are looking for creative ways to utilize our natural resources. We do expect growth in petrochemicals and plastic demand in the recovery.”
Now, with vaccinations underway in the province, industry leaders are turning their focus to recovery. To support it, ATB and MNP partnered earlier this year to develop a comprehensive content series that evaluates challenges and opportunities towards economic recovery. The series shared local perspectives on how to address challenges across key sectors, including aviation and logistics, energy and cleantech, financial services, technology and data, tourism, petrochemicals and agriculture.
Globally, the demand for petrochemicals is set to increase as the middle class continues to grow across the Asia-Pacific region, says Heywood.
“As quality of life increases, the demand for plastics does too. Petrochemicals make a wide variety of products in automotive, household products, furniture, fabrics, carpeting and more,” he says. The IEA expects petrochemicals to account for more than a third of growth in demand for oil to 2030.
Alberta’s petrochemical incentive program is a bright spot
Alberta is home to Canada’s largest petrochemicals manufacturing industry and a major positive for it is the Alberta Petrochemicals Incentive Program (APIP), says Heywood.
The program provides grants to companies to attract investment in new or expanded petrochemical production facilities in Alberta. The grants are worth 12 per cent of a five or 10-year project’s eligible capital costs and are issued after projects are operational. The capital investment must be at least $50 million and the facility must use natural gas, natural gas liquids, or petrochemical intermediaries—such as ethylene, propylene, benzene—in the manufacturing of products.
The non-profit Alberta’s Industrial Heartland Association estimates there is an opportunity to grow Alberta’s petrochemical sector by more than $30 billion by 2030 and create more than 90,000 jobs directly and indirectly while generating more than $10 billion in revenue for the province from corporate and personal income taxes.
“The main objective is to create local markets for NGLs and the development of petrochemicals. There is demand for products, so why shouldn’t it be Alberta providing that?,” says Heywood.
Additionally, he says, Alberta only produces a quarter of Canada’s chemical output, which signals there is an opportunity for production within the province instead of shipping them out for production.
Petrochemicals as a path to diversification
“What I've noticed in the last five years is a trend towards more creative projects that are not simply processing gas and selling natural gas or NGLs,” says Heywood. Instead, the opportunities lie in using NGLs to produce value-added products.
For example, he explains, Alberta is oversupplied on propane. Typically, propane is sold at a very steep discount to other markets because of a need to export it. But a petrochemical facility in the province creates local demand for that propane and turns it into a product, like plastic pellets, that can be sold outside of Alberta.
“This provides diversification where you’re not only relying on getting propane onto rail and taking that lower price. You can actually employ a value-added process with propane development, which not only provides jobs and tax revenue but also provides a better pricing realization for our upstream oil and gas companies that are producing the propane,” he says.
This kind of industry development could have a knock-on diversification effect too, says Heywood.
“The development of petrochemicals has the potential for increasing the demand on actual energy requirements for powering these types of facilities. So this could potentially drive renewable power generation or the development of cogeneration facilities to support the demand. Such facilities could support the economy and the energy transition to further diversify our power generation mix as well,” he says.
"The development of petrochemicals has the potential for increasing the demand on actual energy requirements for powering these types of facilities. So this could potentially drive renewable power generation or the development of cogeneration facilities to support the demand. "
Director, Equity Research, Energy Infrastructure at ATB Capital Markets
Alberta’s high environmental record should appeal to investors
A main benefit of Alberta’s petrochemical industry are the higher environmental regulations and standards embedded into the production process compared to other places around the globe.
“Oil and gas executives in Alberta are positive on reducing greenhouse gas emissions. They want to improve their environmental, social and governance positions and be the stewards of the environment,” says Heywood.
One major example of this is The Alberta Carbon Trunk Line, which is the world's largest carbon capture and storage project. It’s a 240 km pipeline which gathers, compresses and stores CO2 and injects it into depleted oil reservoirs. At full capacity, the pipeline will transport up to 14.6 million tonnes of CO2 per year, which is equal to capturing the CO2 from more than 2.6 million cars in Alberta.
Such projects make the creation of petrochemical products more environmentally conscious and more economical, says Heywood. With technology continually improving combined with the province’s commitment to high environmental regulations and standards, Alberta’s petrochemical industry should be highly attractive to capital investment as global recovery picks up, he says.
Investment and transportation limitations remain a challenge for petrochemical growth
While there are many reasons to be optimistic about the future of petrochemicals, two of the current limitations are corporate investment and transportation.
The pandemic has seen investment in petrochemical projects delayed or put on hold. For example, Pembina Pipeline Corp. and Kuwait’s Petrochemical Industries Co. suspended their $4.5-billion joint venture to build an integrated propane dehydration plant (PDH) and polypropylene upgrading facility in Alberta due to the impacts of COVID-19.
“This year is looking better, but in 2020 there was a lot of reduction in capital programs and a lot of spending that has been restricted as companies want to focus on their balance sheets and have good financial flexibility going forward,” says Heywood.
The limitation for transportation is capacity.
“We rely heavily on rail networks within Canada for petrochemicals. So that means competing with crude oil, which must be transported by rail when there is not enough pipeline capacity. Developing more tidewater or coastal export terminals would reduce the price differential for Alberta products,” says Heywood.
With more export terminals, the potential for petrochemical export growth to foreign markets increases. “If you compare transportation from the west coast of British Columbia to Asian markets with the gulf coast to Asian markets, British Columbia is almost half the actual travel time between the markets,” he says. Despite this stark reality, it will require increasing Alberta’s petrochemical output to make investments in new terminals worthwhile.
What 2021 and beyond looks like for petrochemicals in Alberta
As Alberta moves into the post-pandemic period, the petrochemical sector is on a longer recovery path than other sectors of the economy. Heywood expects technology developments in petrochemicals and a growing interest in ESG practices to continue to improve the appetite for Alberta’s products.
“There is uncertainty going forward, but I do think on a longer-term basis the APIP program is very good. While it might not be in 2021, there will be petrochemicals projects considered down the road. The program puts the idea into a lot of potential investors' heads that Alberta petrochemicals are an investable option in the future,” says Heywood.