Canadian Petrochemical

Market Whitepaper 2015

Canadian Petrochemical Market

Whitepaper 2015

Canadas Petrochemical Expansion

Potential
Introduction
The Canadian petrochemical industry has renewed potential to enter an
era of renaissance bolstered by the abundance of cheap US shale gas, a
developed service sector and availability of land. Canada's key petrochemical production clusters, concentrated in Alberta, Ontario and
Quebec are starting to see a new wave of investment after a decade of
stagnation following the recent global economic downturn.
A new focus on using cheap US shale gas to provide ethane as a feedstock for petrochemical products will likely boost production, allowing
petrochemical producers to stay competitive against their US counterparts.
However, an abundant energy supply is not all that is necessary to give
the industry a new lease of life. Pipeline infrastructure, new roads and
railways are also paramount as without them transportation of any
feedstock can be prohibitively expensive. In addition, if Canada wants to
tap into its own shale resources, it will need to develop the necessary
infrastructure to access them at often remote locations.
The disadvantages that the industry is facing are not impossible to
overcome, however. With co-operation between Canada and the US,
new pipelines can be built at relatively short notice. These barriers can be
overcome with the help of legislature at local and national levels. What
could somewhat hinder progress is environmental opposition from
residents and green organizations.
However, without investment in new pipelines, getting liquefied natural
gas (LNG) sales deals signed with key Asian buyers and increased government support the expansion of the petrochemical industry will remain
constrained. A coordinated, cross-province effort to monetize the
countrys oil and gas resources is necessary to deal with cost inflation
and labour shortages, which are also key challenges for the industry.
This report lays out in detail the potential to expand Canadas petrochemical industry, the advantages and opportunities available to investors in Canada and the obstacles which must be overcome to allow the
industry to expand.

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Canadas oil and gas supply potential

Canada has vast oil resources which could fuel a boom in the countrys
petrochemical sector. Canada, the worlds fifth-largest crude producer
has 173 billion barrels of proven oil reserves according to the US Energy
Information Administration (EIA). Almost all these around 167 billion
barrels are located in the oil sands of Alberta.
Albertas Industrial Heartland, a 582 sq km region northeast of Edmonton,
is home to Canadas largest concentration of petroleum refining, petrochemical, and chemical process

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Canadian Petrochemical Market

Whitepaper 2015

The Downstream Petrochemical Sector in Canada

Alberta is Canadas leading producer of petrochemicals. Located primarily in Joffre and Fort Saskatchewan, petrochemical production is one of
the largest manufacturing industries in the province. It features four
ethane-cracking plants, including two of the worlds largest, with combined annual capacity to produce 8.6 billion pounds of ethylene.
Ethylene comprises the bulk of Albertas petrochemical production, with
up to 245,000 bpd of ethane feedstock being extracted from the
provinces natural gas supply. As natural gas production continues to fall
in the province, there will be a corresponding drop in supplies of ethane
and other natural gas liquids.
To offset this decrease, there are plans to extract ethane from off gases
from bitumen upgrading. It is estimated that with new refining capacity
added, up to 150,000 bpd of ethane could be produced from bitumen
upgrading and used for petrochemical feedstock.

In Ontario Canadas other key petrochemical production centre - the

Sarnia-Lambton Refining and Petrochemical Complex lies at the heart of
Ontarios manufacturing district at the site of Canadas first crude oil
discovery in 1857. The complex receives crude oil and natural gas feedstock mainly from western Canada via the Enbridge Pipeline and
TransCanadas Pipeline.

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Plants in Ontario and Quebec are better situated than those on the Gulf
Coast to supply the large customer base in Canada and northeastern and
central US. In contrast, commodities manufactured in Alberta are largely
shipped to central and western US markets or offshore because of a lack
of pipeline access.
Sarnia benefits from its proximity to nearby oil refineries, extensive
pipeline infrastructure, a tanker terminal for offshore shipments, and
ready access to large US and Canadian customers via excellent transportation networks.
In Quebec the petrochemical industry is located around Montral and
uses solely oil-based feedstocks. Crude oil arrives in Montral by tanker
or via pipeline from Portland, Maine. Although on a smaller scale than
Sarnia, Montral is also an integrated petrochemical complex that offers
oil refineries, a tanker terminal for ocean shipments, and access to the
markets of eastern and central Canada and the US.

Canadian Petrochemical Market

Whitepaper 2015

Canadas Gas Reserves

Canada has vast shale gas reserves of its own which could serve as
feedstock for the petrochemical industry.
According to the US EIA, Canada has the fifth largest shale gas reserves in
the world with around 573 trillion cubic feet thought to be recoverable around 8% of the global total.
However Canadas huge shale gas fields are land-locked in northern
British Colombia. The remote geographical location of the resources
increases capital costs for upstream operators, as they have to build new
infrastructure to get the resources to markets. And with US gas prices at
multi-year lows, Canadian projects have struggled to get past the planning stage and are unlikely to be able to compete with low-cost abundant supplies from the US.
The key to increasing Canadas gas production and improving supplies of
feedstock will be diversifying from its traditional sales market - the US.
Getting LNG export projects off the drawing board and getting long-term
sales deals signed with Asian buyers, will be crucial, industry experts say.
All of Canada's natural gas exports are directed to the US via pipelines.
Canada accounts for 97% of US natural gas imports, most of which come
from western provinces.

Rising US Shale Gas Production and Its Impact on

Canadas Industry
Another challenge facing the Canadian petrochemical industry is that
rising shale gas output at its southern neighbour has created the prospect for long-term availability of relatively low-cost natural gas and
natural gas liquids in North America. This in turn, has curbed Canadian
drilling activity and reduced availability of ethane over the past decade. In
addition, the growing shale gas output in the US has dampened demand
for Canadian natural gas.

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EIA Projections For US Crude and Natural Gas Production to 2040. Source: EIA

Canadian Petrochemical Market

Whitepaper 2015

When less gas is produced, fewer liquids are recovered. This then results
in Albertas petrochemical industry not having sufficient supplies of
ethane, which results in ethylene-based derivative units at petrochemical
plants running under-capacity.

Raw material and utilities make up almost two-thirds of petrochemical

manufacturing costs, according to the Canadian government, thus low
feedstock costs are critical to the success of Canadian operations.
Nova Chemicals is exploiting the USs vast unconventional gas reserves
to access ethane from natural gas shale regions in the northeastern US
for its crackers in Corunna, Ontario, and Joffre, Alberta. In 2014 Nova
switched from using naphta to using natural gas liquids to reduce costs.
The company says this could help open the door for future expansion in
Canadas Sarnia-Lambton's Chemical Valley by having access to stable
and low-cost feedstock supplies.
They also plan to increase ethylene production capacity by 20% at their
Corunna cracker in Ontario, to 1 million t/y, between 2014 and 2018. In
addition, during the last two years the company has spent $250 million
converting its Corunna site to use up to 100% ethane from natural gas
and connect the facility by pipeline to the US Marcellus shale reserves.
Other Canadian companies have also responded to the impact of soaring
US shale gas supply by trying to utilise ethane imported from the US to
supply the Canadian petrochemical industry.

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Growth Forecasts
Canadas industrial chemical sector saw operating profits reach an
all-time high of $3.9 billion in 2013. Sales of industrial chemicals grew
10% to $29.2 billion, exceeding a previous high set in a pre-recession
peak of 2008.
Chemical exports increased by 5% last year, reaching $19.6 billion the
industrys second-best year ever, according to the Chemistry Industry
Association of Canada (CIAC). Industry-wide capital expenditures also
increased by over 20%, reaching $2.6 billion.
The CIAC is forecasting capital expenditures in the sector will jump by
30% next year, to $3.4 billion, after a decade of very limited expansion.

Canadian Petrochemical Market

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We are slowly starting to get companies recognising the potential here.

A lot of low hanging fruit in the US has already been picked up. So
companies are starting to look around elsewhere, said Neil Shelly,
Executive Director Alberta's Industrial Heartland Association.
Theres also the political and economic stability in the region. If youre
going to invest $1 billion in a region you want to know your investment is
going to be safe, Shelly added.
If Canada can create the right investment conditions, especially for big
projects, then further investment will follow. While this year the CIAC
expects chemical sales to fall by 7%, mainly because of lower oil and gas
prices, over the medium term the association is optimistic about the
industrys prospects for growth and attracting investment.
The association estimates that the industry could attract up to $10 billion
in new investments over the next 10 years, thanks to the availability of
North American shale gas and the continents other natural resources.

Pipelines, Infrastructure and Market Access

However, Canada faces an array of challenges in attracting the investment needed to expand it petrochemical sector.

Source: Canadian Energy Pipeline Association

A lack of access to new pipelines, which restricts the sectors ability to

take Canadas crude and natural gas to new markets, is the biggest
obstacle preventing the petrochemical industry from expanding.

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Source: Canadian Energy Pipeline Association

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Despite a wealth of natural resources and a developed service sector,

Canadas lack of pipeline capacity also restricts its ability to transport its
oil and gas to other markets for its crude and natural gas.

Canadian Petrochemical Market

Whitepaper 2015

Pipeline Operators
Canada can transport 3.3 million b/d of oil over 22,000 miles of pipeline,
according to the Canadian Energy Pipeline Association (CEPA).
Three companies operate the majority of Canadas crude export pipelines: Enbridge, Kinder Morgan, and TransCanada. All these companies
have new or pipeline expansion projects in development which aim to
ultimately increase the pipeline capacity to deliver oil from Alberta to the
US Midwest and US Gulf Coast.
Virtually all of Canadas crude oil exports are directed to US refineries
because of a lack of domestic refining capacity which is capable of
processing heavier crudes and a legacy of cross border trade between
the two countries.
Traditionally the US has been Canadas main crude and gas export
market. Almost 97% of Canadian oil exports were directed to the US in
2013, according to the EIA, making Canada the largest supplier of foreign
oil to the US.
Soaring crude and gas output from the US has exacerbated Canadas
crude infrastructure problem as it struggles to find new markets for its oil.
A surge in North Dakota oil output over the past decade has brought new
competition for markets in the US Midwest historically the end point
for Albertan oil.
Clement Bowman, Chair of Canadas Energy Pathways Task Force (EPTF),
said that improving Canadas refining capacity and improving access to
pipelines to bring bitumen from east to west Canada would double the
value of the product for export markets and improve feedstock availability for the petrochemical industry.
The key thing is for Canada to establish access to pipelines as a longterm national priority. The next step is building a pipeline to bring bituumen from east to west Canada. That will be met by considerable environmental challenges from activists and local groups, Bowman said
He added that reducing Canadas reliance on the US as its sole oil and
gas export market, targeting new markets in Asia and boosting its pipeline
transportation capacity will be crucial to the future success of the industry.

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Enbridge and Kinder Morgan have proposed new or expanded pipelines

to the US West Coast, which are only in the preliminary stages of planning and regulatory review.

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Kinder Morgan aims to expand its existing Trans Mountain pipeline

system by building a second pipeline, which would increase Trans Mountain's capacity to 890,000 b/d. The company has submitted an application with the National Energy Board and expects to begin construction in
late 2015.

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Enbridge is pursuing the Northern Gateway Pipeline Project, which would

end at a deep-water port in Kitimat, British Columbia. Northern Gateway

Canadian Petrochemical Market

Whitepaper 2015

would include a 525,000 b/d crude oil pipeline and a smaller parallel
pipeline to carry condensate back to Alberta. It is expected to begin
operating in 2018.
There is also TransCanadas Energy East proposal a plan to build a
4,600-km pipeline, which would carry 1.1 million bpd crude from Alberta
and Saskatchewan to refineries in Eastern Canada.
The pipeline would to be constructed using, in part, surplus gas transmission capacity to connect with refineries in Quebec by 2017.
However, the project has met with delays because of the lengthy process
of applying for regulatory approval from Quebecs National Energy
Board. The pipeline would be North Americas largest and would involve
converting 16,000 km of unused natural gas pipelines.
The completion of either or both of the competing Kinder Morgan and
Enbridge projects would create a new export outlet for oil sands crude.
Additional pipeline capacity to Canada's west coast would provide a huge
trade boost for Canada and would reduce its overland dependence on
the US market while providing access to growing Asian economies in the
Pacific Basin.
The need to factor in the cost of pipeline construction to transport
remote reserves to markets is another reason project costs have escalated across Canadas entire energy sector.
In July last year US firm Apache, Chevrons development partner for
Kitimat LNG terminal on Canadas west coast, said it was pulling out of
the project due to the $15 billion price tag.

Rail Transportation
An increasing amount of oil is transported by rail to overcome infrastructure constraints in the mid-continent region but this is more expensive
and there are safety issues with transporting by rail.
ADD STOCK PHOTO OF OIL TANK TRAIN

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Current rail loading capacity is estimated at 300,000 b/d and the Canadian Association of Petroleum Producers (CAPP) projects that by 2016,
Canada will transport up to 700,000 b/d of crude oil by rail.
Issues related to availability, reliability and liability for rail car shipments
continue to pose a challenge in getting product to market, leading to
higher transportation costs and negatively impacting on competitiveness.

Canadian Petrochemical Market

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LNG Opportunities
The prospect of LNG exports to Asia opens up a new opportunity for
moving gas from stranded pools to markets. However, monetising these
reserves will depend on whether upstream operators can get long-term
LNG export deals signed with big Asian buyers beforehand.
We think there is huge potential [for petrochemical expansion]. We have
the same advantages they [the US] do. The downside we have is that our
major export market is the US. The challenge for Canada is to find new
markets for its natural gas, said John Margeson, Director of Business and
Economics at the Chemistry Industry Association of Canada (CIAC).
LNG is the first thing that has to happen. It will signal that gas production
rates will go up then companies will do the maths to see if it will warrant
new investment., Margeson added. He also said that boosting Canadas
domestic gas consumption, especially in rural areas would likely provide
a boost to the industry.

Costs and Labour Shortages

Overcoming crippling cost inflation and signing sales deals with new
markets in Asia will be keys to incentivising upstream operators to invest
in new projects, in turn ensuring there is sufficient feedstock available.
However, these will only be the first hurdles to overcome in an industry
plagued by a shortage of skilled labour - although the sector is known to
employ a highly skilled workforce.
Concerns about labour costs are most evident in Alberta due to robust
demand for workers in the energy sector, especially for the oil sands. The
strong pull from the oil sector is placing upward pressure on chemical
company wages in order to retain workers.
In other provinces, labour issues are related primarily to the limited
supply of skilled new workers that will be needed as an ageing workforce
begins to retire in larger numbers.

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However industry experts said that if oil prices remain depressed for an
extended period of time, this situation might begin to change again.
In western Canada there is an issue where there has been a lot of
demand for skilled workers so it has pushed up costs. In Sarnia there is a
huge availability of labour that is not utilised. Costs in Ontario are 30-40%
lower than in Alberta.

May 11-12, Calgary

Bowman, from Canadas EPTF, said that as oil prices have come down
there has been a slowdown in investment in upstream projects. This will
eventually create an incentive to build new infrastructure and boost the
industry outside of Alberta.

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Previously most capital was invested in the oil sands. Alberta has a
population of 4 million people so labour is stretched.

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With oil prices dropping to $50 per barrel we have seen a big drop in
capital costs so competition for skilled labour will ease up. Shelly from
Alberta's Industrial Heartland Association said.

Canadian Petrochemical Market

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Shelly added that the current weakness of the Canadian dollar, relative to
the US dollar, has provided a cost advantage for Canadian exporters,
particularly those selling into the US.

Social License and Environmental Concerns

Other obstacles to expanding the industry include social license and
environmental concerns.
Canada's petrochemical industry, along with other chemical and related
sectors, must deal with a variety of environmental issues being addressed
by federal, provincial and municipal regulators. These include:
control of odours
release of toxic chemicals
volatile organic compound (VOC) emissions
generation of greenhouse gases
emissions of contributors to acid rain
ozone depleting substances
testing required prior to introduction of new substances
land contamination and storage
handling mishaps.
Another uncertainty for operators is the effects of carbon taxes and
environmental legislation going forward. The federal government have
pledged to support carbon capture and storage and are committed to
developing clean energy sources. In the future this could impact the
amount of fossil fuels which are allowed to be used as petrochemical
feedstock.
Receiving public approval for projects is also crucial to winning regulatory approval. Maintaining constructive dialogue with all the parties
involved, including government bodies, First Nations communities to
receive public approval for projects is essential to get them off the
drawing board.

Business Climate and Competition with the US

The Canadian petrochemical industry faces stiff competition for investment with the US, particularly from the US Gulf Coast, which has existing
infrastructure and abundant supplies of cheap US gas as feedstock.

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One of the biggest advantages to operating in Canada is that theres

greater availability of land than in the US, in part because petrochemical
investment has been directed south to the US for so long, rendering
some Canadian projects unable to remain competitive.
A lot of older plants have been torn down. There are a lot of brownfield
sites which can be developed and the energy infrastructure is also in
place so we think there is a significant opportunity here for further
development - the main difference between the US and Alberta is market
access, Bowman from Canadas EPTF said.

Canadian Petrochemical Market

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For Canada to compete with the US petrochemical sector it must offer

attractive investment conditions and show it has strong government
support both financially and in terms of there being a swift and transparent regulatory approvals process.
The chemical industry is currently taking advantage of the governments
competitive corporate tax rate and the temporary accelerated capital
cost allowance (ACCA).
Canada currently offers an Accelerated Capital Cost Allowance (ACCA)
that provides a cash-flow advantage for new investments in manufacturing machinery and equipment. However, the ACCA is scheduled to expire
at the end of 2015. The CIAC is lobbying the government to extend this
to a long-term, between 7-10 years, policy measure, saying it will be
crucial for attracting industry investment. This, the CIAC expects, will
level the playing field with the US and support a competitive business
climate in Canada.
Corporate tax rates in Canada are currently pegged at 26.5%. In the key
provinces of Alberta and Ontario, the combined federal/provincial rate is
25%. In British Columbia the combined rate is 26%, and in Quebec it is
26.9%, which is more competitive than the US, where according to
KPMG, the corporate tax rate in 2014 was 40%.

Conclusion
Canadas petrochemical industry has huge potential to expand but
whether it achieves this will be dictated by feedstock availability and
access to transport infrastructure to open up new markets for its oil and
gas. This will be critical for Canada to stay competitive against its southern neighbour. In addition competitive electricity prices, advantageous
environmental policies and strategic tax measures such as the Accelerated Capital Cost Allowance need to be in place supporting the growth
of the industry.
Alleviating regional skills shortages and containing construction costs will
also play a role in attracting investors to the sector.
Canada has the potential to create a petrochemical boom and all the
obstacles it is facing are solvable as the country has low natural gas
prices, a quality industrial services industry and everything is in place to
educate a skilled labour force.

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Currently the domestic shale oil and gas industries are still in their infancy
and any major growth will be restricted by the availability of cheap US
feedstock production, but the potential is certainly there for investors to
make it big in a country famous for its legislative and economic stability.