High demand helped to lift profits for Canadian chemical producers in 2004, and experts say this trend will continue in 2005. Feedstock availability is still a big issue for Canadian chemical producers, but they are working on ways to harness Canada's hydrocarbon riches for new petrochemical investments.
David Podruzny, senior manager and secretary to the board at the Canadian Chemical Producers' Association (CCPA), says the recovery was in full swing in 2004. "2004 has been a top-of-business-cycle year, and 2005 is looking to be more of the same, although perhaps with some softening," he says. "We may end up with close to record profits and certainly new highs in sales and exports."
Indicators of the performance of the Canadian chemical industry were up sharply in 2004. According to C&EN projections of data from Statistics Canada, chemical production is expected to increase for 16 of 17 major chemicals. Only toluene is expected to decrease. Two key Canadian products, ethylene and polyethylene, are projected to climb by more than 8% and 12%, respectively.
The high production pushed up operating rates. According to CCPA surveys, some producers had to ration certain products to customers because supplies were so tight. Val Mirosh, president of olefins and feedstocks at Nova Chemicals, saw tightening in his company's Canadian olefins business. "Operating rates across the industry are at the mid-90% mark, and we're very much in that category," he says. "Most of the olefins units are running at that rate, which is effectively at full capacity."
Prices, in turn, rose sharply across the sector in 2004. The higher prices and strong demand pushed the value of chemical shipments up across the industry.
The trade picture improved for the Canadian chemical industry as well in 2004. The Canadian chemical trade deficit is expected to shrink by $1 billion in 2004, the first decline since 2000.
The strong demand and operating rates made the year profitable for Canadian chemical producers, according to a CCPA survey. Profits, which were about $600 million in 2003, ballooned to $1.6 billion in 2004 and are forecast to rise to nearly $1.8 billion in 2005.
CCPA doesn't expect other indicators to slow down much, either. Its members expect sales to increase by 6% and exports to increase by 7% in 2005.
Even capital spending is recovering in Canada, albeit not to the $1.4 billion annual rates seen from 1998 to 2000, when major projects were being completed in Alberta. But after declining to roughly $700 million in 2003 and 2004, capital spending is expected to rise by 32% in 2005.
In the longer term, the Canadian petrochemical industry will need additional sources of feedstock if it is to build major petrochemical projects, experts say. "We are looking at the energy supply-and- demand balance as being a pretty crucial component for future growth opportunities," Podruzny says.
For Alberta, the conventional thinking is that major petrochemical expansions will have to wait for additional ethane from the Mackenzie Delta in northern Canada and from Alaska. However, chemical producers say some smaller expansions are possible, even without a new supply of natural gas. They add that northern Alberta's tar sands--bitumen-rich deposits--would suffice for major expansions.
According to remarks by J. Michael Yeager, director and senior vice president of Imperial Oil, at a North American gas conference, the three major gas fields of the Mackenzie Delta have some 6.3 trillion cu ft of gas reserves. An investment of some $5.4 billion would bring the gas down to the pipeline system in Alberta in the 2010-to-2012 timeframe.
But, sources say, the Mackenzie gas is likely not as rich in ethane as Alaskan gas, which represents the biggest future opportunity for Alberta petrochemical producers. For years, explains Mirosh, oil producers in Alaska have been injecting associated natural gas liquids back into the ground. Now that oil production in the state is declining, the practice is becoming uneconomical.
If U.S. economics and government policy align to build a pipeline to connect this Alaskan gas to the North American market, it could be a bonanza for chemical producers in Alberta, a likely route for the gas to the U.S. "You can easily have enough feedstock there to support, on a long-term basis, another major ethylene cracker facility in Alberta," Mirosh says.
Ramesh Ramachandran, president of Dow Chemical Canada, recently wrote that even if the gas is developed, it isn't definite that natural gas liquids will be extracted for use as petrochemical feedstock in Alberta. "Projections of liquids-rich gas flow through Alberta show potential feedstocks large enough to see us through the foreseeable future," he said. "We need to ensure that both the Mackenzie Valley gas and the Alaska gas drop off petrochemical feedstocks in Alberta if this province has any chance of expanding its petrochemical industry."
However, Mirosh emphasizes that all of Alberta's "eggs" aren't only in the northern gas basket. "I don't think it is fair to paint a picture that everybody is sitting there waiting for Alaskan gas to arrive before anything can happen," he says. "We haven't looked under every rock, but there are some existing opportunities in terms of feedstocks."
For example, Nova has been running propane through its ethane-based ethylene crackers in Joffre. It is building a pipeline from Fort Saskatchewan--its source of propane--to Joffre to ramp up propane use there. The idea is that because of seasonal natural gas consumption, more natural gas liquids are extracted in the winter. As a result, ethane is plentiful in the winter but in short supply in the summer. Propane, Mirosh explains, will help balance Nova's feedstock supply. "It also happens that propane is relatively abundant in the summertime in Alberta," he says.
With the cracking of propane, however, come more propylene molecules in Alberta. Propylene extracted from natural gas liquids or from oil sands is usually exported to the U.S. in railcars. According to Mirosh, roughly 200,000 metric tons of propylene is available in Alberta each year, enough to support a new polypropylene plant. He adds that there is also enough propylene in Ontario to support a polypropylene unit.
The oil sands could be the next source of feedstocks for the Alberta petrochemical industry. Mirosh says volumes of gases from the refining of synthetic crude could support petrochemical investment. He cautions, however, that in order for the feedstocks to become available, more refining capacity will be needed in Alberta. "The fundamental problem is that as expansion occurs in the tar sands, there need to be refiners that will actually be capable of taking that production," he says. Currently, "there is almost a saturation of refining capacity."
The long-term growth of Canada's petrochemical industry need not be limited to the traditional centers of Alberta, Ontario, and Quebec. Keltic Petrochemicals, a company formed by Calgary businessman Kevin Dunn, has a plan to build an ethylene cracker complex in Goldboro, Nova Scotia.
The plan is massive, calling for a 1.5 million-metric-ton ethylene cracker, two polyethylene units, a polypropylene unit, a cogeneration plant, and a liquefied natural gas (LNG) terminal. Total investment, according to Dunn, would be as much as $4 billion.
Dunn plans to use the ethane from the Sable Offshore Energy Project and supplement that feedstock with natural gas liquids extracted from LNG imported via the new terminal. Some 30% of the feedstock will come from local Sable Island gas, and about 70% would be imported by ship.
Several companies have signed engineering contracts with Keltic. Univation Technologies has signed a letter of intent to conduct engineering work on two Unipol reactors that it would license to Keltic. Stone & Webster is set to do front-end engineering and design of the complex. And German commercial bank WestLB is Keltic's financial adviser.
Dunn says he is working on the tough part: finding people who will hand billions of dollars to a company that has neither built nor owned a chemical plant. Dunn says Keltic may have partners already in the chemical industry. He assures C&EN that Keltic is "real close to signing the feedstock agreement in January."
Many in the chemical industry are intrigued, yet skeptical, about the project's details. Mirosh doubts that a consistent ethane supply can be maintained through discrete shipments of LNG. "The issue with any cracker, in addition to the cost of the feedstock, is the issue of supply," he says. "When you run one of these world-scale crackers, they are monsters in terms of how much ethane they consume in a day," he says.
Mirosh also wonders if the ethane content of LNG will shrink in coming years, given the growing interest in petrochemical projects in the Middle East. Countries in the region have their own incentives to extract ethane from natural gas and feed their own petrochemical projects. The natural gas liquids content of LNG, he says, may get lower and lower.
However, Dunn intends to begin construction after receiving regulatory approvals midyear. If the cracker moves forward, it will likely be Canada's only new ethylene complex in a long time.