Faced with a severe shortage of ethane, Alberta petrochemical producers are on edge over the prospect that liquids-rich Alaska gas might be shipped on a bullet line through the province.
The future of a C$12 billion industry that directly and indirectly employs 30,000 people in Alberta’s industrial heartland hinges on the outcome of current efforts by gas producers, petrochemical companies and the Alberta government to find ways to correct an ethane shortfall, which now stands at 20,000 barrels per day.
Two solutions are at the top of a list proposed by industry leaders:
• Connecting a gas line from Alaska into the existing Alberta pipeline system.
• Changing Alberta government policy to promote ethane production, mirroring the royalty regime used to kick-start oil sands investment.
What happens to Alaska gas on its way to Lower 48 markets depends largely on how quickly the Canadian and Alberta governments resolve the regulatory issues standing in the way of a pipeline, a Canadian Energy Research Institute petrochemical conference was told June 8.
Alaskans might opt for bullet line
Dave Tulk, director of strategic development and feedstock at Nova, said that unless the governments provide early leadership, the North Slope producers may opt for a bullet line over an Alberta hub, regardless of the higher cost.
But he said cost will not be the determining factor when the volumes of gas from Alaska could cover the cost of a US$20 billion pipeline within a couple of years.
Ramesh Ramachandran, president of Dow Chemical Canada, told the conference that he hopes the three-way talks will result in government policy that offers an alternative to the export of raw ethane out of Alberta.
He said it is time for the Alberta government to support the massive cost of an infrastructure that would gather all of the ethane produced in Alberta for use within the province.
To that end, he said petrochemical producers favor a royalty mechanism that encourages ethane production from gas gathering systems, without penalizing gas producers in the process.
“Upgrading of ethane to ethylene is no different from upgrading of tar sands to bitumen and energy-producing products,” said Ramachandran.
In acknowledging the high front-end costs of oil sands operations, producers pay a 1 percent royalty until they recover their capital investment.
Walking away an option
For years, petrochemical companies have periodically warned that they are prepared to walk away from their Alberta investments if the economics are unfavorable.
Ramachandran said “make no mistake … we are for-profit companies and we are not motivated to stay here out of altruism.”
He said Dow has already moved some of its non-Alberta production closer to overseas markets where stranded gas is available for a fraction of North American prices.
The message for Alberta which is “basically out of the global petrochemical market,” is that it faces a shot of “harsh reality” after three strong decades, he said.
Ramachandran said there is no chance that Alberta can compete in the Middle East, but government policy should keep the province on an even footing with the U.S. Gulf Coast, given that Alberta has access to the world’s largest market for ethylene products and sits on one of the world’s largest ethane resources.
The Alberta Energy and Utilities Board has estimated the province’s remaining ethane supply at about 123.9 cubic meters of extractable reserves and about 62.3 million cubic meters left in the marketable gas stream that is theoretically extractable.
Combined, that potential is enough feedstock for at least 13 years based on the 13.7 million cubic meters extracted in 2003.
But the board calculates that there is actually sufficient ethane gas to meet current demand for 25 years.
It said in its 2003 report the “remaining ultimate potential for liquid ethane is considered to be those reserves that could reasonably be recovered as liquid from the remaining ultimate potential of natural gas.”
Ethane extraction averaged about 41,200 cubic meters per day in 2004 and is expected to remain in that range for up to six years, but still well short of the 60,000 cubic meters per day of capacity.
Alberta liquids heating U.S. homes
What troubles the petrochemical industry is the knowledge that high volumes of liquids-rich gas are being shipped out of Alberta and end up heating U.S. homes.
The ethane issue has been an open sore in Alberta since the 1.3 billion cubic feet per day Alliance pipeline came on stream in 2000, offering a direct link from northern British Columbia, across Alberta to the Chicago area’s Aux Sable liquids extraction and fractionation plant that has capacity to handle 40,000 bpd of ethane and 30,000 bpd of other gas liquids.
That lost opportunity was blamed on the Alberta government’s decision to remove a caveat that ethane should not be sent down the pipeline, leaving the petrochemical companies seething, although gas producers argued that the petrochemical sector has passed up the chance to sign long-term contracts for feedstocks during 25 years of surplus ethane supply.
When today’s economics are taken into account, analysts say it makes far more sense to build a new petrochemical plant in Chicago, closer to the end market.
One new hope for averting supply problems is the prospect of building a new refinery to remove ethane from the oil sands.
Using Alaska liquids should be requirement
Former Alberta premier Peter Lougheed, who was instrumental in building a petrochemical industry in the 1970s, said in 2003 that using the oil sands could be an “incredible new page.”
Whatever else, however, he said the Alberta government should require liquids from Alaska gas to be extracted in the province.
“I’d play the card and I might not win, but I would not let that natural gas keep just flowing past our petrochemical plants without requiring that ethane to be taken out,” he said.
The Alberta Energy Research Institute has agreed that the massive wave of new oil sands projects could offer a feedstock source.
An institute-sponsored study concluded that a model integrating oil sands upgrading, refining and petrochemical units is economically and technically feasible, but conceded there was much work still to be done.
The study estimated the cost of a new refinery in the Edmonton area at C$8.5 billion, while the integrated project model would generate internal after-tax returns of 15.2 percent.
The use of mined oil sands and bitumen in petrochemicals might also benefit bitumen producers, by allowing them to diversify their market options.
But the institute said that a role for the oil sands would require a cross-industry consortium, while the government might have to share some of the risk.
Government not considering
Alberta Energy Minister Greg Melchin told a Canadian Energy Research Institute gas conference in March that the province should play a role in ensuring that Arctic gas becomes a source of feedstock to maintain a “vibrant petrochemical industry,” but he hastened to add that the government was not thinking of regulatory intervention.
“We don’t see that we’re going to be able to compel that to happen,” he said. “We just want to help ensure that we have the right structures in place.”
Duke du Plessis, a senior energy advisor to the Alberta Economic Development Department, told the June conference that the government is weighing a possible role in a refinery/petrochemical complex, while making it clear “they don’t want to interfere in the marketplace.”
Several speakers at this month’s conference said supply constraints on ethane are not the end of the road for the petrochemical sector, so long as it is prepared to diversify.
Gary Adams, president of Houston-based Chemical Markets Associates, said the high cost of energy in North America and low-priced Middle East natural gas has increased pressure on the sector to “reposition your business.”
He said Alberta could move along the plastic value chain from ethane to other co-products that could be derived from sources such as refining and downstream oil sands.
Adams said combining paraxylene with ethylene glycol to make polyesters would open the door to a market where demand growth has been in the double digits for years.
