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Why Alberta wants its “pound of flesh” from Arctic gas pipeline
Gary Park
From toys to drinking glasses, film to yacht sails, there is one thing in common: They are among the thousands of items produced with derivatives from the natural gas stream.
And the underlying petrochemicals industry is a vital link in Alberta’s economic fabric, notwithstanding the cyclical fortunes that are often more dizzying than oil and gas prices.
In the past 10 years, the multi-billion sector has stumbled to an annual loss of C$1.1 billion and soared to annual sales of C$12 billion, 55 percent of that in exports. At its peak, about 240 petrochemical operations in Canada directly employ about 17,000.
While not a business for risk-averse investors, the petrochemical industry is seen by political leaders as an essential component of Alberta’s striving for diversification and its determination to profit from the value-added side of its raw natural resources. Alberta wants gas liquids All of which partly explains the sudden outburst from Premier Ralph Klein in May when he tossed an unexpected obstacle in the path of any Arctic gas pipeline that might cross Alberta.
He startled the gas industry and analysts by declaring Alberta will “get its pound of flesh” from Arctic gas — whether it originates from the North Slope or the Mackenzie Delta — by stripping whatever ethane, butane and propane is needed to fuel sprawling petrochemical complexes near Edmonton and Red Deer, in central Alberta.
Referring to assumptions that Arctic gas will be transported uninterrupted directly to the Lower 48, Klein said:
“We’re going to be firm and absolutely insistent that neither the producers nor the pipeline operators will have a bullet line through this province.
“We will have the ability to strip the liquids off that gas for our own petrochemical industry,” he said.
Scoffing at the critics who said he was overstepping his jurisdiction and risked antagonizing the U.S. government and North Slope gas owners, Klein said it did not matter that the gas in the pipeline would not belong to Alberta. “The land is our resource” and that land offered the “most expedient and most cost-efficient route” to U.S. markets, he declared.
National Energy Board oversees pipelines Some said Klein was engaging in bluster, some said he was dreaming and others said he had no chance of winning his case before the National Energy Board, which ultimately holds sway over pipelines crossing provincial boundaries and gas export permits.
But, whatever the substance of Klein’s tough line, his stand shows the Alberta government is still smarting over an earlier National Energy Board decision allowing the C$5 billion Alliance pipeline to ship 1.5 billion cubic feet a day of raw gas from northeastern British Columbia through Alberta to the U.S. Midwest without providing facilities to strip ethane.
The federal regulator felt that allowing the shipment of liquids-rich gas to a C$550 million extraction plant in Chicago represented a pay-off for the Alliance partners, who were embarking on a major gamble in challenging the TransCanada PipeLines’ monopoly over gas exports from Western Canada to the United States.
But the approval angered petrochemical operators in Alberta, such as Nova, Union Carbide and Amoco, who at the time were planning five new plants with a combined value of C$2.5 billion.
The industry’s loud squawks forced the Alberta government to form a task force on ethane exports, which, historically, have been stripped from more than half of the gas exported in provincial pipelines.
“When we get through, the petrochemical operators will have a policy they can lay their hat on with their investments,” said Steve West, who was energy minister at the time.
He said the “free ride” that allows Alliance to send ethane to the United States could jeopardize future expansion plans.
Shipments threaten expansions in Alberta Two years later, not much has changed, prompting Nova president and chief executive officer Jeff Lipton to reiterate that future petrochemical expansion in Alberta is threatened by the amount of gas being shipped directly to the United States.
He said companies have no intention of building more plants until they are assured of a long-term ethane supply.
“I don’t believe that in the current structure anyone would have enough confidence to put in a major new investment,” he said.
Lipton said that while the government has made past assurances, a change in Alberta’s royalty structure is urgently needed to entice gas producers to keep the liquids in the province.
Currently, royalties paid on gas liquids left in Alberta are higher than royalties paid if those products are shipped in the gas stream to the United States.
“If I wanted long-term growth in Alberta for petrochemicals, I would change the royalty structure to ensure that ethane, propane and butane have the same royalty whether they’re exported or extracted in the province,” Lipton said.
Nova’s newly expanded petrochemical site in central Alberta is rated among the lowest-cost producers in North America because of its access to cheap local feedstock, especially during a period of soft demand and high gas prices.
The gas prices ate into Nova’s first-quarter profit, with demand at its lowest ebb “in a long, long time” because of a slowdown in the manufacturing sector, but Lipton said he believes the supply-demand cycle has bottomed out and that the a recovery is in store, peaking in 2003-04.
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