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Gas prices ‘crippling’ chemical sector Canadian industry, federal regulator warn volatile natural gas prices, government indecision puts jobs, investment at risk Gary Park Petroleum News Canadian Contributing Writer
Wildly gyrating natural gas prices and government dithering are pointing to tough times ahead for Canada’s petrochemical industry unless there is action on several fronts, including an end to delays on the Mackenzie Gas Project, according to industry groups.
The Canadian Chemical Producers Association and the Canadian Manufacturers and Exporters have raised their concerns about the risk to job creation and economic growth posed by inadequate raw energy supplies.
Canada’s National Energy Board joined the chorus by predicting that volatile gas prices will stretch over the next few years, putting pressure on the petrochemical sector.
The chemical producers said the federal government’s reluctance to tackle the supply shortage will “cripple” Canada’s ability to attract business investment.
Their frustrations covered a wide spectrum, notably the myriad regulatory delays that have bogged down progress towards the Mackenzie project, the adoption of the Kyoto Protocol to curb greenhouse gas emissions and the obsession among legislators with gasoline pump prices and short-term solutions.
Chemical association President Richard Paton said Canada is “missing a huge opportunity to generate prosperity … by adding value to natural resources such as natural gas, oil and electricity.”
He said the consequences are evident in recent decisions by chemical manufacturers in British Columbia, Alberta and Ontario to shutdown plants, notably the Methanex operation, because of high energy costs.
Paton said new plants, instead of being developed in North America, are surfacing in South America, India and the Middle East, closer to plentiful energy supplies, while only one new facility is planned for Canada.
He said “there is no immediate solution … one would have thought that with all the resources of government, in the resource-rich country that we have, there would have been the foresight and the understanding of the energy demand-supply structure to not put us in this position where we as an industry have to close facilities or invest outside the country.”
To reverse that trend would be “extremely difficult” to achieve in a short period of time, Paton said.
Manufacturers and exports President Perrin Beatty, a former federal cabinet minister, said the costs of energy and the unreliable supply are resulting in a “competitive disadvantage” in Ontario, Canada’s industrial heartland. NEB: ‘extremely close balance’ in markets The National Energy Board, in an updated market assessment for natural gas and natural gas liquids to the end of 2006, said North American markets are entering a period of “extremely close balance” between supply and demand, with supply lagging behind over the past four years.
The federal regulator said the tight supply and high prices will challenge the gas liquids and petrochemical sectors over the next few years.
“Governments and the impacted sectors need to address options for diversification of feedstock supply and improvements in the efficiency of current NGL extraction processes.”
There could be some help on the supply side from coalbed methane and LNG imports, but consumers of all kinds will be forced to deal with what is being referred to as a “step-change” in gas prices, which producers are incapable of correcting, the report said.
It predicted gas prices will range from US$6.90 to $10.34 per million British thermal units over the next two years if North American oil prices average $50 a barrel. If crude prices move by $10 a barrel in either direction, the gas price band will stretch from $5.51 to $12.41.
“Given tight supplies and limited ability to increase supplies quickly, which could be further exacerbated by severe weather, gas prices are expected to remain high and volatile,” the board said. “As a result, gas prices may exceed the forecast range.”
The study predicted that Canada gas production will stay close to 16.8 billion cubic feet per day, with declines in conventional volumes offset by rising coalbed methane output.
NEB: high prices will encourage drilling High prices will be a “key factor in encouraging more gas drilling; however, the projected supply increases are not expected to keep pace with demand,” the regulator said. “The high levels of drilling activity have only managed to offset the higher decline rates and lower productivity of new wells.”
The report forecasts U.S. production will show a modest gain to 51.5 billion cubic feet per day in 2006 from 50.3 billion in 2004, with most of the increases coming from the Rocky Mountain states.
But the struggle to raise production could seriously harm the natural gas liquids market, which is already being squeezed by the growing demand for diluent to aid the flow of oil sands production through pipelines.
Higher gas prices also lower producer incentive to extract liquids, adding to the NGL supply crunch. That, in turn, constrains ethane supply, which underpins the Alberta petrochemical business. NEB: ethane production stable The report predicts ethane volumes will average 253,000 barrels per day through 2006, little changed from 2004, but the Alberta petrochemical plants have the capacity to process 270,000-280,000 bpd of ethane, suggesting the chemical producers should be pursuing longer-term options to achieve a sustainable ethane-based industry in the province, the board said.
It estimated ethane extracted from off-gases produced in oil sands operations could yield up to 50,000 bpd by 2015, while stripping liquids from gas shipped through Canada from Alaska could boost supplies by 300,000 bpd — but that assumes approval of the Alaska pipeline and the extraction of liquids in Alberta.
“To gain access to incremental ethane and to maintain competitiveness with the U.S. Gulf Coast, the petrochemical sector suggests that government policy should recognize the massive investments needed to convert ethane to ethylene and other high-value products,” the board said, adding Alberta’s current royalty regime already promotes other forms of energy production.
“In light of this, the petrochemical sector suggests that a royalty mechanism be developed to encourage incremental ethane production from Alberta gas-gathering systems.”
Otherwise, the petrochemical industry should be encouraged to shift its focus from ethane to other feedstocks such as propane or synthetic gas liquids from (oil sands) upgrader and refinery processes.”
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