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Fueling petrochemicals in Alberta Province offers royalty credits to leverage surplus natural gas, advance hopes of value-added plants; can province compete with US? GARY PARK For Petroleum News
Alberta’s left-of-center government is dredging up ideas from more than 40 years ago, both to rescue a distressed natural gas sector and bolster its resolve to build a “progressive” economy that can offset plans to phase out the province’s coal industry.
In a quick follow up to its freshly minted royalty regime, the administration of Premier Rachel Notley plans to offer incentives to reboot sales of petrochemicals which have been stalled around C$14 billion a year.
The government will deploy its royalty system by offering up to C$500 million a year in credits that can be sold to producers who supply natural gas and liquids feedstock to petrochemical plants, hoping that will spark C$3 billion to C$5 billion in capital investment on two or three plants and attract players from Asia.
Construction, permanent jobs Each project is estimated to create 2,000 to 3,000 construction jobs and result in 1,000 permanent jobs once the plants are operating.
Those job numbers might appear to be over-reaching, given that Williams Energy Canada and Methanex, in floating their own petrochemical plants in recent years, have forecast full-time jobs of 80 and 50, respectively.
Some observers warn that Alberta could end up with the same dashed dreams that have accompanied British Columbia’s extravagant hopes of creating 100,000 new jobs and more than C$100 billion in revenue over 30 years.
In its submission to the Alberta royalty review panel, the Chemical Industry Association said C$150 billion in projects are underway, announced or anticipated across North America, demonstrating the scope and depth of competition facing Alberta.
As with U.S. plans to export LNG, most of the largest proposed petrochemical plants in the U.S. would be located on the Gulf Coast, giving them a clear-cut edge over landlocked facilities in Alberta.
However, the chemical association did suggest that Alberta could use its royalties as “an effective tool in providing economic diversity and responsible development.”
The review panel echoed that observation in an overlooked element of its 209-page final report by citing the liquids-rich Montney and Duvernay formations in Alberta and British Columbia as holding another 100 years of natural gas development.
It said that “if Alberta natural gas will be challenged to be competitive in its raw form, then we can take the opportunity to think differently and creatively about optimizing our natural gas resources.”
The panel said other resource-rich jurisdictions, including Saudi Arabia, have “faced and overcome similar challenges.”
Use for byproducts For now, the plan laid out by the Alberta government would use natural gas byproducts such as methane and propane to manufacture plastic, detergents and textiles.
Royalty credits would be paid out over three years after a facility came on-line.
Although petrochemical plants do not pay royalties, they would be able to trade or sell credits to oil and gas producers, enabling those companies to lower their royalty payments.
Energy Minister Margaret McCuaig-Boyd and Economic Development and Trade Minister Deron Bilous, without providing names, both made oblique references to two “shovel-ready” projects that could start construction this year.
McCuaig-Boyd said a working group will evaluate opportunities to take advantage of surplus gas that is available as a result of horizontal and multi-stage fracturing work.
She said Alberta is strongly positioned to exploit the value-added end and diversification of gas production, noting that the province has “got lots of gas for a long time.”
McCuaig-Boyd said the program will build on the royalty review panel’s recommendation for a “value-added natural gas strategy to support further upgrading and production of higher-value energy products in Alberta.”
Value of incentive questioned But Ron Kneebone, an economics professor at the University of Calgary, questioned the value of the incentive strategy because of the benefits it would provide for an industry that is already reaping the rewards of low gas prices at about C$2.20 per thousand cubic feet, low interest rates and a low Canadian dollar.
“I’m wondering why the government chose this industry to try to encourage expansion when it has every incentive available already to expand what it does,” he told the Edmonton Journal. “The C$500 million could have been used for tax reductions, which we also know creates jobs.”
Kneebone said spending C$500,000 to create one permanent job could be justified, but he questioned how long those jobs would survive if costs rise.
However, Bilous said the incentives are needed to spur the construction of plants such as a methane cracker that breaks open methane molecules to be used as a building block for something new and a propane processor.
He said the U.S. government offers incentives to facilities in Louisiana and Texas, where construction costs are up to 40 percent cheaper than in Alberta.
Ed Gibbons, chair of the Alberta Industrial Heartland Association, which promotes upgraders, refineries and petrochemical plants in an area near Edmonton, welcomed the government’s initiative.
“We’ve got to get (thousands of laid-off) engineers working in Calgary and we’ve got to keep contractors and construction people working in Edmonton. So it’s keeping dollars within our boundaries,” he said.
In rolling out the petrochemical strategy, the government also shelved its earlier talk of supporting the construction of new upgraders and refineries for the oil sands sector.
McCuaig conceded that is “further down the road,” noting that there “just isn’t a business case” in the current commodity price environment.
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