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Big Oil’s Petrochemical Bet Has Hit A Snag

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Big oil has made significant…

Jon LeSage

Jon LeSage

Jon LeSage is a California-based journalist covering clean vehicles, alternative energy, and economic and regulatory trends shaping the automotive, transportation, and mobility sectors.

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Is This North America’s Next PetChem Hub?

Alberta is poised to find a booming market supplying petrochemical companies from its natural gas shale fields — and cost-competitive enough to potentially take away some of the U.S. oil and gas market’s share.

Hydraulic fracturing, or fracking, has unlocked vast reserves of natural gas from shale rock in the U.S., which began transforming the country’s markets starting a decade ago. Alberta sees real potential in mov-ing beyond the primary use of its extracted oil and gas — such as motor fuels, heating, and power genera-tion — into petrochemicals used in plastics, fertilizer, fuel, and other products.

That’s been the case in the U.S., especially in the south. Since 2010, U.S. Gulf Coast shale fields have gen-erated $194 billion in capital investments to build or expand chemical plants.

As for Alberta, a real competitive advantage will be charging prices that are about one-third the cost in the U.S. In land-locked Alberta, the province expects that its low prices will attract investors willing to spend billions to expand the Canadian petrochemical market and reach buyers around the world.

The province has been supporting diversifying its oil-based economy for the past two years. In 2016, Alber-ta initiated incentives supporting petrochemical plants. Two projects have been approved to share C$500 million in royalty credits. One of them, Inter Pipeline Ltd, is investing C3.5 billion ($2.7 billion) to build a petrochemical plant near Edmonton.

In June, Alberta solicited bids in a second subsidy round for petrochemical plants.

Alberta’s Athabasca oil sands (or tar sands) have become a major supplier of petroleum and natural gas to global markets such as the U.S. Canadian oil has become vital to the U.S. reducing imports from OPEC. Canada supplied 40 percent of U.S. oil imports in 2017, reports the U.S. Energy Information Administration. Related: Is Renewable Energy As Clean As We Think?

A partnership between the two countries to expand Canada’s oil and gas reserves in Alberta has been slowed down again. Efforts over the past decade to build the Keystone XL pipeline to refine tar sands by shipping them through the pipelines between Alberta and U.S. facilities has hit another legal snag. It could delay pipeline construction yet again.

A U.S. federal judge this month ruled that the U.S. State Department must conduct a new environmental review of the project after the pipeline’s route was changed. By crossing the U.S.-Canadian border, the State Department is required to obtain permits for the project.

There’s still another legal battle to be cleared as the Keystone XL awaits a case to be ruled on by the Ne-braska Supreme Court.

TransCanada has said it would not begin construction before the second quarter of 2019. The latest legal setbacks could delay that start time even longer.

Competing for petrochemical business from U.S. companies in the Gulf region presents another tough challenge for Canada. Skeptics say that Alberta’s incentives fall short of those offered in the U.S., and that the province faces the disadvantages of higher capital costs and inadequate infrastructure.

Canadian companies are supporting development of the market beyond government support. CF Industries Holdings Inc. plans to increase ammonia fertilizer production for 150,000 short tons starting later this year. The lower cost will still give it a competitive advantage to support famers shipping corn from their Iowa fields.

“At times it’s free,” said Bert Frost, CF’s senior vice-president of sales, referencing Alberta’s natural gas. “We have the lowest-cost gas in the world today.”

Fertilizer producer Nutrien Ltd. is considering a potential expansion in Alberta. Methanol producer Me-thanex Corp. may build a second plant in Alberta’s Medicine Hat. Related: Will China Impose Tariffs On U.S. LNG?

Already the world’s fifth-largest gas producer, Canada is poised to tap into the strength and potential of its market. Much of that gas already goes to the U.S. in the Northeast region. However, expanding U.S. gas supplies is cutting into that market dominance.

Alberta will need more competitive incentive programs, analysts say. Lori Kent, executive director of Re-source Diversification Council, said that Alberta will need to offer an incentive program lasting up to a dec-ade and is competitive to what’s currently available on the U.S. Gulf Coast.

The insufficient pipeline infrastructure is also holding Alberta back, said John Rogers, senior vice-president at credit ratings agency Moody’s.

Alberta’s low prices have been a hardship for gas producers, and prolonged weakness could force them to reduce supplies.

“If companies are not going to make money producing gas and selling it, they’re not going to drill for it,” said Crew Energy Inc.’s CEO Dale Shewd.

By Jon LeSage for Oilprice.com

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