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Our economic success

it was a matter of. was not a matter of chance ;. choice . “. ”. Our economic success. - Former U.S. President Bill Clinton. Choosing to Succeed : -through Value-added Upgrading in Alberta. Gregory A. Howard

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Our economic success

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  1. it was a matter of was not a matter of chance; choice. “ ” Our economic success - Former U.S. President Bill Clinton

  2. Choosing to Succeed :-through Value-added Upgrading in Alberta Gregory A. Howard Commercial ManagerOlefin Feedstocks and Natural Gas LiquidsDow Chemical Canada Inc.

  3. Choosing to Succeed • Outlining Alberta’s Petrochemical Advantage • Meeting Challenges • Competing Globally • Choosing Opportunities

  4. The Chemical Industry in Canada:A Keystone of the Economy Chemistry Discovery and Innovation Better Products Social and Economic Benefits Improved Quality of Life

  5. Alberta’s Petrochemical Advantage • Alberta’s abundant natural resources and progressive business climate caught the attention of gas consuming investors. • Proximity to natural gas resource. • Secure supplies of natural gas and gas liquids. • Favourable government policies. • Feedstock price advantage.

  6. Alberta’s Petrochemical Advantage The petrochemical industry took root in Alberta because of a distinct natural gas feedstock price advantage and as a result, Alberta has thrived. • Largest petrochemical producing area in Canada second only in North America to the USGC • >$9 Billion in annual production • >$5 Billion in annual exports • 6500 direct jobs • Additional 16,000 indirect jobs • >$220 Million in annual tax revenue • 6th largest manufacturing sectoremployer in Alberta

  7. Meeting Challenges • High natural gas feedstock prices have brought the industry to a crossroads. • As an industry, petrochemicals consumes over 380 Bcf/gas per year . . . • that’s over HALF of Alberta’s industrial gas use. • or, a $2 billion gas bill . . . without the residential rebate program. • and, for a petrochemical plant, fully 75% of operating expenditures are tied up in feedstock costs.

  8. Meeting Challenges ALBERTA’S PETROCHEMICAL ADVANTAGE HAS ERODED • Middle East gas priced at 1/5 of North American gas. • Seasonal volatility of border gas flows and maturing gas basins affect supply and increase cost. • Excess natural gas pipeline capacity has tightened basis differentials.

  9. Meeting Challenges ALBERTA’S PETROCHEMICAL ADVANTAGE HAS ERODED • Midstream asset margin squeeze. • Nearly HALF of liquefied natural gas (LNG) terminals strategically placed along US Gulf Coast. • Little flexibility because Alberta’s petrochemical industry was built on a single feedstock.

  10. USGC Vol% Ethylene Feedstock Ethane Naphtha Propane Data courtesy of PetralConsulting Company

  11. North American Ethylene Cash Cost Comparison Compressed Alberta ethylene margin

  12. Meeting Challenges Gas basis differential squeeze . . . pennies DO make a difference. • Excess/stranded pipeline capacity elevates cost for less product. • Transportation cost hikes of just 10¢/GJ increases annual costs to industrial gas consumers by $40 million. • Real or perceived North American gas supply shortfalls due to declining domestic production. • It’s a matter of plants running . . . or not.

  13. Choosing Opportunities • Alberta is poised to regain its foothold as market leader in the North American petrochemical industry . . . • Enjoyed 2 years of relatively good prosperity globally following five years of petrochemical recession. • Alberta didn’t participate as fully as it should have. • Frontier feedstock supplies can help restore Alberta’s petrochemical advantage.

  14. Projected WCSB Ethane Rich Gas Flows

  15. Prudhoe Bay TransCanada Pipeline Mackenzie Valley Pipeline Alaska Pipeline Alliance Pipeline Inuvik MacKenzie Valley Gas 2011 ~1.5 Bcf/day Frontier Supplies 4 Primary Ethane Pools 1. Straddle Plants 2. C2+ Mix 3. Oil Sands 4. Frontier Gas Alaska Gas 2016 4-5 Bcf/day Oil Sands Ethane/Ethylene C2+ Fractionator Feed in Ft. Saskatchewan Straddle Plants Spec C2 Alberta Ethane Supply Pools

  16. % Operating Rate 110 105 100 95 90 85 80 75 70 % Operating Rate North America Ethylene Demand, Capacity & Operating Rate (provided by CMAI) Million Metric Tons 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 99 00 01 02 03 04 05 06 07 08 09 Demand 0.4 / 0.8 * Capacity 1.4 / 0.9 *

  17. Million Metric Tons % Operating Rate 160.0 110 140.0 105 120.0 100 100.0 95 80.0 90 60.0 85 40.0 80 20.0 75 0.0 70 99 00 01 02 03 04 05 06 07 08 09 Demand 3.3 / 4.6 * Capacity 3.6 / 5.0 * % Operating Rate *%AAGR 99-04 / %AAGR 04-09 WorldEthylene Demand, Capacity & Operating Rate (provided by CMAI)

  18. 2004 Global Ethylene Cash Costs Regional Averages as of September 2004 (provided by CMAI) US $ Per Ton 750 USGC Natural Gas = $5.85/MM Btu 650 Brent Crude = $36/Bbl North America Wt'd Avg = $464/ton 550 Average US Feedstock Basis West Europe 450 Wt'd Avg = $350/ton Northeast Asia Wt'd Avg = $315/ton 350 250 Global ethylene demand for Southeast Asia Wt'd Avg = $280/ton 2004 is forecast to exceed 100 million metric tons 150 Middle East Wt'd Avg = $130/ton 50 0 20 40 60 80 100 120 Cumulative Ethylene Capacity (Million Tons)

  19. Choosing Opportunities Alberta can compete and regain its foothold as market leader in NA . . . • Government policies allow for value added energy sector. • Alberta is able to sustain a viable industry until the frontier feedstocks arrive. • Alberta is able to regain our low feedstock cost advantage.

  20. Choosing Opportunities That means: • Ensuring that the right enabling framework of policies are put in place to promote upgrading Alberta’s vast resources into exportable manufacturing products. • Ensuring Alberta has access to northern gas and northern gas liquids. • Developing alternate fuel sources for electricity generation and oil sands extraction

  21. Competing Globally Sustained global recovery in petrochemical industry must reflect change in the way we do business. • Growth expected to occur outside North American geography. • New business reality: choosing excellence over growth and a sustainable industry through competitively priced feedstocks.

  22. What is the Ethane Extraction Project • Commisioned by Energy Minister Greg Melchin • Objective: Increase supply of ethane available to facilitate value-added upgrading in Alberta and encourage full optimization and possible expansion of the Alberta petrochemical industry. • EEP was conducted in two phases • Phase 1 – Petrochemical stakeholders and the Department of Energy • Phase 2 – Broader Stakeholder Consultation

  23. EEP Phase 1 • Reviewed the state of the industry – development of the burning platform • Supply/Demand validation • Developed five potential options, one of which was do nothing • Finding submitted to Minister Melchin in December 2005 • Minister Melchin recommended proceeding with the “Extension of the Gas Cost Allowance (GCA) option. • Minister Melchin stated that the “Do Nothing” option was not an acceptable alternative.

  24. EEP Phase 2 • Broader Stakeholder Consultation • Included producers, pipeliners, mid-streamer, refiners, petrochemicals and government. • Series of weekly round table meetings held to refine the proposed GCA modifications • As part of Phase 2, Purvin and Gertz was commissioned by the broader stakeholder group to validate previous studies • P&G’s conclusions: • Ethane supplies have not kept up with demand • Additional ethane is available, it is more costly to extract • Current ethane feedstock shortfall is 25-30kb/d. • Incremental debottlenecking, could generate an additional 40kb/d demand. • Cost hurdles for new ethane supply could erode the Alberta Advantage

  25. EEP Gas Cost Allowance Mechanism • Expansion of the existing GCA mechanism • Option chosen because: • timely implementation • basic principals are already in place • consistent with current policies and royalty calculations • May require a minor modification to the Natural Gas Royalty Regulations.

  26. Salient EEP Highlights • Uses transferable royalty credits similar to the sulphur emissions control program • Ethane extraction facilities must meet certain qualifying criteria • Applies only ethane from conventional natural gas streams • Must be incremental ethane supply to the province • Total program funding will be capped • Program has a defined sunset. • Targets initial capital costs only, no O&M as in the field plants • Ministerial discretion • Each individual ethane project must prove direct and indirect value-added benefits to the government and Albertans. • Policy must be non-discriminatory – not targeted to one specific project

  27. Summary • A healthy Alberta petrochemical industry is important to ALL • The Alberta advantage is at risk • The petrochemical industry is actively working to meet the industry challenges - head on • Opportunities for growth still exist however, the bar for success has been raised • Alberta continues to be a great place to do business, let’s work to ensure petrochemical viability.

  28. Questions and Answers Our sustained success is certain if we choose it. but we need the right environment to achieve it.

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