There has been a lot of movement in Western Canada’s natural gas midstream industry despite challenging market conditions, including bearish natural gas prices, continued competition from US shale production, and a lack of global market reach through LNG/LPG export capabilities. Natural gas midstreamers still see long term opportunity in Western Canada, and it is an opportune time to save on skilled labour costs by proceeding with projects in stronger, but still fragile markets for oil.
Two major deals occurred in Q3 2016: Inter Pipeline purchased Williams Cos. Inc.’s entire Canadian NGL portfolio, and Enbridge merged with Spectra Energy to become North America’s largest energy infrastructure company. An Enbridge-Spectra merger would create an entity worth an estimated $165 Billion CDN. The deals represent a continued trend in Western Canada’s natural gas industry, as players cope with restructured natural gas flows and growth that is more centered on intra-Alberta industrial demand versus exports.
Likewise, diluent demand remains a strong driver of Montney and Duvernay liquids production in West Central Alberta and North East B.C. Veresen Midstream/KKR, Pembina, Keyera and SemCAMs continue to capture this growing demand with new field plant, fractionation, storage and pipeline capacity. Despite the drop in global oil prices, oilsands producers still require an increasing supply of diluents, (pentanes plus), to transport bitumen through pipelines to Western Canada, Ontario and the United States markets. About 850,000 b/d of new bitumen production capacity is coming online between 2015 and 2019. The Alberta Energy Regulator (AER) expects Alberta’s demand for diluents to exceed 655,000 b/d by 2019, up from over 550,000 b/d in 2015. About 188,000 b/d of pentanes plus volumes were sourced from Alberta in 2015.
Finally, despite a complete change in the economic environment, underlying conditions remain that would benefit new petrochemical development in Alberta. An abundance of cheap propane feedstock could stay long term driven, in part, by condensate demand for oilsands diluent, current lack of West Coast export capacity, and the explosion of competing NGL production (including propane) in the United States. The NEB anticipates that Western Canadian field propane volumes will increase by 15,000 b/d to 185,000 b/d in 2019. As shown by the AER, Alberta will continue to produce a large majority of that supply.
To date, 16 project proponents have applied for the Alberta Government’s $500 million Petrochemical Diversification Program, which seeks to expand methane and propane value chains in the Province. While the Alberta Government continues to assess program applications, Inter Pipeline and a separate joint venture of Pembina and Kuwait-based Petrochemicals Industries Company (PIC) continue to assess viability of propane-based petrochemical projects in Alberta. For Inter Pipeline and Pembina, proceeding with petrochemical development would advance their value chain beyond being just a feedstock transporter. However, a few hard questions remain:
- Is the Petrochemical Diversification Program enough of an incentive to help offset costs associated with the new carbon tax?
- What will the market for propylene and polypropylene look like after competing Gulf Coast plants are fully constructed and operational? Will the global market be able to absorb new volumes from Alberta projects in the coming decades?
- How much LPG export capacity will be constructed on Canada’s West Coast?
On a side note, Statistics Canada reported that Alberta’s E.I. recipients have crested, and were below 87,000 in August 2016 from above 100,000 earlier in the summer. Hopefully, the downward trend continues with the addition of new jobs. Click here for more detailed project information found in AVH Engineering Operator`s Market (OM) Report section.
Justin Ziebart works for AVH Engineering, a trusted Alberta-based company that specialises in asset integrity management and technical services.