When governments are confronted with a problem, one of their first instincts is to throw money at it.
In Canada's province of Alberta, the recently elected New Democratic Party is making noise about throwing money to the petrochemical industry. Availability of these funds, worth up to C$500 million (US$360 million), might lead to a new polypropylene plant, among other projects.
It's anybody's guess whether this will come about.
Alberta announced Feb. 1 that it will offer royalty credits to companies that build new petrochemical plants. The theory is that companies will build the plants and then sell these royalty credits to oil and gas producers who ultimately supply the raw materials for petrochemicals. Oil and gas producers would use these credits to offset royalties they pay to the provincial government for the amount of oil and gas they extract. This royalty credit scenario is little consolation to an industry made livid by the government's plan to introduce a carbon tax and to cap oil sands emissions.
Alberta Premier Rachel Notley et al are spinning the petrochemical program as an effort to create jobs in Alberta, which is understandable given the job losses there in the current global downturn in energy prices. Alberta hopes the credit program will stimulate as much as C$5 billion of investment, creating thousands of construction jobs and maybe a thousand permanent jobs when the petrochemical plants are built and running. That comes to about C$5 million per newly created permanent job in the petrochemical industry, which might include a new PP resin plant.
Economists can figure out whether that incentive is cost effective. Petrochemical companies, however, have much bigger variables to ponder. They are beholden to global energy trends that they can't control, or even influence. As long as Saudi Arabia keeps pumping cheap oil, almost everyone else has to adjust their economics to a crude oil price that is about a quarter of its level in mid-2014. The low price has massacred cash flows and curtailed capital expenditure plans among oil and gas producers who until recently were trumpeting schemes to cash in on a shale oil bonanza.
In this environment it is risky — maybe even suicidal — to invest big time in new plastic resin plants. It means many projects are shoved to the back burner, frustrating those who want to exploit abundant shale petroleum reserves. When global energy prices rise again — and they will — some of these projects will be revived but marginal ones will be forgotten.
In Tulsa, Okla., Williams company executives are weighing their options in Alberta. Canadian subsidiary Williams Energy Canada ULC has expressed interest in building a propylene plant whose output could be upgraded into PP by North American Polypropylene, a new company owned by Goradia Capital, a Houston-based private equity whose investments include a PP facility in Saudi Arabia. Williams announced in October that it signed an agreement to supply propylene to NAPP for conversion into PP. Williams has been floating its propylene project since 2013, long before Alberta's current government was elected. Its agreement with NAPP was announced a half year after Alberta's government was elected. So these projects to make propylene and convert it to resin were drafted before Alberta offered its royalty credit program. It seems Williams has kept its propylene project alive despite the global energy price slump so it might believe the economics of it are sound, regardless of incentives.
Williams hopes to make a final decision on its propylene project this year. Alberta is slated to announce in April who qualifies for its royalty credit program. If the Williams and NAPP projects are awarded the royalty incentives, will that be enough for their executives to green-light the projects? Or will alternative projects stare down the Williams/NAPP plan if U.S. Gulf Coast states bring their incentive packages to the game?
It is of course impossible to predict world events and how they will impact petrochemical investments. Oil price shocks, recessions and political upheaval have frustrated prognosticators for the past 40 years. We have lived through feasts and famines and we can expect more so we must choose wisely how we will grow. I will tweak a Bible parable here — houses built on rock can endure but those built on sand are at the mercy of the whims of fate.
Thanks to Mike Lauzon, Plastics News' long-time Toronto-based correspondent, for today's post.