Speaker: Dr. Ramesh Ramachandran, Dow Chemical Canada Inc. President and HC&E Olefins Business Director
Event: CERI 2005 North American Natural Gas Conference & Calgary Energy Show 2005
Location: Calgary, Alberta
Date: 03/07/2005
Good morning ladies and gentlemen.
I am privileged to speak for Dow Canada this morning and, as it seems, for all of Canada's industrial gas consumers. Because we are underrepresented at this gas conference, I am compelled to make my voice heard.
There's a problem facing the North American petrochemical industry right now. High North American energy prices - the highest in the world - challenge our competitiveness in a globally traded commodity market.
Value of the petrochemical industry
What does that mean to you? To give you a scope of what I mean by industrial gas consumer, The Dow Chemical Company's global operations consume the equivalent of a Middle East country's daily gas production.
Dow Canada itself uses 600,000 gigajoules of energy each day.
And what do we do with it?
We upgrade natural gas liquids - particularly ethane -- that would otherwise be combusted for electrical power generation. That feedstock and energy source becomes the very stuff of modern life, keeping people healthy, clean, safe, and comfortable.
Historically, the petrochemical industry benefited from
- Alberta's vast and rich natural resources
- secure supplies of natural gas and gas liquids
- favourable government policies
- skilled and educated workforce
- $25 million annual tax revenue
- $4 billion annual export revenue
- $1 billion annual capital investment
- Over 8,000 full-time jobs, which spin off 2.5X more - highly skilled, highly paid workers stimulate the economy.
- high productivity leads the G7 countries.
- 67 per cent of products exported
In fact, the petrochemicals industry is Canada's third largest within the manufacturing sector and Alberta's second largest industry. Petrochemicals are a nexus in Canadian industry that bridges the resource sector with manufacturing, retail, transportation, and others.
I'm not talking about a point in time that's long past.
Our reality - today - is nicely reflected in the theme of this conference. Indeed, petrochemicals are walking the fine line between supply and demand. On the far side is growth - Alberta has the natural resources to sustain petrochemical expansion. The Alberta government is responding to our message and is trying to make our journey less precarious. Whether or not we make it to the other side - to growth - depends almost entirely on you.
Challenges
If the value to the petrochemical industry alone were not enough of an argument in favour of competitively priced ethane, just look at the historic correlation between the world GDP and ethylene demand. In the history of business as we know it, I'm not sure you can find another such strong long-term correlation in existence.
There's a simple reason for it: Chemicals and the ethylene portfolio are an integral part of global GDP. What has forced the hand of North American producers to look for opportunities elsewhere?
In recent years, manufacturing costs to produce ethylene have changed and will continue to change over the near future. Even this slide from September 2004 doesn't reflect the volatility of this cost - the cost per barrel of Brent Crude hitting $53 dollars last week.
Historically, petrochemical assets in Alberta were built on the foundation of readily available and low-priced natural gas. This meant low fuel cost, with the fuel being the floor price for ethane, our low feedstock cost.
Today, Alberta's petrochemical industry must compete with electrical power generation facilities for smaller volumes of natural gas. We currently use a significant portion of Alberta's gas to extract oil! This is akin to using $100 bills to light the candles at the dinner table: Mandating the use of natural gas for power is costly and inefficient and diminishes the potential of this value-added industry.
Volatility of feedstock costs
The petrochemical industry is highly energy-intensive, using over 380 bcf of gas per year, over half of Alberta's industrial gas use. That comes to $2 billion annually or 75% of the cost to manufacture ethylene. Remember, Dow Canada alone uses 600,000 gigajoules of energy each day.
Add to that the minutia costs that add up for major industrial consumers. A 10 cent per gigajoule increase means a cost hike of $40 million per year. And inequities in gas pipeline haul charges tend to force Albertans to subsidize consumers in the US. This takes away critical funds from the purpose of innovation that put us into business in the first place.
The Alberta Advantage has eroded.
Energy price trends
While crude oil is a globally traded commodity with pricing set on the global market place, natural gas liquids are generally traded more locally. That is what helped build the modern petrochemical industry and what is now helping to stifle it.
Challenges to petrochemicals
In the last six months, only in October did ethane out-compete naphtha and propane production costs. Ethane is quickly falling out of favour as a preferred natural gas liquid feedstock.
However, the petrochemical industry in North America is based on ethane as the primary feedstock. In years past, there was a hesitancy to invest in naphtha crackers because North American ethane crackers were competing so successfully in a global marketplace that was still dominated by naphtha.
At the root of the problem are policies that promote natural gas for growth and stonewall development of known new sources.
Natural gas prices have rocketed with tremendous speed. The natural reaction to this change in energy prices in the market place has created unusual volatility, weakening our domestic industry.
We also take a double hit because these high and volatile prices on power are also the cost of our feedstocks. This puts the petrochemical industry at a globally competitive disadvantage, and the effects of that disadvantage ripple through the derivative users and their customers. Indeed those effects are felt by the whole of industry and society who use our products as enablers for many other essential industries.
The challenges facing the petrochemical industry are possible to overcome, but that change is most likely to come five-to-ten years from now, if and when the Northern gas passes through Alberta. We applaud long-term, strategic policies for sustainable industry development. But, we need solutions for today.
Dow's response
On a world scale, more than 50% of all new capacity investment in ethylene plants in the next five years will be in the Middle East. There are no new plants planned in Canada - in fact, Dow has suspended activity at two facilities in Ontario this year alone.
Dow cannot afford to wait for the miracle of Northern gas and must act now to stay competitive into the future.
We believe we can be, and should be, part of a solution that helps create more shareholder value in this enterprise through selective investment and participation in the olefin chain. Dow's strategy and commitment is to devote our energies and resources to markets where we can create value and build competitive advantage.
Investing in cost-advantaged regions of the world
Dow, and others in the industry, are investing and moving production overseas to be closer to the growing markets for our products and where we can supply those same markets with more competitive energy and feedstock supplies.
Our movements have been market-driven and strategically placed. We will selectively sustain or grow our share in regions in which we participate, extracting full value from our cost advantaged positions.
Potential outcome: respite in the near future
Today's business reality in the petrochemical industry means a focus on excellence, not on growth. Value-added companies like Dow have the potential to increase production in Alberta and to help sustain a buoyant local economy.
- We need to regain a low-cost feedstock advantage. Saving NGL for upgrading into higher value products and sharing pipeline costs equitably across all user bases can help ease the strain on the petrochemical industry.
- Exploring alternative feedstock options. Developing a downstream petrochemical industry from heavy hydrocarbons from the tar sands is possible.
- Sustaining a healthy industry until the northern feedstocks arrive. High productivity and effective management do make a difference.
Outcomes
Even though sales of basic chemicals and plastics fell by two per cent and operating profits fell by 22 per cent in 2003, Alberta is poised to regain its foothold as the market leader in the North American petrochemical industry.
During the first quarter of 2004 alone, operating profits improved by 50 per cent over the year before, while chemical export revenues rose 12 per cent.
Natural gas is far more valuable as a petrochemical feedstock. Letting it burn snuffs out the potential for Alberta's sustainable economic growth and destroys the well established networks that help the province to prosper.
Alberta's hydrocarbon resources are strong enough to support a vibrant and growing petrochemical industry.
- Using Alberta's gas to extract Alberta's oil is not a prudent use of the resource.
- Energy conservation and increased gas supply will restore Alberta's competitive advantage.
We support promoting policies that will increase the supply of natural gas by enabling exploration and by situating LNG terminals: North American political consensus must be achieved that will open access to promising new areas for gas supply including the Rocky Mountain region, Outer Continental Shelf, Eastern Gulf of Mexico and Mackenzie Delta/Alaska.
Building a sustainable future
So, for the interim, the petrochemical industry continues to walk along that tightrope, the fine balance between growth and stagnation. As much as you might think we're walking this alone, think again. Our success clearly supports the growth of your industry. Help us to make it across that line.
