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Petrochemicals
Introduction
Table of contents
- Introduction
- Structure and Performance of the Industry
- Regional Clusters
- Trade
- Relationship to Oil and Natural Gas Industries
- Technology
- Environmental Issues
- Canada-U.S. Comparison
- Prospects for the Future
- Principal Statistics
- Major Firms
Introduction
Petrochemicals are a category of organic chemicals derived principally from two feedstocks: natural gas liquids (NGL) obtained from natural gas processing plants, and oil refinery streams such as naphtha and light gas oil.
NGL (principally ethane, propane, and butanes) are "cracked" at high temperatures to yield the primary petrochemical building blocks of ethylene, propylene, butylenes and butadiene. Cracking crude oil based feedstocks such as naphtha or gas oil yields higher ratios of the ethylene co-products propylene, butylenes and butadiene plus the aromatic products benzene, toluene, xylenes along with other co-products.
Primary petrochemicals are reacted to form secondary petrochemicals, other chemical products, or polymerized to form synthetic resins. These in turn are incorporated into a great variety of industrial and consumer products. In Canada, ethylene is the primary petrochemical product made in the largest quantity from whichever feedstock is used. Ethylene is produced in Alberta, Ontario, and Quebec and used at nearby plants to make derivatives including ethylene oxide, ethylene glycol, ethylene dichloride, and vinyl chloride monomer, and polymerized to synthetic resins including polyethylene, polyvinyl chloride, polystyrene, and synthetic rubber. Relative production levels for the major petrochemicals are shown in Figure 1.
Under the North American Industrial Classification System (NAICS 32511), the definition of petrochemicals is limited to "acyclic (aliphatic) hydrocarbons and cyclic aromatic hydrocarbons". The main chemicals falling within this definition are: ethane, butanes, ethylene, propylene, butylenes, butadiene, benzene, toluene, xylenes, ethylbenzene and styrene. Note however, that much of the benzene, toluene, and xylenes produced in Canada are streams from oil refinery operations, and as such their production is captured within NAICS 32411 — Petroleum Refineries. Similarly, most ethane and butanes are produced from gas extraction operations which are also captured in NAICS 32411.
Structure and Performance of the Industry
The Canadian petrochemical industry had shipments of $7.7 billion in 2008, and employed 1 290 people in 19 manufacturing establishments (see Principal Statistics for more data). The current global recession became acute in the latter half of 2008, significantly reducing demand for many commodities. Weak demand has continued into 2009 so output for the current year is also expected to be adversely affected. The majority of larger firms operating in Canada are owned by U.S. and European multinational firms that operate subsidiary or joint venture operations around the world. NOVA Chemicals is the largest producer with headquarters located in Canada.
Compared to the overall manufacturing average, Figure 2 shows that the petrochemical industry has a very high level output per employee, reflecting the capital intensiveness of this industry. The industry employs a highly skilled workforce as evidenced by the high average salary levels compared to all manufacturing in Figure 3.
Regional Clusters
Canada's petrochemical plants are concentrated in Alberta, Ontario, and Quebec as shown in Figure 4.
Most of the recent growth in the industry has occurred in Alberta, based almost exclusively on natural gas feedstocks. There are two main petrochemical complexes in the province. One at Fort Saskatchewan, near Edmonton, is an integrated petrochemical cluster based heavily on ethylene and derivative products that offers extensive pipeline inter-connections, large underground salt cavern storage capacity for hydrocarbons (raw materials and products), and nearby petroleum refineries for raw material acquisition and co-product exchange. The other complex at Joffre, near Red Deer, is an integrated cluster based exclusively on ethylene and derivatives. Joffre is connected to the Alberta Ethane Gathering System for feedstock supply, and is connected by pipeline to Fort Saskatchewan allowing for movement of product streams between the two centres.
In Ontario, the petrochemical industry is concentrated around Sarnia. This region offers well-developed infrastructure for petrochemical production. Sarnia has an integrated petrochemical complex that provides petrochemical producers with large underground salt storage caverns, nearby petroleum refineries, access to certain Western Canadian NGL feedstocks via the Cochin pipeline, a tanker terminal for offshore shipments, ready access to large U.S. and Canadian customers via excellent transportation networks, and access to crude oil and oil-based liquids by pipeline from Montreal. The Sarnia-Montreal pipeline (pipeline #9) was originally built to supply crude oil from Sarnia to Montréal, but it was reversed in the mid 1990s. Most of the recent investment in Ontario has been to make existing manufacturing units more efficient through "debottlenecking". Up until the late 1990s, construction costs were estimated to have been 15 percent higher in Sarnia compared to the U.S. Gulf Coast which acted as a strong deterrent to investment. In response, the Ontario government passed legislation that allows companies to negotiate construction agreements on a project-by-project basis or for multiple projects, successfully overcoming the former cost disadvantage.
In Quebec, the petrochemical industry is centred around Montreal and is based solely on oil-based feedstocks. Crude oil arrives in Montréal by tanker or via pipeline from Portland, Maine. Although on a smaller scale than Sarnia, Montréal is also an integrated petrochemical complex that offers petroleum refineries, a tanker terminal for ocean shipments, and close access to the large eastern and central U.S. and Canadian markets. The region has successfully attracted a number of new investments in recent years, building an aromatics value chain. These investments were supported through equity participation by the Société générale de financement du Québec (SGF), an agency of the Quebec government. The olefins value chain was shut down in 2008 due to the small size of the production facilities and their inability to remain competitive.
Trade
In 2008, exports of petrochemicals were $2.9 billion and imports were $1.1 billion for a strong trade surplus of $1.8 billion. Trends in trade orientation are shown in Figure 5. Canadian exports represented 37 percent of shipments in 2008, and imports accounted for 18 percent of the domestic market.
The proportion of Canadian exports going to the United States increased from 64 percent in 1992 to 100 percent by 2001, and it has remained there. The proportion of our imports coming from the United States was 92 percent in 2008. The strong predominance of our trade with the United States reflects the tariff advantage resulting from the North American Free Trade Agreement, and the impact that transportation has on competitiveness in a given market.
There are no tariffs on petrochemicals imported into Canada (for example., Canada's Most Favoured Nation tariff rate is 0 percent).
Globally, many leading petrochemical-producing countries participated in the Uruguay Round of multilateral trade negotiations under the General Agreement on Tariffs and Trade (GATT). Export tariffs from Canada into other countries are highly variable. For countries like Canada that have signed-on to the Chemicals Tariff Harmonization Agreement (CTHA), all petrochemical tariffs will drop to 0 percent once the Agreement is fully implemented.
Relationship to Oil and Natural Gas
Raw material and utilities constitute almost two thirds of petrochemical manufacturing costs. Low feedstock prices are, therefore, critical to the success of Canadian operations. Not only are oil and gas used as fuels, but they are also the source for most of the feedstocks used to produce petrochemicals.
In North America, natural gas used to be abundant and relatively cheap. In response, most of the newer petrochemical capacity was constructed using NGL feedstocks. Overall more than half of North American industry is now based on NGL whereas in other parts of the world, where gas has not been so abundant, oil is the dominant feedstock.
Whereas oil has long been a globally-traded commodity and prices tend to be more or less equal in all western economies, natural gas is a regional commodity, with wide variations in prices observed from one part of the world to another. Gas has only been transported from source to markets in situations where construction of a pipeline was economic. LNG opens up another option for moving gas from so-called stranded pools to markets, and thus moves natural gas closer to becoming a global commodity. At present less than 10 percent of global natural gas is moved as LNG and this ratio will need to become much higher before we start to see significant equalization of prices on a global scale. LNG is produced by supercooling natural gas to -160oC for ocean transport via specialized cargo ships. It is an important export of countries like Algeria, Trinidad and Tobago, Nigeria, Russia, Indonesia and the Middle East. At destination, the liquid is warmed, regasified, and transported to market via existing pipeline infrastructure. There is currently no LNG imported into Canada, but a re-gasification terminal is nearing completion in Saint John, New Brunswick. There are a number of other groups that are studying options for terminals in Canada. There are 4 re-gasification terminals operating in the United States (plus one liquefaction site in Alaska, that exports LNG to Japan).
Technology
Access to technology is typically not an issue for this industry in Canada. For the most part, both the process and product technologies utilized are up-to-date, either as a result of in-house development or through licensing agreements with parent companies or other technology providers. Some of this technology has been developed in Canada, but the trend in this industry has been to centralize R&D activities close to the head office, and with the exception of NOVA Chemicals, all of the major research centres are outside Canada.
Against this general trend, Canada has had some limited successes in attracting niche R&D activity, driven by the fact that performing research in Canada is very cost effective. There is a good supply of qualified scientists engineers, and salary costs for this highly-skilled labour are lower than in other industrialized countries. Canada also offers more favourable tax treatment to R&D expenditures than other G7 countries. It is estimated that the cost of performing R&D in Canada is 18 percent lower than the comparable cost in the United States or Japan, and 40 percent lower compared to Germany.
