Submission to Standing Committee on Resource Stewardship (Study of Natural Gas)

Transcription

1 Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Submitted by the November, 2013

2 Executive Summary Value add based on upgrading, mainly of natural gas and natural gas liquids, but also of all of Alberta resources represents over $13 billion in chemical sales and production in the province and the chemical sector also exports $8 billion. The province of Alberta has long recognized the value added benefits of the petrochemical industry. Alberta Energy, in Launching Alberta s Energy Future, Provincial Energy Strategy notes: the Province of Alberta and its oil, gas and petrochemicals industries have excelled in value-added development of Alberta s energy resources, particularly conventional oil and gas. Alberta has a major refining industry along refinery row, the world s largest ethane-based petrochemical facility at Joffre, and other major petrochemical facilities in the Fort Saskatchewan region. Alberta needs access to and diversity of markets. Export markets for natural gas are essential but not sufficient. Adding value to natural gas and NGLs through the production of chemicals and polymers provides significant incremental value creation in Alberta and across Canada as well as providing access to incremental markets which are not constrained by inadequate transportation capacity. In addition, diversity of markets is improved since the energy products are converted into chemical products which have their own unique market dynamics. As government studies the opportunities and issues surrounding natural gas, it has options and can offer choices. Instruments such as IEEP and BRIC, today s versions of economic diversification measures undertake in the 70s, can offer choices for industrial development for the province. For the natural gas sector transparent reporting of natural gas and natural gas liquids by components right across western Canada can help to facilitate value-add opportunities. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 2

3 Introduction and Scoping Resource Stewardship, Responsible Resource Development, Sustainable Development This Standing Committee is the right group to be looking holistically at sustainable economic development in the context of natural gas and in particular in the context of the emerging shale gas revolution. Canadian energy and in particular Alberta energy is a source of wealth creation contributing to our quality of life. And there are ways forward to furthering that contribution to our economy. Alberta is challenged to develop and implement policies that enhance the opportunities for extracting maximum value from energy resources while respecting market principles and environmental sustainability. It is also evident that Alberta should be examining this opportunity alongside its neighbours the opportunity and the challenges are shared. Energy comes from many sources, including hydro, wind, solar, oceans (tidal and wave), biomass, uranium, crude oil, natural gas, coal, oil sands bitumen, and coal bed methane; all are in abundance and all offer opportunities for development and growth. This assessment is focused on the natural gas opportunity, but applies to all unconventional gas, oil and liquids (natural gas liquids are a component part of natural gas and associated gas as a component of unconventional oil). As with each resource area, energy offers a portfolio of opportunities in Western Canada and responsibly optimizing these opportunities is a good goal for all of us. Canada s chemical industry, through the application of chemistry adds value and jobs, creates wealth, diversifies and optimizes. CIAC recognizes that energy and other resources developments offer a variety of opportunities and challenges, it recommends an approach that recognizes the importance of responsible energy development, and also resource upgrading to create value-added products based on energy inputs. Essentially, we are talking about an all of the above approach to economic development which can be applied to the shale gas opportunity as well as to other types of energy resource developments. While it is imperative that the owners and developers of the resource have the ability and right to maximize the value of what they produce it is also important to create an environment to advance competitive opportunities for upgrading and manufacturing to thrive and benefit Albertans and more generally the entire Canadian economy. Overall, it is our view that in examining the energy sector and developing an energy strategy or framework, Albertans need to broaden the dialogue and consider options to further integrate and leverage our resource-based economy to maximize the benefits of all stakeholders. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 3

4 The Opportunity (IHS and Citi GPS examples) There are two studies which have been done for the US market that have direct bearing on the economic diversification and sustainable development messages which this document wishes to emphasize. First, America s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy Volume 3: A Manufacturing Renaissance ( is a thoughtprovoking assessment of opportunity, of a fundamental shift in the US, and perhaps by extension, the North American economy. It was released in September, 2013 and looks at the renaissance from the perspective of a full set of value chains upstream, midstream, downstream and energy-related chemical industries necessary to unlock unconventional oil and natural gas resources. By 2020, IHS projects that economic contributions from unconventional oil and gas development in the U.S. will grow to 3.3 million new jobs, more than $125 billion in incremental federal and state tax revenues and more than $468 billion in annual contributions to GDP, or 3.5%, all by the end of this decade. Against a backdrop of a slow economic recovery and stubbornly high unemployment, the second-order gains by economic sectors that benefit from the unconventional revolution will help the US economy to make progress in the face of steady economic headwinds. Energy-related chemicals referred to in this study, refers to processing and transformation of natural gas and gas liquids into chemical products. These products include the major commodity petrochemicals that use natural gas and gas liquids as feedstock, such as olefins, methanol, and ammonia. These are in turn, key building blocks for a whole range of downstream industrial inputs and consumer products. And while manufacturing also undergoes economic cycles and downturns, this diversification dampens the much more serious swings of the more basic commodities. This in turn can dampen the impact on government revenues and smooth out public/social planning. The second study, Energy 2020 North America, the New Middle East? ( undertaken by Citi GPS (March, 2012), looks at the impact on the North American economies of increasing energy production. And, again, the impacts are profound. One excerpt, from page 75 is particularly informative: In a world of high energy prices, the potential economic activity generated by this wave of new hydrocarbon production is extraordinary, and should strongly boost national output, increase incomes, create wealth, stimulate consumption and create jobs. But on top of the direct economic benefits of this production bonanza, there are also the added benefits down the value chain, in areas such as refined products and petrochemicals. Already, the US producers of ethylene, polyethylene and propylene have benefited greatly from the influx of cheap natural gas and associated ethane, helping the US petrochemical industry become cost-competitive compared to their naphtha-based Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 4

5 peers across the Atlantic. Other hydrocarbon and energy-intensive industries such as fertilizer and steel production also should benefit strongly from the production revolution, leading to extra marginal economic output and job creation. Against a backdrop of lowered energy consumption (as energy) right across North America, the prospect of increased global competitiveness is striking, and exciting. To be clear, Alberta is in competition, not just for gas development and market diversification, but right across energy value chains and well downstream into manufacturing. The allure of attraction of long-term, high-paying manufacturing jobs is strong, so the competition is keen. The chemical industry is a key contributor to Alberta s energy value-add strategy. Natural gas liquids, in particular ethane, and natural gas itself (methane) are converted into high value chemicals and fertilizers, $13 billion in sales this past year, with $8 billion in exports. These are high value jobs; 1/3 of our employees have university degrees. These are jobs that have important multiplier effects within local economies each chemical job results in another five in related sectors and services (source: Statistics Canada). Feedstock or raw materials are core to the competitiveness of chemical producers, and its capacity to move along the value chains (see figure 1). Recently across Canada there have been supply-side constraints to growth and even to operating existing assets at capacity. Canada s business of chemistry consumes and converts 15%-20% of the domestic gas barrel, but over the last few years we have been short of supply for some necessary raw materials required to operate existing plants. And while that is changing as chemical producers find new innovative sources of feedstock, it will take development of our existing untapped supplies, new markets for gas and Figure 1 Source: Alberta Government (Adapted from Purvin & Gertz) commercial access to incremental natural gas liquids to achieve significant new growth. For example, a new world-scale ethylene/polyethylene complex requires on the order of 80,000 barrels of raw material (ethane). Equally of note, an integrated petrochemical site is a 30, 40 or 50 year investment. The overall investment ranges upwards of $4.5 billion once infrastructure and derivative facilities are included. With raw material (in this case ethane) 70% or more of operating costs, clearly supply of feedstock is the paramount consideration of the investor. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 5

6 Background (chemical sector in Canada; energy intensity with energy efficiency; sustainable solutions) This next section describes the chemical industry and how energy resources and natural gas in particular are a component part of the opportunity for economic diversification. The illustrations and data help to make the case for Alberta economic diversification based on Canadian data. Canada s Economy is Closely Linked to Natural Resources While the Canadian economy is mature and appears to be dominated by the service sector many of these services are related to manufacturing and resource development (Figure 2). Manufacturing is a very important component of our economy and figure 3 further breaks down manufacturing into industries based directly on resource upgrading and other further-downstream industries. Figure 2 The Chemistry industry consumes 18% of domestic gas, 5% of oil and 3% of electricity in adding value within the Canadian economy. A good illustration of the resource-manufacturing linkage is chemical manufacturing which purchases 18% of gas, 5% of oil and 3% of electricity consumed in Canada. Figure 3 Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 6

7 Canada s Chemical Sector Chemistry Conversion and Value added Chemicals are made from Canada s energy products and minerals. Chemical producers convert oil, gas, minerals and electricity into value-added manufactured products, adding 5, 10, 20 times and more to the value of the original input. The chemical sector (see figure 4) is the fourth largest manufacturing sector in the Canadian economy, and also provides key inputs upstream and downstream (see Appendix 1). These are large, capital-intensive and integrated facilities. To attract international investors, Canada needs to be globally competitive; better than the bigger players already situated within large domestic markets. Figure 4 Source: Statistics Canada In moving along resource value chains, including energy, Canada needs to consider those factors that can enhance our global competitiveness. First, where there are duplicative and sometimes conflicting federalprovincial environmental regulations this discourages potential investors. But, there are real efforts to try to move towards one project - one review, and that must apply to more than the energy sector. Regulatory streamlining must be a goal across all sectors of the Canadian economy. CIAC recognizes the Alberta Government s initiative in developing the Integrated Resource Management Framework. In particular, it must be facilitated where business is seeking to add value to resources, including energy and our Responsible Care ethic will ensure we are doing the right thing as we undertake resource upgrading (see Appendix 2). Second, competitive access to resources for upgrading is a crucial component of an integrated energy strategy. Canadian chemical producers have been hit by rapid price fluctuations and market uncertainties for energy and are concerned about adequate and sustained access to supply of competitively-priced raw materials or feedstock to run plants and provide for future growth. North America and central Canada in particular, has been experiencing a serious erosion of its manufacturing base. Adding value creates jobs and wealth across the economy. Manufacturing, a key market for the chemical sector, is a competitiveness concern today. Facilities have been closing and to reverse this trend, we need to attract new investments. Adding value to resources is manufacturing, it creates jobs and wealth across the country. The shale gas phenomenon has opened up new opportunities but these advantages are shared by our largest competitor, the U.S. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 7

8 In the U.S., both governments and industry are aggressively pursuing investment opportunities. Alberta will need to up its game as well. Competitiveness challenges can and are being addressed. Industry and governments must work together on business and policy issues that will stimulate future growth in the keystone chemical sector of our economy. Canada is a major source of all the necessary ingredients (energy, minerals, skilled workers) to produce chemicals. Canada has the potential to become the world s best upgrader of natural resources into value-added manufactured chemicals for domestic and global markets through several routes, but these require vision at a national as well as provincial level. An energy strategy can optimize and secure opportunities for adding value in the petrochemicals area. All of Canada s resources offer opportunities for adding value. Hydroelectric and major initiatives to advance mineral production in Ontario and Quebec create opportunities for inorganic chemical production. Forest products and agriculture are sources for making biochemicals. And sustainable development in all resource sectors opens up new and growing opportunities for chemistry solutions and service providers. Here in Alberta, an energy strategy must be more than facilitation of energy project approvals and expeditious delivery of our energy to a broader suite of export markets. Our energy extraction and production must serve Canadians well and serve them responsibly. Each chemistry industry job results in 5 additional jobs across the Canadian economy. Specifically, Canada s chemical sector relies on access to affordable energy to add value and manufacture products for Canadians and for export (see figure 5). These are good jobs; good careers (see figure 6). Figure 5 Source: Statistics Canada Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 8

9 Canada can supply the world with value-added products. Petrochemicals Chemical companies use energy as both a fuel and as a raw material or feedstock for chemical production. The energy may be oil, gas, electricity or bio-based materials. In the case of natural gas, our impact is significant (see illustration 1). Figure 6 For the petrochemical subsector, members take energy products, mainly the natural gas liquid ethane and convert it into a broad range of petrochemicals such as ethylene glycol, styrene and polyethylene and beyond into fabricated products and formulations. Source: Industry Canada Making it Happen Alberta specifically and Canada will need to develop and implement the policies that enhance the opportunities for Illustration 1 extracting maximum value from energy resources, while respecting market principles. Extending the accelerated capital cost allowance (ACCA) on an ongoing basis by a method that is equivalent or superior to that in the U.S., specifically for manufacturing machinery and equipment will enhance the competitiveness of value-added projects for Canada 1. A diversified economy can smooth out the government revenues, can dampen resource-base swings and can diversify employment and career opportunities right across Canada. The chemical industry has potential for further expansion and wealth creation, provided we realize our goal to access new energy and feedstock supply. 1 see Capital Allowance For Manufacturing Corporations in Canada and the United States, November, 2013 Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 9

10 Canada can supply the world with value-added products Future feedstock sources could include northern gas and new supplies from B.C., Saskatchewan and Alberta through a Western Canada Energy Hub in addition to continued growth in oil sands upgrading capacity. For a review of competitiveness factors specific to the development of the chemical sector, refer to the Chemistry Industry Association of Canada (CIAC) competitiveness score cards and supporting texts ( A Broader Dialogue CIAC believes that energy must become a matter of Canadian priority, bringing together the federal and provincial governments and energy stakeholders to develop a modern, comprehensive energy framework. This should be designed to achieve two strategic goals: first, to bring long-term balance and opportunity for sustained growth to Alberta and Canadian energy markets; and secondly, to competitively add value to our energy resources in the most sustainable way possible to create Canadian wealth and jobs, products that improve everyday living, and reduce our environmental footprint. The chemistry industry is actively engaged in finding solutions; our Figure 7 Source: CIAC Report, Reducing Emissions 19 members are working with partners in the energy sector to address emissions, water use and site remediation issues (see figure 7 and Appendix 2). Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 10

11 The Options The Standing Committee on Resource Stewardship has already held discussions around options, and some of our colleagues in the sector have participated in discussions concerning options. CIAC believes that the government has the ability to make choices within the context of the business environment choices in letting the market decide. First, as the owner of the resource, and in defence of representing the public interest, the government should not apologize for adopting policies that optimize benefits for its citizens. That does not mean interfering with business. A fundamental principle is that ultimately decisions about how Canadian energy resources should be developed, produced and sold are best left to energy markets themselves, both domestic and international, to resolve. Indeed, individual decisions about who and where to sell an individual firm s energy production to and on what terms will continue to be made by firms involved and different market participants will have different opportunities, with different views on which market opportunities are most favourable for them. A critical role for governments in this is to ensure that markets are enabled to work efficiently, openly and fairly, while appropriately safeguarding the environment and the rights of all participants. This includes helping ensure that Canadian energy markets are open to global energy markets and also open to value add right here in Alberta. And that in turn means, among other elements, ensuring efficient, fair regulatory processes that can expeditiously provide necessary energy transportation infrastructure developed in a safe, environmentally and socially responsible manner. But while this optimizes development of primary energy, it does not acknowledge the very real societal partnership that is already taking place throughout the energy value chain globally and the need to balance optimizing development, providing access to markets and creating a competitive environment for growth in value added industries. For example, decisions that impact the nation require national consideration of options. That is precisely why Alberta is leading on development of a Canadian energy strategy. The option for Alberta, as the resource owner, is to offer choices. Examples of this have been demonstrated through the creation and use of instruments such as IEEP, BRIC, around Royalties and are examples of delivering an all of the above approach that CIAC supports. To the extent that these programs use the royalties portion of government income to encourage further upgrading and does not remove, limit choice, or hinder the market s ability to operate effectively and competitively, it offers more choices. This is not interfering with the business, it is offering real options that represent public interest and offer a way forward to achieving some additional value add. Another measure that will permit markets to work more effectively would be to introduce greater transparency into the existing marketplace in Alberta, but also right across western Canada. Greater reporting of natural gas liquids within gas streams would enable gas Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 11

12 producers, mid-streamers and petrochemical producers to make choices around securing additional values for natural gas by separately marketing the valuable liquids. This might be an area where the National Energy Board takes the lead, but it could also be an area where reporting transparency can be led by BC, Alberta and Saskatchewan, for example. Natural gas liquids reporting at major gathering points in the fields across western Canada would permit the opportunity for interested customers to bid on liquids for other uses in addition to the basic energy value of the gas. There is a portfolio approach to energy development that sees some extraction and export, some upgrading and some further refining into finished products. Adding some further value to some basic resources provides a diversity that optimizes opportunities for Albertans. That is portfolio development. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 12

13 The Recommendation ( all of the above or pursuit of economic diversification) CIAC supports policy initiatives that promote sustainable development of diverse energy supplies, energy conservation, and the concept of using some energy as a feedstock to produce high value-added chemical products. At the same time, energy Chemistry solutions can address Canada s environmental issues. development, environmental improvements and societal expectations should advance cooperatively and not in conflict. Chemistry solutions can address environmental concerns and issues. Canada s energy, environmental and societal goals must be mutually reinforcing and take industrial competitiveness, value-added upgrading and sustainability into account or Alberta risks creating significant investment uncertainty. Energy is a key component of economic well-being and an essential input into an economy. Alberta needs access to markets, but also needs diversity of markets. Adding value to natural gas and NGLs through the production of chemicals and polymers provides significant incremental value creation in Canada as well as providing access to incremental markets which are not, for example, constrained by inadequate transportation capacity. Adding value further adds to diversity of markets since the energy products are converted into chemical and polymer producing which have their own unique market dynamics. In summary: 1. Alberta should take full advantage of our abundant resources to maximize our resource development opportunities in the energy industry in a sustainable and responsible way. As a province it should leverage major projects that will build Alberta and Canada s economy and multiply the benefits of our resources right across the country. 2. Alberta should recognize explicitly in any energy strategy, framework or policy discussion for natural gas that cost, availability and access is a key to a highly competitive and productive economy and can produce huge value added manufacturing opportunities throughout the country (i.e. chemistry, steel, petroleum products, aluminum, forest products) as well as related service and technology sectors. 3. It is important but insufficient to only pursue market Our industry is located across diversification for energy. The chemistry industry is a key Canada, upgrading its enabling sector that can transform resources whether oil, resources gas, biomass, and electricity into high value added products. It should be recognized as an integral part of any energy strategy or framework at the federal and provincial levels. For Alberta and right across Canada, access to affordable and competitively-priced energy drives economic growth and sustains competitive advantage. Figure 8 illustrates where CIAC members are located; where we convert basic resources into products for Canadians and for export. Competitive and market-based access to natural gas and natural gas liquids for the chemical sector is crucial to Canada s value-added growth and capacity for further value-added manufacturing. Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 13

14 Natural gas can be exported, consumed, converted or sequestered. CIAC will speak out on behalf of diversity. This is about much more than market diversity; it is about how Canadians can optimize the value of energy and any other resources. Moving along the value chain adds value, wealth and opportunities for good careers the diversity it presents enables sharing a bigger opportunity. Chemistry can add value across energy and resource value chains beginning here in Alberta, but ultimately clear across this country. Alberta is encouraged to consider policy options that results in moving some of its resource wealth along value chains to enhance economic diversity. Figure 8 Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 14

15 Appendix 1 Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 15

16 Appendix 2 Responsible Care - Our Commitment to Sustainability CIAC is the national trade association of Canadian chemical manufacturers, representing companies that manufacture basic chemicals and resins. Members range from family-owned companies to affiliates of global enterprises. Together, these companies generate revenues of more than $27 billion, representing over half of the total chemical sector which also includes fertilizers, pharmaceuticals and formulated products. Responsible Care is the Association s commitment to sustainability the betterment of society, the environment and the economy. Our member operations are bound and guided by the ethics and principles of Responsible Care. A consequence of these ethics, our members constantly innovate for safer, more environmentally-friendly products and processes, and work cooperatively to identify and eliminate harm throughout the entire life cycle of their products. For a more complete description of the ethic and the membership commitment to sustainable development principles, visit Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 16

17 For more information: David Podruzny Vice-President, Business and Economics (CIAC) 350 Spark Street, Suite 805 Ottawa, ON K1R 7S8 Tel: (613) ext Dan Hall Alberta Regional Director Chemistry Industry of Association of Canada (CIAC) Alberta Limited 111 Aspen Meadows Court, SW Calgary, AB T3H 4T2 Tel: (403) Al Schulz Associate Alberta Regional Director (CIAC) # Range Road 223 Ardrossan, AB T8E 2M3 Tel: (780) Submission to Standing Committee on Resource Stewardship (Study of Natural Gas) Page 17