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LNG Exports Could Spawn Domestic Petchem Growth, Canadian Researchers Say

Breaking into the global liquefied natural gas (LNG) trade would spin off a renaissance in petrochemical manufacturing, according to the Canadian Energy Research Institute (CERI).

Overseas exports would trigger a gusher of liquid byproducts from shale gas fields for use as raw materials by the makers of synthetic items from tires to hockey helmets, said the research group, which is supported by industry, government and academic agencies.

Canada alone is forecast to gain 350,000 b/d of the main gas byproduct used by petrochemical plants: ethane. That's enough to support two or three world-scale operations capable of competing on global markets for synthetics and plastics.

The projection is based on high LNG expectations and experience to date with horizontal drilling, hydraulic fracturing and liquids extraction in four shale deposits: the Montney in British Columbia, Duvernay and Wilrich in Alberta, and Bakken in Saskatchewan.

CERI said about one-sixth of LNG exports proposed by 78 terminal projects on the Pacific, Atlantic and Gulf of Mexico coasts of Canada and the United States will succeed. The agency forecasted tanker shipments of 20.8 Bcf/d: 14 Bcf/d from the United States and 6.8 Bcf/d from Canada.

Much of the potential for petrochemical growth is concentrated in Alberta, where a traditional formula keeps costs down by basing the value of most ethane on shrinkage of gas production volumes from extracting the liquid rather than linking its price to oil.

The Alberta government adds an incentive called IEEP, short for incremental ethane extraction program. Petrochemical plant additions earn fractionation credits of C$1.80-5.00 (US$1.35-3.75) per barrel of ethane they use, for transfer to gas producers that enlist as suppliers as deductions from provincial royalties.

More sweeteners may grow out of a royalty review by the province's four-month-old New Democrat government, which has revived decades-old political ambitions to diversify the petroleum-dependent regional economy by encouraging manufacturing.

The government's instructions to the expert review panel include, "Understand and assess how a royalty regime can generate diversification opportunities, such as value-added processing, innovation or other forms of investment."

Petrochemicals have been a key item in provincial economic strategy since the 1970s, when a young and more active version of the 44-year-old Conservative regime that the ND ousted in May fostered manufacturing complexes at Joffre in central Alberta and at Fort Saskatchewan, northeast of the capital in Edmonton.

CERI's high hopes for LNG, meanwhile, gained support from a Calgary investment house that circulated a report dissenting from the skepticism voiced by most Canadian industry and financial analysts.

AltaCorp Capital predicted four export tanker terminals would eventually be built on the Pacific Coast of British Columbia. Construction is expected to start with one of the smallest projects, the C$500 million (US$375 million) Douglas Channel LNG scheme proposed by AltaGas Ltd. to ship out about 250 MMcf/d.

The Calgary investment house also gave most likely to succeed ratings to three multibillion-dollar schemes that require new jumbo pipelines to the BC coast from northern shale deposits: Pacific Northwest LNG sponsored by Malaysian state energy conglomerate Petronas through Calgary subsidiary Progress Energy, LNG Canada led by Shell at the head of an international consortium, and the WCC LNG proposal advanced by ExxonMobil and Imperial Oil.

Like LNG, petrochemical growth depends on breaking out of North America and onto global markets. "Market access remains a challenge if expansion is to occur in Canada," CERI said.

"The petrochemical sector has been built to serve the domestic and U.S. markets. These markets show little potential for growth either due to a lack of increase in demand or increased capacity in the U.S. Overseas market access would be needed to facilitate expansion of the sector in Canada."

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