A positive outlook for Canada’s propane industry

April 2020  |  EXPERT BRIEFING  |  SECTOR ANALYSIS

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In Canada, the production of propane, a hydrocarbon that, in its liquid state, falls within the category of liquefied petroleum gases (LPGs), is on the rise. Between 2015 and 2018, propane production in Alberta increased from 7,958,621 cubic metres to 12,610,330 cubic metres, an increase of almost 37 percent. While this is principally due to the growth in liquid rich natural gas production in the Montney region, it is also the result of the closure of Canada’s principal propane export pipeline, the Cochin pipeline, in 2014. Prior to April 2014, most propane produced in western Canada was exported to US markets on the Cochin pipeline. In April 2014, the Cochin pipeline was reversed to transport light petroleum liquids from the US to western Canada. Exports of propane to the US dropped dramatically, leading to an oversupply of propane in Canada and resulting in much lower propane prices.

Propane is also considered a greener, cleaner source of energy as it emits 60 percent less carbon monoxide than gasoline, 98 percent less particulate matter than diesel, and contains virtually no sulphur – a contributor to acid rain. Furthermore, propane is a pressurised fuel that must be contained within a sealed system, and in the event of a spill, becomes a vapour that does not contaminate the soil, air or aquifers. Unlike natural gas, propane is not a greenhouse gas in its unburnt state. These attributes are an important part of the world’s transition to a lower carbon economy.

Propane’s abundance in western Canada, its lower price and its characterisation as a cleaner energy source, have presented new opportunities for the growth of the propane industry in Canada, primarily as a source of supply for propane-hungry regions in Asia, such as China, India and Japan, and as feedstock for the petrochemical industry in Alberta. The increased supply of propane is supporting the development of these new markets, while at the same time, new opportunities are creating increased demand for propane production.

Diversifying Canada’s export markets

In North America, propane has been primarily used for heating and crop drying, and so demand is seasonal and variable, peaking in the autumn and winter. Globally, however, demand from Asia accounts for 45 percent of the world’s LPG consumption, with China being the largest LPG importer. Sixty percent of Asia’s LPG demand is for use in residential cooking and heating, with the remaining demand divided among commercial use, petrochemical companies and propane dehydrogenation operations that make propylene for the plastics industry.

Following the closure of the Cochin pipeline in April 2014, most of Canada’s propane was exported by rail, with much smaller volumes transported by pipeline or by truck. Until 2019, nearly all of Canada’s exported propane was exported directly to the US. On 23 May 2019, the first ever shipment of propane from a Canadian port departed the Ridley Island Propane Export Terminal (RIPET) bound for Japan. RIPET is a joint venture between AltaGas Ltd and Vopak Development Canada Inc.

RIPET is the first of four propane export terminals proposed for Canada’s west coast. Pembina Pipeline Corporation (Pembina) is currently building the Prince Rupert Export Terminal on Watson Island in British Columbia, with exports expected to begin in the second half of 2020. In February 2020, Pembina announced plans to expand the Watson Island facility to have greater export capacity. The expanded terminal is expected to be in service mid-2023. The other two terminals, a second terminal on Ridley Island proposed by Royal Vopak, and Pacific Traverse Energy’s terminal at Kitimat, British Columbia, may come online in 2022. As the west coast of Canada is the closest location for LPG terminals to Asia, and given the construction of LPG terminals there, there is an opportunity for western Canadian propane producers to diversify their market access to Asia, a premium market for propane.

Demand from Asia accounts for 45 percent of the world’s LPG consumption, with China being the largest LPG importer. Since 2010, as a result of the shale boom, the US has become the world’s leading exporter of LPGs, with most shipments bound for China, India and Japan. Sixty percent of the LPGs imported into Asia are consumed by residential and commercial customers for cooking and heating, but the manufacturing sector is also a significant importer of LPGs. In 2019, LPGs from the US accounted for 37 percent of Asia’s total imports, and 70 percent of the LPGs imported into Asia consisted of propane. Most of the US’s propane exports depart from the Gulf coast, and reach Asia via the Panama Canal, but for one propane export facility on the west coast in Ferndale, Washington that is operated by Petrogas Energy Corp.

A shipment of LPGs from the west coast of North America takes 10 days to make a Pacific crossing, whereas shipments from the US’s Gulf Coast take 25 days to reach Asian ports. Ocean freight to Asia from British Columbia costs much less than from the Gulf Coast and via the Panama Canal. Furthermore, considering the US’s and China’s ongoing trade disputes, Chinese buyers may become more interested in buying Canadian LPGs through which they could enjoy cheaper freight rates due to the shorter distance across the Pacific.

Supporting the growth of Canada’s petrochemical industry

The growth and development of Alberta’s petrochemical industry was supported by the abundance of ethane as a feedstock for the production of ethylene and polyethylene, the world’s most popular form of plastic. Today, with a view toward a cleaner, greener economy, polypropylene, which uses propane as its feedstock, is a widely used plastic, preferred for its durability and its recyclability. Polypropylene is an element of many common goods, including consumer packaging, automobile parts, medical equipment, currency and textiles. Canada has never produced or exported polypropylene, but with an abundance of supply and relatively low prices, two propane dehydrogenation plants and polypropylene upgrading facilities are under construction, which when in-service, will allow Canada to process domestic propane and participate in the global polypropylene market. Notably, polypropylene ships in the form of plastic pellets, which are inert and can be transported alongside other products in generic shipping containers. One multi-purpose rail car used to transport polypropylene beads could replace nearly two specialised rail cars currently used to transport propane, thus creating additional rail capacity for substances that require pressurised cars.

Inter Pipeline Ltd has begun construction on the Heartland Petrochemical Complex in Hardisty, Alberta, a propane processing facility that is designed to convert locally sourced propane into polypropylene (the Heartland Complex). Science and Economic Development Canada estimates that Inter Pipeline’s process of converting propane into polypropylene will displace 1.75 million tonnes of carbon dioxide per year. In March 2019, the Canadian government announced a commitment of $49m to the Heartland Complex, as part of a $1.6bn stimulus package for the oil & natural gas industry. Also in March 2019, Inter Pipeline was awarded $70m in royalty credits from the government of Alberta, in addition to the $200m it was awarded in 2016 from the Province of Alberta’s Petrochemicals Diversification Programme, upon completion of the Heartland complex, which is scheduled to begin operating in 2021.

Canada Kuwait Petrochemical Corporation is a joint venture between Pembina and Petrochemical Industries Company K.S.C. of Kuwait. In February 2019, CKPC received a positive final investment decision on its propane processing facility in Sturgeon County, Alberta (the CKPC Complex). In March 2019, the Canadian government announced a commitment of $49m to the CKPC Complex. CKPC will invest $7m into initiatives aimed at reducing plastic waste as a contribution to Canada’s environmental goals. In December 2016, CKPC was awarded $300m in royalty credits from the Province of Alberta’s Petrochemicals Diversification Programme upon completion of the CKPC Complex. The CKPC Complex is scheduled to begin operating in mid-2023.

Both Inter Pipeline and CKPC anticipate exporting polypropylene produced at the Heartland Complex and the CKPC Complex to the US, where Inter Pipeline forecasts that polypropylene will sell for the highest price worldwide. This prospect suggests a positive shift for the Canadian propane industry, which has historically been limited by a lack of export options that exerted downward pricing pressure on Canadian propane exports to the US.

A case for optimism

As natural gas continues to be produced in Canada, and the demand for greener energy sources grows louder, the prospects for Canada’s propane industry remain positive.

Alicia K. Quesnel is a partner and Robyn A. Finley is an associate at Burnet, Duckworth & Palmer LLP. Ms Quesnel can be contacted at +1 (403) 260 0233 or by email: akq@bdplaw.com. Ms Finley can be contacted at +1 (403) 260 0186 or by email: rfinley@bdplaw.com.

BY

Alicia K. Quesnel and Robyn A. Finley

Burnet, Duckworth & Palmer LLP