Natural Gas and Canada’s Manufacturing Renaissance

Natural gas was once a boring commodity that rose and fell pennies in price depending of weather-related demand. Since the late 1990s, this story has shifted dramatically both in demand and supply, rising to $13 per gigajoule near the end of 2005, to a low last year at $1.76/GJ in the spring.

For industries such as manufacturing and chemical, the drop in price of a fuel source and feedstock – components of natural gas are the building blocks of plastics – has proven a boon to a sector hard hit by the recession.

smile“We have already started to see the impact of lower natural gas prices in U.S. manufacturing in two ways – both in direct use and indirectly as electrical generators rely on natural gas and can pass on savings to big industrial customers over other things,” says Chris Sands, with the Hudson Institute.

“In those two ways it’s beneficial, and I think that is significant for Canada because we’re always watching in manufacturing the productivity gap and price differentials that can make Canadian manufacturing potentially have to struggle to keep up. ”

Total natural gas demand in Canada is projected to double between 2012 and 2035, according to the Conference Board of Canada. Much of the growth is expected in Alberta, driven primarily by oil sands and electricity generation, and in British Columbia, driven primarily by liquefied natural gas exports.

In Alberta, about 25 per cent of natural gas demand comes from the chemical and fertilizer industries, a number which slides to about 17 per cent Canada-wide, 12 per cent of which is represented by the chemical industry.

“On a North American side – the availability of shale gas is changing the whole landscape for our industry. What it is doing is giving us an energy competitiveness as a North American manufacturer that we have not seen in decades,” says Richard Paton, President and CEO of the Canadian Chemistry Industry Association.

In the 1960s the abundance of natural gas in Alberta prompted the creation of world-class chemical plants to produce polyethelyne and ethylene, as well as methanol and fertilizers. Up to 34 per cent of natural gas burned in the province was consumed by the industry, Paton says.

But when natural gas prices shot up to $12-$13/GJ, producers had to close their plants or reduce capacity, had to use propane. “Basically all our investment prospects for building any new plants in Canada were zero – and the idea that we would expand them was impossible,” he notes.

The bleak scenario changed as natural gas prices dropped: Nova Chemicals currently is refitting its Sarnia, Ontario plant for shale gas from the Marcellus play in Pennsylvania, in Alberta the company just announced a $1-billion expansion at its Joffre plant, and Methanex is looking at re-investing in their methanol plant in Medicine Hat.

Overall manufacturing in Canada, which is concentrated in Ontario and Quebec, is less reliant on natural gas as an energy source: Quebec is a hydroelectric giant and more than 50 per cent of power generated in Ontario is nuclear, Martin Lavoie points out.

Nova Chemicals currently is refitting its Sarnia, Ontario plant for shale gas from the Marcellus play in Pennsylvania.

Nova Chemicals currently is refitting its Sarnia, Ontario plant for shale gas from the Marcellus play in Pennsylvania.

The director of policy, manufacturing competitiveness and innovation with the Canadian Manufacturers and Exporters says the resurgence of manufacturing seen in the U.S. because of the shale revolution has not affected manufacturing in Canada in the same way.

The outlook for the sector is tied to a number of factors, such as competition from other countries, the strength of the Canadian dollar, rising labour rates and energy costs, he says.

“What you have in manufacturing because of high labour rates and high currency is major gains in productivity,” Lavoie says. “What you’re starting to see is output increasing but employment remaining stable, indicating greater efficiency – plants producing more with fewer employees.”

Ontario started losing its competitive edge with the U.S. in 2008, when the province changed its power policies through long term contracts with generators, and industrial rates rose, he says. Lavoie estimates industrial rates in Ontario will have increased by 34 per cent by 2017, tripling the rate gap between the U.S. over the same period.

“On a North American side – the availability of shale gas is changing the whole landscape for our industry. What it is doing is giving us an energy competitiveness as a North American manufacturer that we have not seen in decades,”

“It seems to me that natural gas will have a role to play,” he says about reducing the rate increase. “If we want to bring down industrial rates in Ontario, we certainly need to keep the nuclear base that we have for electricity, but natural gas would be a good way to make it accessible to all the regions of the province.

“The American Chemistry Council has estimated shale gas has resulted in US$72 billion invested in the U.S. chemical industry sector, and US$52 billion in related manufacturing industries because the cost of energy is now globally competitive up to 2020.”

“I think that the answer is to strike the right balance between the sources of power so you’re not stuck with just one. And you also can benefit from new technologies which could unleash new resources, like fracturing did to shale gas.”

The challenge for the chemical industry is to get a percentage of that southern investment in Canada, Paton says. The American Chemistry Council has estimated shale gas has resulted in US$72 billion invested in the U.S. chemical industry sector, and US$52 billion in related manufacturing industries because the cost of energy is now globally competitive up to 2020.

“If we want to bring down industrial rates in Ontario, we certainly need to keep the nuclear base that we have for electricity, but natural gas would be a good way to make it accessible to all the regions of the province.”

“The difficulty that we do face is these (chemical) plants are being built on a 25 to 40 year life span, and a lot of gas contracts are for two years,” Paton notes. “Our companies need long-term supply arrangements and that has not been that easy to get.”

Ben Dachis, Senior Policy Analyst at the C.D. Howe Institute says supply arrangements for natural gas are a piece of the story.

“There are going to be some manufacturers who want to ensure they have a supply of domestic natural gas just for them, such as chemical companies,” Dachis says.

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ABOUT THE AUTHOR

Dina O’Meara is a former business writer with the Calgary Herald and is now a communications consultant.