Text Version (IBM-PLI Quality Score Ranking): IBM-PLI Quality Score Ranking
Text Version (IBM-PLI Profitability Index Ranking): IBM-PLI Profitability Index Ranking
Western Canadian Capabilities in Industrial Chemicals: Strong Global Competitiveness
Canada’s Industrial Chemicals sector is among the country’s largest in manufacturing, and is the country’s third-largest manufacturing exporter. Nationwide, the industry has 3,000 firms and employs approximately 78,000 people62. Nine of the Top 10 global industrial chemical companies have established production facilities in Canada63.
Industrial chemicals comprise a technology-driven industry employing an enormous number of highly-skilled knowledge workers who have expertise in a wide range of disciplines, including chemistry, computer science and mechanical and chemical engineering. Alberta is the largest petrochemical manufacturing region in the country, benefiting from abundant natural resources that support the manufacture of both petrochemicals and organic chemicals64.
Western Canada’s chemical industry encompasses the following sectors.
Western Canada’s Petrochemicals sector is focused principally on ethylene production. Major foreign petrochemicals firms, such as Dow Chemical and NOVA, have a significant presence in Western Canada, and Alberta has four major ethylene plants, two of which are among the largest in the world65.
This high-growth industry produces plastic products, as well as machinery and moulds. In Western Canada, plastics production is concentrated in B.C. and Alberta. This sector is closely integrated with other advanced manufacturing sectors, including aerospace, automotive, medical devices and telecommunications.
Two key western Canadian cities for plastics manufacturing are Edmonton and Vancouver. Edmonton and surrounding areas have seen a significant increase in economic growth as a result of investments in Alberta’s oil sands, which have benefited the local plastics industry. Vancouver, as Canada’s gateway to the Pacific, also hosts a strong industry cluster of plastic products firms, serving both local markets and fast-growing markets in the western U.S. and Asia.66
Other chemical products produced in Western Canada include pesticides and fertilizers, specialty and fine chemicals (dyes, lubricants, etc.), synthetic resins, soap and other cleaning compounds and toilet preparations, and paints and coatings for the architectural and industrial markets.
Employment Levels, Contribution to GDP and Key Foreign Investors
Although there are numerous industrial chemicals establishments in Western Canada, they tend to be relatively small, with the majority employing fewer than 100 people. B.C. has only four medium-sized players (100-499 employees) and no large establishments with more than 500 employees67.
Alberta has an enormous number of industrial chemicals establishments. The province is home to 27 medium-sized enterprises and one large player in the basic chemicals space (Dow Chemicals, which employs about 630 people). As with B.C., the majority of medium-sized establishments are in the plastic and rubber industry, though there are also seven medium-sized enterprises in petrochemicals and four in pesticides and fertilizers 68.
Saskatchewan is home to fewer major establishments, although it does have one large company with more than 500 employees in the Petrochemicals sector. Manitoba also has fewer establishments overall, but has one large player in the Rubber and Plastics sector69.
Overall, Western Canada has the largest petrochemical manufacturing industry in Canada, with Edmonton supporting an integrated upgrading, refining and petrochemical complex and the country’s largest Petrochemical Manufacturing sector. Edmonton is home to two of the world’s largest petrochemical plants, as well as to smaller establishments employing more than 7,700 people that generated exports of $6.2 billion in 2007. With access to abundant natural gas stores and the potential to access even more supplies with the refinement into petroleum of oil sands reserves, Edmonton is poised to become one of the world’s largest and most competitive chemical producing regions70.
Alberta is home to a world-class cluster of approximately 36 major chemical and petrochemical manufacturers, representing more than 50% of Canada’s petrochemical capacity. Nearly 35% of all Canadian basic chemicals and resins are produced in Alberta. The province’s industrial chemicals industry benefits from low-cost ethane and natural gas feedstocks, as well as the Alberta oil sands, which are the world’s second-largest known oil source71.
As the province’s largest manufacturing sector in terms of exports and revenues, Alberta’s chemical and petrochemical industries produce more than $9.5 billion worth of products each year, the majority of which are destined for the U.S., Asia and Mexico. Overall, chemical and petrochemical shipments comprised 44% of the province’s 2006 manufacturing shipments72. Some of Alberta’s more significant industrial chemicals companies are:
Vancouver’s thriving chemical industry is supported by strong infrastructure, such as Port Metro Vancouver, which is a key conduit in connecting Vancouver to offshore chemical markets. The local industry, which supplies adhesives; antifreeze; clean-burning gasoline additives; formaldehyde; hard and soft plastics; paints; processing aids and agents; pulp, paper and water treatment agents; and minerals and vitamins for animal feed, generates more than $1 billion in annual shipments through Port Metro Vancouver82.
Major chemical companies in Greater Vancouver and other locations in B.C. include the following:
Saskatchewan is home to some major chemicals and fertilizer companies, and its plastics industry is well-established and has high growth potential. Small plastics clusters have arisen in Saskatoon and Regina/Moose Jaw, and the industry receives support from the Saskatchewan Research Council88. The most notable industrial chemical company is the Consumer’s Co-operative Refineries Limited (CCRL). Located in Regina, CCRL is the world’s first co-operatively owned refinery, supplying local co-operative associations with quality petroleum products. Since its inception, CCRL has experienced immense growth and now employs 640 full-time staff and an additional 1,000 employees and contractors during peak times89.
Manitoba does not have as many larger players as do the other western provinces, but it is home to Winpak Ltd., a major manufacturer of high-quality packaging materials and innovative packaging machines that operates nine production facilities in Canada and the U.S., employs 300 people and serves a global customer base. The Winnipeg-based company’s products are used primarily for the protection of perishable foods and beverages, and in healthcare applications90.
Leading Foreign Firms Invested in Western Canada
Western Canada has attracted a large number of leading multinational industrial chemical firms, many of which have established a significant presence in more than one western province.
Research and Development Facilities and Programs: Western Canada is home to a number of state-of-the-art research facilities and groups focused on industrial chemicals. Some key centres of research and innovation are as follows:
University of Alberta Lipid Utilization Research Program: Through the University of Alberta’s Lipid Utilization Research Program, the world’s largest team of lipid utilization scientists is engaged in breakthrough research into the use of oilseed crops and animal fats for bioplastics and specialty chemicals96.
Alberta Energy Research Institute (AERI): AERI promotes energy research, technology evaluation and technology transfer in areas including oil and gas, heavy oil and oil sands, coal, electricity, and renewable and alternative energy. AERI promotes consortia and builds networks by integrating the knowledge, skills and investment potential of industry players, federal and provincial governments, research providers, and universities97.
Alberta Ingenuity Centre for In Situ Energy (AICISE): AICISE brings together scientists, industry and other partners to develop more efficient, cost-effective and environmentally sustainable processes and practices for in situ recovery and upgrading of Alberta’s oil sands. The Centre was established in 2004. Shell International E&P/Shell Canada is the Centre’s founding industry partner, and ConocoPhillips, Nexen Inc., Repsol YPF and Total E&P Canada have become industry partners in AICISE. The Centre is housed in the Calgary Centre for Innovative Technology98.
University of Calgary Institute for Sustainable Energy, Environment and Economy (ISEEE): ISEEE was established in 2003, to provide leadership and coordination for developing and implementing energy- and environment-related initiatives at the university. ISEEE provides leadership for engaging world-class, interdisciplinary and mission-based research and education, with the goals of advancing sustainable energy, protecting the environment and the enhancing the economy99.
University of Calgary Consortium for Heavy Oil Research by University Scientists (CHORUS): The purpose of CHORUS is to develop and evaluate seismic methods for monitoring heavy oil recovery processes. This involves the processing of time-lapse seismic data and interpretation of the results. Benefits include real field data problem-solving for specific real reservoir data issues in heavy oil production. CHORUS sponsors include ConocoPhillips, Nexen Energy, Shell Canada and other major energy companies100.
Alberta Research Council: The Alberta Research Council (ARC) is a not-for-profit applied research and development corporation that specializes in developing and commercializing technology, and converting early-stage ideas into marketable technology-focused products and services. ARC employs more than 600 engineers, scientists and other professional staff, and operates five facilities throughout the province, working in collaboration with the Government of Alberta to help fulfill Alberta’s innovation agenda, including in the Industrial Chemicals sector101.
University of Regina Petroleum Technology Research Centre (PTRC): PTRC, located in Regina’s Research Park, adjacent to the University of Regina campus, is a not-for-profit research and development organization that was founded in 1998 by Natural Resources Canada, Saskatchewan Industry and Resources, the Saskatchewan Research Council and the University of Regina, with support from the western Canadian oil and gas industry. PTRC’s activities include managing the world’s largest CO2 Storage Project (the Weyburn-Midale CO2 Project), managing potentially the world’s largest avoided CO2 emissions project (the JIVE Project), collaborating with SaskPower on the world’s first zero-emissions coal-fired power plant and advancing enhanced oil recovery technologies (EOR Research Program)102.
Saskatchewan Research Council (SRC): SRC is Saskatchewan’s leading provider of applied R&D and technology commercialization, including in the Industrial Chemicals sector. SRC has more than 350 staff and annual revenues of $41 million. SRC has five business divisions: Agriculture, Biotechnology and Food; Alternative Energy and Manufacturing; Energy; Environment and Forestry; and Mining and Minerals. The Council operates more than 110,000 square feet of bench-scale laboratories and pilot-scale facilities, and its 350 employees serve more than 1,900 clients and partners.
Business Case Analysis: Strong Value Propositions that will Benefit from Gateways
Our analysis of IBM-PLI data shows that Edmonton is the only western Canadian location that appears on their Top-20 list of global industrial chemicals centres. Based on IBM-PLI’s quality and profitability scores, Edmonton is ranked 9th and 8th respectively. In terms of quality, it is significant to note that Edmonton is ranked broadly in the same category as some leading industrial chemicals centres, such as Yanbu-Madinah, São Paulo, Leipzig, etc., and above North American centres such as Sarnia and New Orleans. In terms of profitability scores, Edmonton’s ranking generally compares well to those of other Canadian centres and of leading U.S. industrial chemicals clusters such as Houston and New Orleans.
Competitive advantages for Western Canada’s chemicals industry include a highly skilled workforce, relatively low tax rates, modern ethylene crackers, large and efficient extracting plants, some of the world’s largest derivative plants and a ready supply of competitively priced feedstock103. In addition, the development of offshore resources and northern natural gas pipelines in the near future is anticipated to further increase the profitability of the sector104.
Given that the value chains in the Industrial Chemicals sector run north-south, we undertook a further analysis of cost structures of western Canadian cities compared to other U.S. and Canadian industrial chemicals clusters based on KPMG’s Competitive Alternatives study. This analysis gives us a more detailed comparison of cost structures in Western Canada. We find that with the exception of Abbotsford and Vancouver, western Canadian cities do rank below the United States’ baseline of 100, and even Abbotsford and Vancouver score below most other cities outside of Western Canada in terms of operating costs (see Table 5 below)105. However, we note that cost advantages of western Canadian centres are not significant, ranging from 2.4% for Red Deer, Alberta to 5.2% for Brandon, Manitoba.
In addition to cost structures, Gateway infrastructure is important to the Industrial Chemical sector as basic or commodity chemicals derived from natural resources are often shipped in bulk (by rail or sea) to intermediaries and subsequently to their final destinations. We therefore think that relative to competitor cities in Midwestern United States, centres such as Edmonton and Vancouver provide a strong value proposition when one takes into account all-in costs such as those for transportation and logistics.
Table 6: Ranking of Operating Costs of Specialty Chemicals Manufacturing in Selected Cities
|Cheyenne, WY||United States||97.3|
|Greenville-Spartanburg, SC||United States||97.0|
|Lexington, KY||United States||96.9|
|Little Rock, AZ||United States||96.3|
|Oklahoma City, OK||United States||96.1|
|Plymouth, Devon||United Kingdom||106.6|
|Red Deer, AB||Canada||97.6|
|San Diego, CA||United States||102.7|
|San Juan, PR||United States||94.3|
|Seattle, WA||United States||102.3|
|Shreveport, LA||United States||95.6|
|St. John’s, NL||Canada||96.6|
*Business costs are expressed as an index, with the United States being assigned the baseline index of 100.0.
Source: KPMG. Competitive Alternatives. 2008. <ftp://ftp.competitivealternatives.com/2008_compalt_report_vol1_en.pdf>. Downloaded December 16, 2009.
Industry Structure and Competitive Dynamics: Refining Capacity Constraints and Headwinds in the Value Chain
In our view, the key issue facing the western Canadian Value-added Industrial Chemicals sector is refining capacity in Western Canada. This is because refining capacity is at the core of supply dynamics to the downstream industrial chemicals industry. Currently, total refining capacity in all of Western Canada is about 625,000 bpd106. Compare this to “refiners’ alley” on the U.S. Gulf Coast (Texas and Louisiana), which, at about 20.9 million bpd, has about half of the U.S. refining capacity. ExxonMobil’s Baytown refinery in Texas alone has a refining capacity of 557,000 bpd, or 1.27x the entire current refining capacity in Alberta.
Part of the problem in justifying more refineries in Alberta is cost. The IBM-PLI and KPMG studies highlighted above do establish some cost advantages in favour of western Canadian centres, but these cost advantages are nowhere close to justifying major investments in refinery capacity in Western Canada. Also, we have to remember that until 2008, there was a severe labour shortage in Alberta. Shell Canada's Scotford refinery, for example, required 9,000 construction workers at peak construction107. While there have been studies showing that an integrated refinery does provide Alberta with a significant cost advantage over U.S. Gulf Coast refiners108, it is clear that other value chain factors continue to be top of mind among global industrial chemicals and refinery companies when thinking about value addition in Western Canada.
In addition to relative costs and scale of building a major refinery, the current momentum of oil and gas investment in Western Canada is geared toward the export of crude. Pipelines operated by Enbridge and Kinder Morgan, along with the Rangeland, Milk River and Bow River, and Wascana pipelines all carry crude oil from Alberta and Saskatchewan to destinations west (Vancouver), east (Sarnia) and south (Montana, Wisconsin, Illinois, etc.). Furthermore, newer pipeline initiatives such the Northern Gateway proposal by Enbridge (which will see a 525,000-bpd pipeline from Alberta to the tidewater port at Kitimat) are designed to meet increasing demand from the Asia-Pacific market. Kinder Morgan Canada already runs a crude oil pipeline from Alberta to Burnaby, recently expanding it to carry 300,000 bpd with expectations that capacity in this pipeline could reach 700,000 bpd109. This, combined with initiatives at Port Metro Vancouver to expand Panamax and Aframax vessel capacity, tells us that industry momentum is toward exporting crude rather than refining the crude in Western Canada.
Foreign Direct Investment Implications: Targeting Mid-Sized Specialty Projects
The industry structure and broad competitive dynamics of the Oil and Gas sector in Western Canada have important implications for the industrial chemicals industry in the West. First, the lack of refining scale means that likely investments by global and Canadian industrial chemicals companies will be limited to mid-sized specialty projects that may be add-ons to existing capacity. Indeed, this appears to be the modus operandi of existing industrial chemical operations in the West.
Second, while our view is not based on a detailed analysis of cost structures (this was not in the scope of this study), it appears that the cost “advantages” in the West highlighted in various marketing collateral are, in fact, not very large. Indeed, the 2-5% cost advantage highlighted in KPMG’s Competitive Alternatives Report for 2008 has disappeared since that report was published (in March 2008), due to the rise in the Canadian dollar!
Third, both oil sands property owners and western Canadian pipeline companies have invested tens of billions of dollars in the creation of a value chain that is entirely driven toward the export of crude. This tells us that any shift in this value chain toward servicing a western Canadian industrial chemicals industry will likely start with only marginal deviations from the existing business model, i.e., toward specialty chemicals and specialty plastics applications.
Finally, global refiners face major supply-demand imbalances in the wake of the global economic recession. In fact, in Canada alone as of January 2010, two refinery closures have been announced, resulting in a 10% reduction in the Canadian refining capacity. These are the Shell refinery in Montreal East and the Petro-Canada refinery in Oakville, Ontario. This trend towards deep cuts in refining capacity globally will likely continue in the short term, again telling us that the likely investments being considered by global industrial chemicals companies for Western Canada may be limited to niche applications.