Canada’s two biggest petrochemical projects face reality check

Inter Pipeline and Pembina Pipeline, two Canadian midstream companies behind the country’s two biggest petrochemical projects, face a reality check after spending hundreds of millions in plans to go downstream by turning propane gas they traditionally only transported into plastic.

Inter Pipeline's PDH/PP project near Edmonton, Alberta as of Q2 2020. Image courtesy of Inter Pipeline.

Inter Pipeline, halfway into a C$4-billion plant construction, struggles to find an equity partner to share risk. Pembina, which announced a final investment decision for a C$4.5-billion plant in partnership with Kuwait’s Petrochemical Industries Company in 2019, had to defer plans and mulls its next step.

Both projects are propane de-hydrogenator (PDH) /polypropylene (PP) plants. Both are near Edmonton, Alberta.

There has been a “big compression” in PP to propane margins this year compared with recent years, Christian Bayle, Inter Pipeline’s CEO, said in August just months after first announcing plans a partner was sought.

“Significant time and resources” were dedicated to finding a partner, he said.

As for Pembina Pipeline Corp., retaking their project interrupted in March 2020 would require new approvals from board directors in Kuwait and Canada.

Inter Pipeline’s chances to find a partner willing to pay full dollar for the equity aren’t rosy not just due to market conditions but also because of similar and more attractive asset purchase possibilities, an industry source said.

For similar reasons, Pembina and its Kuwaiti partner may find it better to take losses and not move on, the source added.

Inter Pipeline focused on finding a partner

“Clearly, the near-term forecast, particularly the spread between polypropylene and Alberta propane, has compressed,” Bayle said during the company's second quarter earnings discussion.

In the first half of 2020 “the price for PP was around US $1,000/tonne. Historically, now going back the last several years, they have averaged about $1,400. That's a big compression,” Bayle said.

“But our long-term outlook on that spread remains intact, so we continue to have constructive conversations with potential counterparties,” Bayle added.

Such efforts “will continue to remain to be the major commercial focus of the business here for the balance of the year,” he said.

“We expect it will take at least until early 2021 to conclude this process, and there can be no assurance that a transaction will be completed,” Bayle added.

Inter Pipeline first announced in the first quarter 2020 that it was seeking a partner for the project. In May, it reported a 14% project costs increase, or C$500 million, to C$4 billion with C$150 million related to Covid-19.

The project involves 525,000 tonnes/year of PP capacity. Investment as of the end of the second quarter was C$2.7 billion, 68% of the total. Projected startup is in early 2022.

Inter Pipeline sold in September assets for $535 million in Europe with part of the proceeds to help finance the PDH/PP project.

Pembina mulls what to do

Pembina and Kuwait's PIC formed their equal partnership in 2017 for a similar PHD/PP project.

A C$4.5-billion investment was to lead to a new 550,000 tonnes/annually PP plant operating by mid-2023. Pembina estimated its share of the investment at C$2.5 billion, higher than PIC as it was to retain related pipelines.

On Jan. 2020 Pembina announced that costs increased to C$2.7 billion after the timeline was extended to the second half of 2023.

In late March Pembina announced a reduction in capital expenditures due to Covid-19. This included the deferment of several projects, including the PDH/PP complex.

Manufacturing “of critical long-lead items has continued and key talent and knowledge are being retained, all to preserve project value for efficient potential restart,” said Pembina’s CFO Scott Burrows on Aug. 7.

“Pembina and its joint venture partner continue to evaluate a number of factors related to the project. The future and ongoing risks needs to be understood and priced into the project cost estimate,” he said.

“Future demand for polypropylene remains uncertain and needs to be carefully evaluated,” he added.

Potential alternative assets on the market

Inter Pipeline’s efforts to find a PP plant investor may have been complicated by Odebrecht’s announcement of plans to sell Braskem, an industry source said.

Braskem owns PP assets in Texas as well as in the northeast of the U.S.

Odebrecht, Braskem’s majority owner, said on Aug. 7 it plans “the private sale of up to its total equity” to meet obligations to creditors.

“If anybody was interested in buying assets like that they would probably go and buy those assets rather than make a deal in Western Canada,” the source, who asked not to be named, said.

Braskem plants “are already running, the name is proven in the marketplace, they’ve got customer relationships, a product portfolio. All that has to be developed in Western Canada,” he added.

Cost overruns in Canada have been significant and unless there is a discount, attracting a buyer would be difficult, he added.

“There is also the market risk. The market does not really need what they are trying to build.

The U.S. market is not growing,” he said.

As for Pembina, “don’t think they are going to build for the same reasons,” he said.

Having “too much propane was the whole reason for building the plants to begin with, but it is misleading to think both sides of the equation are sold,” the source said.

Other North American PP projects

“That’s why Formosa has kind of walked away from their plant. Wouldn’t be surprised if it is canceled,” he added.

Formosa Plastics published a project update on Nov. 25, 2019 saying its “PP plant III” was under construction in Texas with startup by third quarter 2021. It has not provided any update. An email was sent to a Formosa spokesperson on Sept. 25.

Exxon Mobil announced in 2019 a 450,000 tonnes/year PP Baton Rouge expansion by 2021. That may not be the case anymore.

“We are evaluating all appropriate steps to significantly reduce capital and operating expenses in the near term and will provide updates as appropriate,” an ExxonMobil spokeswoman said by email on Sept. 25.

“Timing of expansion plans for select downstream and chemical facilities across the company's portfolio will be adjusted to capture efficiencies, slow spending pace and better align with a return in commodity demand. We are not commenting on specific projects at this time,” she said.

By Renzo Pipoli