For oil, the path to Canada’s West Coast has been littered with obstacles. For natural gas, the route to Pacific markets faces global competition and the risk that high export terminal construction costs will scupper projects expected to cost tens of billions of dollars.
Now, those who pump a third kind of energy – liquefied petroleum gas, made up of products like propane and butane – are quietly attempting to open new Asian markets, hoping they will find an easier way through British Columbia.
Like oil and natural gas, LPG production in North America has gained speed in recent years, and subsequently faced declining prices. And, like oil and natural gas, prices for LPG are much higher outside the continent. By one calculation, propane sold to Japan rather than the U.S. could fetch prices up to a third higher.
Unlike other energy forms, however, LPG has long moved on rail cars, allowing it to skip a challenging and expensive pipeline to the coast. That stands to lower the difficulty in launching sales to Asia, a factor that has raised some optimism among companies like Altagas Ltd. and Pembina Pipeline Corp., which are both pursuing export terminals on Canada’s West Coast.
“It makes a lot of sense. The pricing seems to indicate that it would be very profitable,” said Steven Paget, an analyst with Calgary’s FirstEnergy Capital Corp.
Even accounting for the cost of moving liquids around the world, Mr. Paget has calculated that U.S. Gulf Coast companies able to sell to Japan can boost their prices by 30 cents (U.S.) a gallon. Propane in North America today sells for about 90 cents – and British Columbia is far closer to Japan than the southern United States, although the price of building new terminals would likely be higher.
Companies have begun to look at export possibilities from Prince Rupert, B.C., where port lands are served by a Canadian National Railway Co. track that connects to Alberta.
“We’ve seen the same kind of interest that we saw originally in LNG [liquefied natural gas], as you see the same market shifts happening where the big focus is toward Asia,” said Shaun Stevenson, the port’s vice-president of trade development.
One advantage for those looking to ship LPG is cost. Enbridge Inc.’s proposed Northern Gateway pipeline and oil export terminal has a current estimated price tag of $6.5-billion. Major new LNG terminals could easily exceed $10-billion, in addition to natural gas pipelines costing around $5-billion.
David Noseworthy, an analyst with CIBC World Markets Inc., has estimated a small LPG export terminal might cost $500-million to build, and could export 25,000 barrels a day.
That could help to solve a problem for Alberta producers, which have relied heavily on U.S. LPG sales, but are seeing a key route south disappear. Kinder Morgan is in the process of removing propane from its Cochin pipeline, which currently carries up to 70,000 b/d from Fort Saskatchewan, Alta., to Windsor, Ont.
LPG products don’t tend to get much attention, since they come to surface as byproducts of oil and natural gas production. But propane, butane and pentane together form fully 70 per cent “of Alberta’s remaining light-medium crude oil reserves,” according to a recent report from the Energy Resources Conservation Board, the Alberta energy regulator.
Still, several important gas liquids players are skeptical about West Coast exports.
Building a new terminal on the coast might be challenging from an engineering perspective, said Terrance Kutryk, chief executive officer of Alliance Pipeline LP. Alliance today moves some gas liquids to the United States, but is modifying its system to carry up to 50,000 additional b/d of liquids, which could help fill the Cochin gap. Mr. Kutryk added that pipelines tend to be able to move products more cheaply than trains.
David Smith, president of Keyera Corp., has ruled out Asian exports for his company, in part because Canada doesn’t produce enough propane, for example, to make it worthwhile, he said.
“What’s more likely to happen is you’ll have additional export capacity built in the U.S., and then the propane we produce in Western Canada will find its way into U.S. markets,” he said.
In November, 2008, the U.S. exported 20,000 barrels a day of propane. By March, 2013, that had grown to 287,000 b/d, and plans are under way for further exports. Based on publicly announced expansions, CIBC’s Mr. Noseworthy calculated in a recent note that capacity would nearly double in 2013.
In the meantime, prices have been severely depressed. Over the past five years, North American propane has sold on average for 65 per cent of West Texas intermediate, the continent’s most important oil price. In the early months of 2013, it sold for 37 per cent, a major discount. Canadian propane has faced even worse discounting.