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Varcoe: Alberta gives $500M carrot to kick-start petrochemical projects

Varcoe: Alberta gives $500M carrot to kick-start petrochemical projects
Business
The government is providing $500 million in incentives to two planned petrochemical projects, paid out over three years after they begin operations. 

In return, they will create more than 240 full-time jobs, along with several thousand temporary construction positions and indirect employment.

But the real debate is whether the subsidies are worth it.

“We’re talking about $5 billion that these companies are investing here in Alberta. These jobs are going to go to Alberta men and women … this is significant,” says Economic Development Minister Deron Bilous.

“Like any subsidy program, that’s a pretty costly way to increase employment,” replies economist Trevor Tombe at the University of Calgary.

The Notley government announced Monday its long-awaited selection of companies to receive up to $500 million in royalty tax credits from the province in return for building petrochemical plants.

The idea of offering such incentives was first unveiled earlier this year as the NDP attempts to diversify the ailing provincial economy.

Alberta’s petrochemical sector is an obvious area of growth, reporting sales of $14 billion last year, with primarily gas and natural gas liquids — ethane and methane — turned into higher-value products.

A new project by Pembina Pipeline Corp. and Petrochemical Industries Co., was approved to receive up to $300 million in royalty credits. They’re looking to construct a massive $3.8-billion to $4.2-billion development in Sturgeon County in the Edmonton region.

The facility will consume about 22,000 barrels per day of propane, creating polypropylene products that will be shipped, in pellet form, to markets in central Canada and outside the country.

Polypropylene is used in an array of consumer products such as manufacturing plastics, appliances and medical supplies.

Likewise, Inter Pipeline Ltd. will receive up to $200 million in royalty credits, which can be traded to a petroleum producer, to construct a $1.85-billion propane dehydrogenation facility in Strathcona County.

It will also process about 22,000 barrels per day of propane into propylene. (Separately, Inter Pipeline is assessing a $1.3-billion processing facility that would convert propylene into polypropylene.)

Final investment decisions on both Inter Pipeline projects are expected by the middle of next year; Pembina anticipates a final investment decision in mid-2018.

There’s little dispute both plants would provide a much-needed shot in the arm for construction in Alberta as oilsands spending slows. Combined, the two developments would create an estimated 3,700 to 4,200 positions during the building phase.

That means metal fabricators, welders and many other tradespeople would have work — and hope — after a gruelling recession.

The Pembina facility will create 150 full-time jobs when it’s going. The Inter Pipeline plant would have about 95 permanent positions.

If built, these two developments would become the first such facilities to produce polypropylene in Canada, increasing the raw value of the propane by seven times through the process. 

“We will start adding the value here in Alberta. We’ll get the long-term jobs, the long-term taxes,” Inter Pipeline senior vice-president David Chappell said Monday.

“Hopefully these announcements mean Alberta and Canada will become a little less hewers of wood and drawers of water.”

Following the shale gas revolution, the continent — and province — has plenty of cheap propane to offer the petrochemical sector.

With construction costs also dipping in Alberta during the recession, it makes capital-intensive plants more attractive to build.

However, Chappell points out construction costs are still higher in Alberta than on the U.S. Gulf Coast by about 20 per cent. 

Pembina CEO Mick Dilger said the Alberta-based company wants to create jobs in its home province, but other locations, such as Texas and Louisiana, also offer enticements.

“Alberta has lost projects over the last year to other jurisdictions that have incentives. So I do think it is a difference maker,” he said Monday.

From the government’s perspective, Bilous insists this isn’t a race to the bottom. But he surely knows questions will be asked about the government picking winners and losers.

“What we want to do is level the playing field. And that’s exactly what this program does.”

But there’s an obvious counter argument.

If the projects were clearly economic, they would be built here without any help.

As Tombe points out, subsidies encourage distortion of normal economic activity. To attract more investments and jobs, it would be more effective to offer broadly based reductions in corporate income taxes then give individual sectors subsidies, he adds.  

“Alberta’s budget was not exactly flush with money. I think there are better uses of $500 million than this.”

In the mid-1970s, PC premier Peter Lougheed unveiled incentives to kick-start the petrochemical sector through policies to promote ethane use, almost doubling the number of Albertans employed in the sector over a decade.

Energy Minister Marg McCuaig-Boyd hearkened back to those bold steps in Monday’s announcement, saying the province wants to “further that legacy.”

Naturally, she didn’t reference some of the dogs in Alberta’s diversification kennel, such as Gainers or MagCan.
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