When it comes to matchmaking, eHarmony couldn’t have dreamed up a better pairing than Pennsylvania and the small Ontario city of Sarnia. After all, what’s not to love about a place that houses Canada’s largest ethanol plant, boasts a track record of globally noted accomplishments and is one of North America’s largest trading hubs?

Indeed, the allure of Sarnia is drawing the midstream’s attention. And for good reason. In the delicate balance between supply and demand, Sarnia has become the ying to the Marcellus yang.

After all, Sarnia gave the over-supplied Marcellus a place to send its ethane, which for years caused takeaway constraints and storage challenges. Economically, Sarnia has been on the receiving end of the Marcellus’ NGL, translating into good news for the area’s petrochemical industry. It’s also become a petrochemical paradise of sorts, where energy behemoths do business in a cost-effective, timely and environmentally friendly way. Sarnia has become an industry staple and is expected to remain so well after the ethane honeymoon is over.

“This is a once-in-a-generation, once-in-a-lifetime, once in 500 years opportunity for the petrochemical industry in North America,” Dan Lippe, founder of Petral Co., told Midstream Business. Lippe has spent the past 30 years studying industry trends.

“[Companies] have done what they have needed to do to maintain their economics at a very competitive level, relative to the economics of producing petrochemicals from ethylene on the Gulf Coast,” said Lippe. “They’re not the lowest-cost producers of petrochemicals based on ethylene, but they are definitely in the lower quartile on a global basis, which means they are in very good shape for being very successful and profitable long-term.”

Making the connection

Marrying Sarnia with Pennsylvania’s Marcellus required innovative thinking from across the energy spectrum, particularly in the world of midstream. But when it came to the Marcellus’ ethane oversupply, and Sarnia’s hunger for gas liquids, it was clear they were a natural fit.

The first pipeline project to transport Marcellus ethane to Sarnia was Mariner West, which came online in mid-2013. Startup was delayed by a few months after Sunoco Logistics replaced a nine-mile pipe section due to integrity concerns. Mariner West is a joint project between Sunoco Logistics Partners LP and MarkWest Liberty Midstream & Resources LLC.

As of late 2014, Sunoco was continuing to add pumps to the system and expected to reach about 50,000 barrels per day (bbl/d) in the fourth quarter, the company said during an earnings call. During a third-quarter 2013 earnings call, Sunoco CEO Michael Hennigan said he was optimistic on the future of ethane and other NGL.

“I think there’s interest across the board,” he told call participants. “There is interest in propane. There is interest in butane … and then there’s renewed interest in ethane. Early on between our projects, Mariner West and East and Atex, there [were] some early ethane solutions, but I think the biggest change that people become more and more aware of is the amount of production that’s occurring. And we continue to be really bullish.”

Hennigan has also said that he expected to see the appetite for ethane outside North America remain strong.

“Our goal is to try and show a transportation solution that provides value so that the producer and consumer can walk away with a win-win. And, at the end of the day, we stated many times, we are a believer that the best value in the Marcellus-Utica is to fractionate up in the Northeast. That’s what we think creates the most value, and it gives you the most optionality to get your ethane to the right market, get your propane to the right market, get your butane to the right market. So we’ve been a believer that fractionation in the Northeast creates value. And we’ve been trying to set up our projects to have that flexibility.”

Financial results specific to Mariner West were not available, however company-wide, Sunoco posted record-setting quarterly results for second-quarter 2014. Adjusted EBITDA for third-quarter 2014 was $246 million, a $65 million increase compared to third-quarter 2013. The company reported distributable cash flow of $194 million, a $74 million increase from the prior-year quarter.

Prophetic thinking

Though Mariner West was the first to bring Marcellus NGL to Sarnia, it wasn’t the first to attempt the strategy. In June 2010, before Mariner West was announced as a potential project, Kinder Morgan Energy Partners LP launched an open season to gauge interest in its Marcellus Lateral Project. Kinder Morgan’s proposed project would have moved NGL from the Marcellus Basin to Sarnia-area fractionation plants and petrochemical facilities via a 250-mile newbuild pipeline and Kinder Morgan’s existing Cochin system.

The system would have had an initial capacity of 75,000 bbl/d and could have been expanded to handle up to 175,000 bbl/d. However, at the time, the proposal was not met with adequate levels of shipper support.

“Our approach offered a more robust solution, something that could be expanded in the future,” Karen Kabin, Kinder Morgan’s vice president of business development, told Midstream Business. “I think at the end of the day, we were just ahead of our time. The industry didn’t recognize how prolific the Marcellus and Utica production would be and the value the project would have.”

Several other factors were working against the project. BP Plc—which operated Canada’s major NGL fractionation facility—was engaged in the aftermath of the Deepwater Horizon explosion and oil spill and unable to make commitments. BP later sold its Sarnia plant to Plains Midstream Canada. As well, Plains Midstream’s Windsor, Ontario-Sarnia Pipeline had not yet been placed back into service, causing marketplace uncertainty.

Opening UTOPIA

Four years later, Kinder Morgan has launched and closed a successful binding open season for its $500 million Utica to Ontario Pipeline Access (UTOPIA) project, which will gather ethane and ethane-propane mix from the Utica. The new 240-mile, 12-inch pipeline will interconnect with an existing 80-mile portion of the Cochin pipeline to deliver product to a Plains Midstream facility in Windsor. From there, Plains will use its currently operational Windsor-Sarnia pipeline to transport the product to Sarnia’s NOVA Chemicals Corp. and Imperial Oil crackers. The project is expected to be online in January 2018.

Kinder Morgan confirmed it is considering holding an additional binding open season for UTOPIA for the committed capacity that was not subscribed during the original open season, but no firm decision on timing has been made.

Sarnia is no rookie when it comes to the petrochemical industry. There’s been a significant petrochemical complex in the region for the past 50 years, with local powerhouse NOVA being renowned in the industry as an ethane consumer. NOVA keeps tabs on all industry developments and was first in line to buy ethane from Pennsylvania, said Lippe.

“They were negotiating for ethane supply before anyone else even thought about it,” he said. “They knew that the business from western Pennsylvania to Sarnia, just across the river from Detroit, was the only way they were going to stay in business in Sarnia. And they wanted to stay in business at Sarnia.”

NOVA holds a number of Sarnia-area assets, including its Corunna, Moore and St. Clair River sites. Its largest operation, Corunna, is capable of producing more than 3 billion pounds of petrochemicals annually. NOVA recently converted its Corunna cracker from naphtha to ethane to allow it to utilize up to 100% NGL as feedstock. It is currently using exclusively NGL as feedstock, consisting mostly of ethane from the Marcellus.

Polyethylene output

Its Moore Site converts Corunna-supplied ethylene to manufacture both low-density and high-density polyethylene resins. Its St. Clair River polyethylene facility uses SCLAIRTECH technologies to make high-density polyethylene resin.

As well, NOVA has spent more than $250 million converting plants from naphtha to ethane.

“We have acted quickly and were the first petrochemical company to begin utilizing ethane from the Marcellus Shale Basin,” Grant Thomson, NOVA Chemical’s president of olefins and feedstock, told Midstream Business. “Our proximity to western Pennsylvania provided us with costeffective transportation and shorter project time lines than what was possible for others.

“A conversion from more expensive heavier feedstock, including naphtha, to up to 100% NGL allows us to take advantage of the growing cost competitive ethane supply from the Marcellus Shale Basin and the earnings improvements and earnings volatility reduction that the price and supply of NGL can offer,” Thomson added.

NOVA is currently mulling building a second-stage polyethylene plant, which could be located in Sarnia, though the company is also considering the Gulf Coast and other areas as options. The company has not yet announced an expected cost.

Spending in Sarnia

Sarnia is among North America’s largest natural gas trading hubs. As such, it’s on the receiving end of an influx of Marcellus and Utica shale gas, which is providing a competitive source of feedstock for industry majors. A number of new pipelines are being constructed or modified to bring more gas to the region. As well, Pembina Energy bought Dow Chemical’s former hydrogen storage complex and made a $40 million investment to store NGL.

Meanwhile, Thomson added, NOVA’s future investment in the Sarnia region could top $300 million during the next five years.

All this activity has had a positive impact on the local economy, too.

“It’s pretty significant because the chemical industry is a high wage industry,” George Mallay, general manager of the Sarnia-Lambton Economic Partnership, told Midstream Business. “The average job in the chemical industry pays more than $70,000 a year. If we look at 19,000 people employed in 1,500 manufacturing and service industries in Sarnia-Lambton, about 53% of the workforce is engaged in the production of chemicals and refined products. It’s significant.”

Mallay said he hopes this growth continues. They’re working to build a hybrid chemistry complex that would be the first of its kind in the world. As part of those plans, the association is pursuing opportunities around oil, shale gas and biobased feedstocks.

“Our community is very open to petrochemical investment,” Mallay said. “We can get the social license to make things happen here. You can get things permitted and you can do it in a timely fashion.”


NOVA Chemical’s Corunna site is capable of producing more than 3 billion pounds of petrochemicals annually. It is using exclusively NGL feedstock, consisting mostly of ethane from the Marcellus. Source: NOVA Chemicals Corp.

The association seeks to make use of more of the region’s underutilized infrastructure. It is actively approaching businesses, mostly chemical companies, and pitching Sarnia’s business-friendly atmosphere to them. The organization has discussed investment opportunities with petrochemical companies as well.

“You can get a plant built on time and on budget here,” added Mallay. “The Sarnia Building Trades Council is willing to negotiate project agreements to guarantee standard hours of work and conditions to ensure projects are completed on time and on budget.”

Buildout complete?

From a midstream perspective, Sarnia already has much of the necessary infrastructure in place. There are plenty of rail car facilities, for example, and upward of 20 million bbl of salt cavern storage. And with the completion of Mariner West and the option to use Cochin to meet additional needs, the pipeline piece of the puzzle is ultimately complete, said Lippe.

“It’s already done,” he added. “Mariner West is big enough to satisfy the needs that NOVA Chemicals has, and the need for ethane that Imperial Oil chemical facility in Sarnia has. There is no need for another Mariner West, unless somebody decides to expand ethylene production at Sarnia. And Sarnia is a better place to build ethylene plants than Pennsylvania because Sarnia already has the entire necessary infrastructure in terms of storage that you would want if you were going to build a grassroots ethylene plant.”

Challenges and opportunities

Pennsylvania’s lack of storage had been among the greatest challenges the midstream world faced in the Marcellus, said Lippe.

“The lack of underground storage in Pennsylvania was a very significant challenge that required out-of-the-box thinking and some creativity to resolve,” he added. “Clearly they have resolved it. There is a lot of underground storage in Sarnia and that was probably one of the solutions that made it a natural fit between the midstream companies and natural gas producers: the fact there is significant storage in Sarnia.”


Kinder Morgan’s $500-million Utica to Ontario Pipeline Access (UTOPIA) project will gather ethane and ethane-propane mixtures from the Utica. Source: Kinder Morgan Inc.

The decision to pair the Marcellus with Sarnia didn’t come overnight. It required plenty of thinking and foresight. Lippe predicted the necessity of such a project during a 2007 presentation he gave regarding business development opportunities for emerging U.S. shale plays. Several years later, his prophecy came to fruition, though he insists there was nothing particularly prophetic about the issues he identified.

“Any consultant who has been doing this for 20 to 30 years should have come to the same conclusion without having to think about it for more than 10 minutes,” he said.

Ontario also faces challenge with high electricity costs, added Thomson. But where there are challenges, there are also opportunities. Thomson pointed to southwestern Ontario’s well-educated and capable workforce, and the fact Sarnia sits in Canada’s petrochemical heartland. It’s in close proximity to shale-based resources, too, which provides cost-competitive feedstock for companies such as NOVA.

“In Eastern Canada, based on the emergence of the Marcellus Shale Basin and the investments that we are making in the region, we now see long-term future growth opportunities for our Ontario assets that were not as clear five years ago,” said Thomson. “Through the investments that NOVA Chemicals has made over the past few years, we expect our Sarnia-based facilities to be costeffective into the future and well set up for additional growth.”

Perhaps Sarnia is the right place to do it. Sarnia-Lambton Economic Partnership’s Mallay said the city has become a world-class example of environmental remediation.

“We have one of the cleanest waterways around,” he said. “It’s clear blue water; there’s a big salmon derby held every year; and beaches maintain blue flag status. It’s an excellent place to live where the beach stretches from downtown right into the rural area. There has been really strong environmental management by the community and by the companies."

Sarnia’s Storied History

By Michelle Thompson

The Sarnia region’s presence in the energy industry dates to 1858, when Jack Miller-Williams struck oil while drilling for water in central Lambton County near the present-day community of Oil Springs, Ontario. A few years later, in 1862, the region recorded Canada’s first oil gusher at 3,000 barrels per day.

The boom-generating gusher sent local energy executives on a worldwide tour to showcase their drilling techniques. Today, an effort is in place to make the scene of that impressive gusher at Oil Springs a world historic site. Imperial Oil, now the Canadian subsidiary of ExxonMobil Corp., established a refinery at Sarnia in the early 1890s.

The Second World War led to the creation of the petrochemical industry in Sarnia. One of Canada’s commitments to the war was to develop synthetic rubber, prompting the establishment of the federal crown corporation Polymer Corp., now owned by the German multinational LANXESS. Within two years, a petrochemical plant was built in Sarnia to make synthetic rubber. Dow Chemical Co. established a presence in the region shortly after.

Sarnia hit another peak in the late 1940s, when oil was discovered in Alberta. Pipelines were built from Alberta to Thunder Bay, Ontario, before being shipped via tanker to Sarnia. A pipeline flowing directly to Sarnia was later built. Sunoco Ltd. established a refinery in the city. Shell Oil Co. of Canada Ltd. followed suit.

Sarnia sits on natural salt beds, making it a prime spot to create underground storage caverns and build chemical plants.

Activity remained frenzied through the ensuing decades. Companies began erecting ethylene and polyethylene plants, and Petrosar, now the NOVA Corunna Site, built an ethylene cracker. But as big hair and leg warmers became fashionable in the 1980s, the trends of the energy world also began shifting.

“In the ’80s and ’90s, we really went through a period of rationalization and restructuring,” George Mallay, general manager of the Sarnia-Lambton Economic Partnership, told Midstream Business. “There were some significant mergers and acquisitions. In the past 15 to 20 years, there has also been downsizing. A lot of the plants that were built in the ’40s and ’50s were no longer globally competitive. A lot of those plants have been torn down. Now we’re at a point of rejuvenation and that’s based on three things.”

Opportunities include oil coming from Alberta (there are three Sarnia-based oil refineries), Sarnia housing Canada’s largest ethanol plant and efforts to build a world-class hybrid chemistry complex.

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