Originally appeared in Breakbulk Magazine - Issue 4, 2017
The U.S. Northeast’s Appalachian Basin is the next frontier for American petrochemical projects. And while production is highly unlikely to ever come close to rivalling that along the U.S. Gulf, impacts are anticipated to be in the tens of billions of dollars.
The region – which includes large portions of western New York, Pennsylvania, Ohio, West Virginia and Kentucky – is rich in natural gas and oil supplies from the Marcellus/Utica and Rogersville shale plays, making it a logical place for building massive petrochemical plants, known as crackers, used in transforming raw materials into everyday plastics.
A U.S. unit of British-Dutch energy and petrochemical giant Shell has this year begun grade-level construction for a massive cracker complex about 30 miles northwest of Pittsburgh, while Thailand-based PTT Global Chemical Public Co. Ltd. is expected to decide by year-end whether to solidify plans for building a 450-acre cracker plant of its own in Dilles Bottom, Ohio, about 15 miles south of Wheeling, West Virginia.
Shell plans to have its facility at a former zinc smelter site along the Ohio River in Beaver County, Pennsylvania, operational by early 2020s. It will take the natural gas liquid ethane from the Marcellus/Utica formations and use furnace units to break it apart – or “crack” it – rearranging its large molecules into carbon and hydrogen atoms to create ethylene, which is to be further processed to create different types of polyethylene. Polyethylene pellets, produced at a pace of 1.6 million tons a year, are then to be shipped to plastics products manufacturers via railcars and trucks.
Senators Seek Action
Meanwhile, U.S. senators from West Virginia and Ohio are pushing legislation to direct the U.S. departments of Energy and Commerce to study establishment – likely along the Ohio River – of a subterranean Appalachian Storage Hub for holding and distributing ethane from the region’s shale plays. Currently, much of that ethane is shipped via pipelines to the U.S. Gulf region for cracking, with the rest blended into the overall methane stream and sold as commercial natural gas.
The Appalachian Ethane Storage Hub Study Act of 2017, S. 1075, was introduced in May by Sen. Shelley Moore Capito, R-W.Va.; Sen. Joe Manchin III, D-W.Va.; and Sen. Rob Portman, R-Ohio, and was referred to the Senate Committee on Energy and Natural Resources, where it remained without action through early summer.
But development of storage facilities for natural gas liquids, or NGLs, isn’t waiting on legislation. Energy Storage Ventures LLC, a Denver-based portfolio company of a private equity fund managed by Goldman, Sachs & Co., anticipates storing ethane below ground at a 200-acre site 12 miles south of Dilles Bottom by the end of 2018. That Ohio site is near Blue Racer Midstream’s Berne Complex of two cryogenic natural gas processing plants, both of which became operational in 2015.
Costs Expected to Rise
Yet, even with the current and projected activity, expert observers don’t see the U.S. Northeast as ever coming close to the long-established Gulf petrochemical industry in production capabilities. This is in part because of higher construction and labor costs. Moreover, the Gulf is decades ahead in infrastructure, with more than a dozen major new cracker projects in the pipeline. An abundance of Gulf region feedstock is helping fuel a record boom in exports of plastic resins from Gulf ports.
American Chemistry Council economists see higher costs associated with Northeast crackers compared with Gulf counterparts, but they see Appalachia offering some advantages as well.
“The fixed capital costs are higher largely because construction costs are higher in the Northeast,” said Kevin Swift, chief economist at the Washington-based chemical industry trade group. He pointed out that states of the Appalachian Basin are heavily unionized, while Texas and Louisiana are right-to-work states, with opportunities for lower-cost nonunion labor.
Swift’s view on costs is supported by a May report from Petrochemical Update, a division of London-based market intelligence firm FCBI Energy Ltd. The report indicates capital costs, including construction and detailed design, are $250 million to $270 million higher in the Northeast compared with the Gulf for development of a similar typical cracker.
Whereas hundreds of millions of dollars may seem to be a deal-breaker, one way to look at the comparison is that the capital cost difference is about 5 percent of the total investment for a new cracker. While the companies haven’t released figures, the Shell and PTT cracker projects each have estimated price tags in the $6 billion range.
Proximity is Key
Martha Moore, the American Chemistry Council’s senior director of policy analysis and economics, agreed that costs may be higher, but also cited several benefits related to Northeast crackers.
First of all, Moore said, Appalachian Basin crackers benefit from proximity to shale plays that are rich in NGLs, with production expected to increase, reaching 350,000 barrels a day of ethane available from Marcellus/Utica formations by 2025.
Furthermore, she said, the Appalachian Basin is close to Midwest manufacturing hubs, including those which demand plastics.
Moore offered the strength of the U.S. economy as another factor favoring Northeast cracker development. And her colleague, Swift, noted that the interior Northeast does not experience hurricanes as the Gulf does – although it does get plenty of snow.
A report from the American Chemistry Council, unveiled at a Capitol Hill press event featuring lawmakers from West Virginia, said the four-state region of West Virginia, Pennsylvania, Ohio and Kentucky could realize 100,000 permanent new jobs, including 25,700 new chemical and plastic products manufacturing positions, by 2025, with new facility investments generating $2.9 billion a year in federal, state and local tax revenues.
All told, the American Chemistry Council analysis projects a $32.4 billion investment in petrochemicals and derivatives and a $3.4 billion investment in plastic products in the Northeast through the mid-2020s, including construction of five ethane crackers and two propane dehydrogenation facilities, with each of the latter containing a polypropylene resin plant.
In releasing the report, council President Cal Dooley underscored the importance of supportive governmental policies in bringing to fruition the Appalachian Storage Hub around which Northeast petrochemical activity is seen as being centered.