VIP Shipper Club library – Petrochemicals' Northwest Frontier

ISSUE 4 / 2017

ISSUE 4 / 2017

PETROCHEMICALS’ NORTHEAST FRONTIER Appalachia Looks to Gain from Reserves

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SHELL ....................................................................................................................... page 16 CB&I .......................................................................................................................... page 22

energy update

PETROCHEMICALS’ NORTHEAST FRONTIER Appalachia Looks to Gain From Reserves

T

he 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 rivaling 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 fur-

BY PAUL SCOTT ABBOTT

nace 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.

The petrochemical cracker complex being built by Shell on the Ohio River northwest of Pittsburgh is the biggest project of its kind in the Appalachian Basin.

Credit: Shell

ABOVE: Polyethylene pellets with added pigments. Polyethylene pellets are produced at a pace of 1.6 million tons per year. / Credit: Shutterstock

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ISSUE 4 / 2017

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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.

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 Kevin Swift Ltd. The report indicates capital American Chemistry Council costs, including construction and detailed design, are US$250 million to US$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 US$6 billion range.

COSTS EXPECTED TO RISE

PROXIMITY IS KEY

APPALACHIAN BASIN SHALE FORMATIONS Marcellus/Utica Shales Rogersville Shale

VALUE OF SHIPMENTS (US$BILLION) 11.0+

1.0-2.9

6.0-10.9

<1.0

3.0-5.9

n/a

The Appalachian Basin’s Marcellus/Utica and Rogersville shale formations are close to states with large volumes of plastics shipments, including Ohio, Michigan and Illinois.

Source: American Chemistry Council

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 18 BREAKBULK MAGAZINE www.breakbulk.com

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.

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 ISSUE 4 / 2017

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Northeast petrochemical activity is seen as being centered.

“The right policies are critical to realizing this opportunity,” Dooley said, adding that he sees the Senate bill as “an important step forward [that] will help inform efforts to maximize America’s domestic energy and manufacturing potential.”

“Uncertainty around financing is a key barrier to the development of energy infrastructure in the Appalachian region,” Dooley added. “Policymakers can help by affirming that NGL storage and distribution projects are eligible for existing private-public financing programs. As Congress and the administration consider infrastructure modernization legislation, the Appalachian Hub should be a priority. And a timely and efficient regulatory permitting process is essential.”

‘NOT A COMPETITION’

A reactor for Sasol’s manufacturing ethylene cracker is hubs, includoffloaded in Lake ing those which Charles, Louisiana. demand plastics.

Moore offered Credit: Port of Lake the strength of Charles 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

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chemical and plastic products manufacturing positions, by 2025, with new facility investments generating US$2.9 billion a year in federal, state and local tax revenues.

All told, the American Chemistry Council analysis projects a US$32.4 billion investment in petrochemicals and derivatives and a US$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

Swift emphasized that the Gulf, with its seven-decade lead in providing crackers and related infrastructure, should always be a much larger player than the Northeast when it comes to the petrochemical business. While development of U.S. shale resources is spurring a cumulative investment of US$181 billion, that is predominantly occurring in the Gulf, with a comparatively small US$16 billion announced for the Appalachian basin.

“We’re only talking about up to five crackers going into the Northeast,” Swift said. “The Northeast will never surpass the Gulf. It’s not a competition.”

In fact, the Mid-Atlantic Technology, Research & Innovation Center, a South Charleston, West Virginiabased not-for-profit group that is at the forefront in pushing for the Appalachian Steve Hedrick Storage Hub, is MATRIC anticipating plenty of activity for both regions.

“First, to be clear, we are advocating for a dual-region approach,” said Steve Hedrick, president and CEO of the group, which is known at ISSUE 4 / 2017

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EPCs REVEAL RELUCTANCE Despite the hype, leaders of major engineering, procurement and construction firms seem hesitant to commit to development of petrochemical projects in the U.S. Northeast.

Executives of several EPC companies declined to comment, while Jake Swanson, director of global logistics, engineering and construction for Texas-based energy industry technology and infrastructure provider CB&I, stated that his firm is not bidding on any oil and gas work in the U.S. Northeast. Swanson

said he does not see oil and gas project work picking up in North America in general, nor in the Northeast specifically. He also said projects in the Northeast would be at a disadvantage over the Gulf.

“It would be more expensive to build a similar [cracker] plant in the Northeast compared to the Gulf,” Swanson said, adding, “The Northeast has tighter shipping envelopes due to older infrastructure and there are less transportation service providers to choose from in the area.”

MATRIC. “Second, we can foresee significant projects in the Appalachian Basin enjoying the advantage of being collocated with major raw material resources in the Marcellus, Utica and Rogersville shales, and hence avoiding the transport costs of these raw materials to other processing locations in the U.S. Gulf.

“These manufacturing facilities will be complementary to those being built and those already operating along the U.S. Gulf Coast,” Hedrick said. “We may see that the major operations in the Gulf are utilized at maximum capacity to supply export markets around the world through supply chains with high elasticity, while significant operations in Appalachia may supply the domestic markets with cost-effective intermediates to be transformed into finished consumer goods.”

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ISSUE 4 / 2017

Hedrick said he believes most of the transport of raw materials and liquid intermediaries in the Northeast will be accomplished by pipelines, with intermediate solid goods requiring transport to converters via road, river and rail.

STORAGE HUB REMAINS VITAL

Development of the Appalachian Storage Hub is critical to maximizing potential of the raw materials from the Marcellus/Utica and Rogersville shales, according to Hedrick, who said the concept is similar to the Mont Belvieu hub in Texas that supports the Gulf Coast chemical industry. Mont Belvieu, about 30 miles east of Houston, has been the center of the NGLs universe since the 1950s, with salt dome storage served by an expansive network of pipelines.

The Appalachian hub project, with a cost estimated by TopLine Analytics to be about US$10 billion, would have capacity for 75 million to 100 million barrels of NGLs and liquid chemicals, and would include as many as 3,000 miles of underground pipelines to move the chemicals to industries along a 454-mile corridor in four states.

Advocates for the Appalachian Storage Hub are quick to note that 70 percent of all North American polyethylene and polypropylene demand is within 700 miles of the Appalachian Basin, thus offering a ready market for plastics that are used by consumers and original equipment manufacturers.

The other key selling point, proximity to NGL supplies, is driven home in a report produced by IHS Markit for Team Pennsylvania and the Pennsylvania Department of Community &

Economic Development. That report says transportation accounts for between 65 percent and 70 percent of the cost for ethane and propane transported to Mont Belvieu, while the Appalachian Basin has access to ethane or propane for “less than half the cost.”

The same report notes that, in 2015, natural gas from Marcellus/Utica shale plays accounted for one-quarter of all natural gas produced in the U.S., and these Northeast formations are expected to account for more than 40 percent of the nation’s natural gas production by 2030, with commensurate increases in availability of NGLs. BB A professional journalist for nearly 50 years, U.S.-based Paul Scott Abbott has focused on transportation topics since the late 1980s.

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