Market Headwinds Buffet Appalachia’s Future as a Center for Petrochemicals
From an Article by James Bruggers, Inside Climate News, March 21, 2020
A Wealth of Financial Problems
The headwinds began blowing in Appalachia last year, when the Braskem and Odebrecht companies ended their plans to construct an ethane cracking plant in West Virginia.
Tens of billions of dollars in petrochemical investment from China, announced in 2017, never materialized. (The West Virginia state government seems fixated on “pie in the sky.” DGN)
And a company seeking to secure $1.9 billion in federal loan guarantees to construct massive underground storage for ethane, promoted as essential to support a petrochemical bonanza along the Ohio River, ran into Congressional opposition. The money would come from a fund that has primarily been used to back wind power, solar and other types of clean energy.
Plastics: From the Gas Well to Your Home
The company, Appalachia Development Group, announced more than a year ago that it had been invited by the Trump administration to submit a second phase of an application for the money. Steven Hedrick, the chief executive officer of the Appalachian Development Group, said this week that he’s still working to complete the application.
And while Pennsylvania lawmakers last month passed a bill that could deliver hundreds of millions of dollars of tax breaks to new plastics, petrochemical or fertilizer plants that use Pennsylvania natural gas as a feedstock, Gov. Tom Wolf has said he would veto the bill.
Suddenly, however, local factors such as tax incentives and financing issues have been dwarfed by the coronavirus pandemic, which, along with Saudi Arabia’s oil price war with Russia, have sent the crude market plummeting to levels not seen in nearly two decades.
That makes Appalachia’s ethane, though still cheap, less competitive as a basic building block of plastics, compared to naphtha — a petroleum product found in other regions whose price falls along with oil.
The Economics Have Never Looked Worse
IHS Markit had removed the proposed $5.7 billion ethane plant in Belmont County, Ohio, from its long-range plastics supply forecast even before the coronavirus pandemic seized the global economy. The project is a collaboration between Thailand’s PTT Global Chemical America and South Korea’s Daelim Industrial.
There has been an oversupply of polyethylene, the product the Ohio plant would make. And IHS sees that overage continuing for at least three more years. Plastics demand will continue to rise, but at a slower rate.
Coronovirus will take its own, additional bite out of global plastics demand. The economics that would support approval of a final investment decision of the (Ohio) project are less compelling today than they have been the entire time it has been under consideration.
Twice since June 2018, Moody’s bond credit rating business, which is used by investors to decide where to put their money, raised doubts about the project. Most recently, in mid-February, Moody’s predicted that PTT Global Chemical this year would “not embark on any new capacity expansion plan until margins improve on a sustained basis.”
In Ohio, the state’s private economic development corporation —JobsOhio — remains optimistic. It has invested nearly $70 million in the project, including for site cleanup and preparation, saying thousands of jobs are in the offing. The companies have obtained their environmental permits. A final investment decision is still expected to be announced by summer, Dan Williamson, a project spokesman said, declining further comment.
But market conditions do not bode particularly well for the venture. Plastics prices today are much lower than what they were from 2010 to 2013, when the Ohio project was being planned, said Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis. He added that future prices are also projected to be weak.
PTT Global Chemical’s profits were down 60 percent last year, and they’ll have a lot of competition in the United States, he said.
The region’s gas exploration and production companies are also teetering on a financial cliff. They were burdened by debt even as they continued to boost production in 2019. “Taken together, there are a lot of red flags,” said Sanzillo.
Financial Uncertainty Hangs Over Shell—and the Region
All the financial and economic factors at play with regard to the proposed Ohio ethane plant also weigh on the region’s one actual facility, a multi-billion plastics manufacturing plant being built by Shell Polymers in Beaver County, Pennsylvania, 25 miles north of Pittsburgh.
Shell this week temporarily halted construction after some workers and public officials raised concerns about unsafe practices related to the coronavirus.
The project’s future may also be uncertain, said Beckman, the University of Pittsburgh chemical engineering professor. If demand for polyethylene stays strong in China, Shell “may come out OK,” he said.
But that may not happen, and to a big oil company like Shell, “five to six billion bucks in not the end of the world if you have to write that off,” Beckman said.
Shale gas exploration and production companies in the Appalachian Basin were teetering on a financial cliff, even before the coronavirus pandemic’s economic fallout.
A Shell spokesman, Ray Fisher, said Shell does not see “the current price environment” affecting plans at its Beaver County plant. “We take a long-term view of the demand for the products that will come from this site,” he said.
Whatever Shell’s future, the region’s shale deposits are not limitless, said Andrew R. Thomas, the executive in residence at Cleveland State University’s Energy Policy Center.
Natural gas production from the Marcellus and Utica shales has a lifespan of 30 years—possibly 50, if gas wells can be fracked a second time, said Thomas, who has worked in the energy industry as a lawyer and geophysicist,
Losing even 10 years could mean “we lose the opportunity to develop our own petrochemical region,” he said, adding that a recession would frustrate “any investment opportunities.”
In Belmont County, Ohio, Larry Merry, an economic development official, agreed that these are “uncertain times,” a considerable understatement, given the coronavirus’s rapid spread across the nation. But he said that petrochemical firms are “thinking long term—not just about the next couple of months, or even just the next couple of years. So I remain very optimistic.”
Three (3) States’ Natural Gas Boom
Even if multiple ethane cracking plants are never constructed, the region will still be grappling with environmental and health concerns from thousands of fracking sites. And the region could continue to produce natural gas and pipe it elsewhere, said Matthew Mehalik, executive director of Pittsburgh’s Breathe Project, a collaboration of some 40 organizations working to improve air quality and fight climate change.
Long before Shell began construction on its ethane plant outside Pittsburgh, nearby residents and doctors had been alarmed by air pollution from fracking and natural gas processing.
They’ve called for answers on why there has been a surge in Ewing sarcoma, a rare childhood cancer, in a four-county area outside Pittsburgh.
“The health risks and environmental costs never made any sense,” said Mehalik. Now, the economics aren’t making any sense, he said.
There is tremendous uncertainty, including how far state or federal governments are willing to go to prop up the shale gas and plastics manufacturing industries, he said.
“The expansion of natural gas 10 to 15 years ago was made with a different mode of thinking and different market conditions,” Mehalik said. “It’s time for a rethinking, and a rethinking on this opens up prospects for a different economic development vision.”
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See also: Health & Economic Impacts of Cracker Plants 3/24/20
Come and learn from Matt Mehalik, PhD, Executive Director of the Pittsburgh-based Breathe Collaborative, as he talks about the health impacts and economics of cracker plants and the oil and gas industry. This is information that has been gathered through researching the impact that the Shell cracker plant (about 20 miles west of Pittsburgh) would have on the community. Matt brings his expertise to the Ohio Valley to educate people on the truth behind what the PTTG cracker could do to our area if it is built. He also looks at what this plant would do to short and long term economics of the region.
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