Pennsylvania's Hope Fades for Shell Ethylene Plant

Updated Oct. 21, 2013 12:07 a.m. ET

When Royal Dutch Shell RDSB.LN +0.65% PLC unveiled plans early last year to build a multi-billion-dollar petrochemical plant in Pennsylvania, the company saw it as a smart way to exploit the boom in natural gas coming from the region's Marcellus Shale formation.

The plant would turn ethane, which is a liquid produced alongside natural gas and oil, into ethylene, a chemical used to make plastics. Annual global demand for plastics is expected to rise by half by 2020 to about 225 million tons, according to estimates from Exxon MobilCorp. XOM -0.37% , which operates petrochemical plants.

Ethane costs have fallen by 20% from last year to a recent 25 cents per gallon, making it the feedstock of choice for plastic makers.

Yet Shell's proposed plant location in Northwest Pennsylvania sits vacant, despite almost $2 billion in state tax incentives. Meanwhile, analysts wonder whether new pipelines envisioned to move Pennsylvania ethane to Texas and Louisiana could erase Shell's advantage and torpedo its plans entirely.

State and local officials referred all questions about the plant to Shell, which still hasn't purchased the land for the project. The company now says it might take several more years to evaluate the 360-acre site, according to spokeswoman Kim Windon. Earlier this month the company ended an official search for oil and gas producers to supply ethane to the plant, but hasn't disclosed the outcome.

"They've taken 18 months to think about it, and then they say they're still thinking about it," said Rusty Braziel, an analyst with consulting firm RBN Energy Inc. The plant "fundamentally doesn't make sense to me," he added.

Since Shell proposed its plant, three pipeline projects that would channel Marcellus Shale ethane southward have been announced. Kinder Morgan Energy Partners KMP +1.89%LP, Enterprise Products Partners LP and Williams Companies Inc. have said they will build lines carrying 600,000 barrels per day of ethane and other liquids from the Marcellus down to the Gulf Coast.

With the added capacity coming on line, it may make more sense to pay to move ethane across the country via pipeline than build an entirely new plant with entirely new, expensive infrastructure in Pennsylvania, said Raymond James analyst Darren Horowitz.

At first blush, Pennsylvania would seem to offer a lot of advantages for ethylene production. In the next three years, the state's ethane output could increase eightfold, reaching 650,000 barrels a day, according to RBN Energy projections.

But even though Pennsylvania would seem to have a home-field advantage, sitting atop so much ethane, the state can't compete currently with the Gulf Coast's massive infrastructure, home to millions of barrels of ethane storage and pipelines feeding nearly a dozen petrochemical complexes and plastics plants, according to RBN.

http://online.wsj.com/news/articles/SB20001424052702304384104579143...


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Permalink Reply by Trapper on October 21, 2013 at 2:42pm

The fact that pipelines are planned or under way to export our product to the gulf has bothered me for some time and I have expressed that numerous times. But then I look about and see Shell is still a growing presence in Western PA (albeit at a slower pace than we would like) and wonder if there still is a very real possibility the cracker will be built. We are fortunate that we sit atop several producable plays and they have hardly been touched yet and this should hold some promise for us. For now it seems the emphasis is on Ohio and the Utica though.Let's face it , everything cannot be tapped all at once and the O&G cos. will go where the biggest buck can be fetched the fastest. My fear is that Shell is or was just a little too slow to commit to a rigorous program to get things moving and now may be faced with the quandry of seeing the raw materials needed to feed such a plant being contracted away from the area and lost to them. Lost to us as a whole as well. The potential for good paying jobs that would have healed our area's wounds left after the steel industry's demise would have been such a blessing. We have never really recovered from these losses 30 years ago and it would be a shame to have the brass ring snatched from our grasp once again. Sure , us landowners fortunate enough to hold a few acres of mineral rights will prosper via our royalty checks but the population as a whole will continue to languish. All we can do is hope for the best. As usual , we will be the last to know what the outcome will be.

Permalink Reply by Jim Litwinowicz on October 21, 2013 at 3:18pm

I don't agree with the pessimistic tone of the article and some of the facts presented in it support my optimism. It state that the new pipelines will have a capacity of 600,0000 barrels/day. But it also says that in three years Pa alone will be producing 650,000b/d.  Add in what WV and Oh will be producing and it may be double the new carrying capacity in just three years. It will have to be used somewhere.  And since the plant will take five yrs to build, there will be even more ethane in the immediate area, maybe triple what the pipelines can handle.

Further, if they are shipping an additional 600,000 b/d to the Gulf Coast, then those plants will have to be expanded to handle that increased supply.  Even if they are now importing a substantial amount of ethane, you still have to consider what ethane will be produced by the Eagle Ford, The Utica, the Bakken, the Haynseville, the Burkett and many more newly producing fields.

Having all that ethane produced in one area will result in a glut of product in that area, driving down prices of the end product. Having it produced in various areas will support a better price as well as reduce shipping costs.

And I imagine a new plant built from scratch will be more efficient and profitable than an older, expanded plant. And having  a plant nearer to the industrial heartland and closer to East Coast markets would have additional advantages.

Those pipe aren't in the ground yet. If Shell gives the project a GO in the next couple of months then one or two of those lines may be cancelled.

Lots of factors to consider.  This ain't over yet.

Permalink Reply by Ed on October 21, 2013 at 10:12pm

Jim, That's a very good reply to this dilema but a little too optimistic.  The key word in your reply is "glut", and if you think about the economics of this entire shale game that word keeps coming up.  The problem isn't the capacity of the US (especially along the Gulf Coast) to convert ethane to plastic.  The problem is who would buy that much plastic?  So why build more capacity to make more plastic?  Then the next quandry would become, "why produce so much ethane?"  That's exactly why all booms become busts sooner or later.  So once the big boys feel that there is enough production capacity in place to produce enough ethane (at least for the forseeable future) then further exploration and expansion will slow down a great deal. Look back in history and you will see this repetitive pattern over and over again. 

 

Then the emphasis will shift once again away from wet gas back to dry gas as the world converts away from dirtier coal & oil over to cleaner burning natural gas.  The shift is already beginning to happen.  This has happened before in history and is happening once again. 

 

With that, it is understandable why Shell wants to step back and take a "wait & see" position.  XTO just built a facility in Butler County,PA to seperate the ethane from the gas and (I'm sure) XTO will pipe it to their facilities along the Gulf Coast.  They are gobbling up leases in Butler Co. and surrounding areas.

 

 

Permalink Reply by Jim Litwinowicz on October 22, 2013 at 2:01am

Ed; there will certainly be a large increase in plastics and related products made from ethane. But how much of that is currently imported from over seas? As ethane becomes cheaper, it will drive out the imports. And as the end products become cheaper, industry will find more uses for them.  Vehicles are being made with more and more plastics to reduce weight and meet the newer fuel standards that are coming soon. (I think 45 mpg). More and more electronics, home products, clothing all made from ethane products. And additive manufacturing will be a huge market for derivative chemicals and products.

And having all that plastic made in the gulf will have a huge local glut. If plastic becomes so cheap that the margins are very tight, the company with the product closest to the market will be the winner.

And if Shell takes a wait and see attitude they may as well cancel the project now.  The longer they wait, the more pipelines will be put in place to ship it all south. Doesn't make any sense to wait until all the infrastructure to ship it out is in place to then build the plant. The longer they wait the less sense it makes.

Permalink Reply by Trapper on October 22, 2013 at 10:40am

Shell recorded 10 more leases today in Lawrence County , mostly Little Beaver Township. :-)

Permalink Reply by Fred Flintlock on October 22, 2013 at 12:56am

He won't be re-elected. 

Permalink Reply by Samuel J. Orr on October 22, 2013 at 1:32am

And then we will have a democrat who will push for more taxes on O&G companies reducing Pa's competitive advantage. Heck we may even get a NY style moratorium on fracking putting an abrupt end to the practice and to further leasing and O&G job development! Won't this all be just ducky? 

Permalink Reply by Jed Clampett on October 22, 2013 at 3:53am

I think Shell is reconsidering partially due to labor issues.  Established plants in Texas, right to work state, vs PA union construction and probably unionized workforce.  The same reasons GE is leaving Erie - GE Trasportation headquarters moves to Chicago, new "overflow" manufacturing plant built in Texas - 1000 jobs eliminated in Erie, next will be closing of the Erie manufacturing plant.  Better business conditions in Texas, and now that Shell sees pipelines might be a better option - what will make and let Shell keep the most money....

Permalink Reply by gary smith on October 22, 2013 at 3:50am

who wants to build in a state where pittsburgh and philly are about to elect democrats to run it?that would be dumb.

Permalink Reply by craig on October 22, 2013 at 5:03am

One has to wonder about the article's veracity when it plainly states that the considered site is sitting vacant and is located in NW Pa. "Yet Shell's proposed plant location in Northwest Pennsylvania sits vacant".... when in actuality it is still being used by Horsehead and isn't located in NW Pa. Of course they are closing down in the near future, but you have to wonder about the rest of their 'facts' presented as well.

There are more forces at work in Shell's decision than we will ever know.

 

Permalink Reply by Frank Nesmith on October 22, 2013 at 6:22am

Did Gov Tomblin Find a European Investor for a WV Cracker Plant?
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At the beginning of October, MDN told you that West Virginia Gov. Earl Ray Tomblin was heading out on a 13-day whirlwind European vacation trade mission to five different countries. One of his aims was to find someone to invest in an ethane cracker plant in West Virginia (see WV Gov Going to Europe to Find Him a Cracker). Tomblin is almost done touring Europe and said by phone from Switzerland that “he expects to make announcements within the next few days concerning deals made” as a result of his trip.
Will one of those announced deals be an investment in a cracker plant?…
Gov. Earl Ray Tomblin said he expects to make announcements within the next few days concerning deals made during a nearly two-week investment trip to Europe.
Tomblin and a West Virginia delegation will return today from a 13-day trip to five countries – including Spain, France, Germany and Italy – and eight cities.
During the mission, Tomblin met with companies already doing business in West Virginia, including Constellium, Saint-Gobain and Pietro Fiorentini, as well as companies considering investing in the state. The governor also attended the K-show, the world’s largest international trade fair for the plastics and rubber industry, in addition to speaking at the Swiss-American Chamber of Commerce luncheon and the Vicenza Trade Association investment seminar.
“It’s been kind of a whirlwind tour,” Tomblin said Monday during a teleconference from the West Virginia Development Office’s European office in the Zurich World Trade Center.
West Virginia Commerce Secretary Keith Burdette said the office provides the state with a “virtual and actual office space throughout Europe” at a lower cost than locating offices in other parts of Europe.
Tomblin said his time has been spent meeting with potential investors in a variety of industries, from chemical to manufacturing to energy building projects.
Tomblin said he hopes to have several announcements when he returned to the states.
“I cannot announce them right now, but I could have some in the next few days,” he said
Tomblin said during discussions he fielded many questions about Marcellus Shale, technical schools and colleges and the state’s workforce.
Tomblin also said recent drama with the shutdown of the U.S. government and a run up to a possible default on U.S. financial obligations was an often-discussed topic.
“There were questions,” Tomblin said. “It had repercussions around the world. They wanted to know from us what effect it would have on state and local governments. ”
The crisis was averted after a last-minute deal allowed the government to reopen and continue paying its bills, at least for the next three months.
“Since it was resolved while we were here, (the mood and questsions) changed a little bit,” he said. “It was definitely on everyone’s minds.”
The European initiative is Tomblin’s second trade mission. A mission to Japan in June 2012 resulted in more than $100 million of investments in the state.
Tomblin has said a third of West Virginia’s $11.3 billion exports went to Europe and more than 80 European companies have invested in the state, employing more than 10,000 residents.*

http://marcellusdrilling.com/2013/10/did-gov-tomblin-find-a-europea...

Permalink Reply by Lance Nimmo on October 22, 2013 at 6:37am

They are probably just looking for more handouts. I hope when Corbett is fired next year the democrat revokes all tax credits. They deserve no different treatment than any other business. What, just because they turn neighbors on each other and lie through their teeth they deserve tax breaks? LOL

 

For the record, they aren't going anywhere. Sure the Shell plant might not come, but long term who cares. I've heard post construction jobs of around 600 permanent employees. Big deal. I know all of the secondary employment tax revenue will be lost too, but if PA can't lure Shell here with our reserves/location alone then let them blackmail some other state. Let's not forget to not bring attention to themselves they let some real estate firm from Portersville buy the Shenango Bowlaway, then signed a long term lease with them for the property.... It's embarrassing watching politicians bow down to these thieves who will leave this area rot as soon as they are done squeezing whatever they can out of it. Rant off... 

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