The Appalachian Basin's shale formations helped to birth the natural gas renaissance in North America, and the region now is poised to join the Gulf Coast as a major petrochemical hub, a group of experts said Monday.
(Part 1 of 3) (See Part Two, Part Three)
A webinar hosted by NGI’s Shale Daily, "Cracking the Ethane Code in Appalachia," delved into all sides of the petrochemical equation. Last spring a unit of Royal Dutch Shell plc made a final investment decision (FID) to build a multi-billion dollar cracker about 30 miles northwest of Pittsburgh, officially signaling that the region will be a major hub. Sited on 400 acres in Beaver County, adjacent to the Ohio River in Potter and Center townships, the project as designed would have capacity to produce 1.6 million metric tons/year (mmty) of polyethylene and 1.5 mmty of ethylene. Construction would require 6,000 people at its peak, while another 600 permanent employees would staff the facility when it becomes operational in the early 2020s.
Shell's project will not only be huge, but transformational in all ways, said an all-star panel of experts during the one-hour webinar. Joining NGI Associate Editor Jamison Cocklin, who was the moderator, were Consol Energy Inc.'s Don Rush, vice president of marketing, and James Cooper, senior petrochemical adviser to the American Fuel & Petrochemical Manufacturers trade group. Also joining in the conversation were Denise Brinley, special assistant to the secretary of the Pennsylvania Department of Community and Economic Development (DCED), and Danielle Sandusky, president of Denver-based Level 2 Energy, a risk management firm.
Appalachian ethane production went from virtually nil in 2010 to about 20% of the national total, at around 300,000 b/d at its peak, Level 2 Energy’s Sandusky said.
"It's quite a robust slice of what we've got in the U.S.," she said. "There is definitely ample supply there to feed a world-scale cracker. But early on, there was almost no outlet other than the gas stream, essentially...The gas stream is still the best decision for those without a cost transport commitment or they are in a situation where they might shut in because they’re bumping into their pipeline specs...
"The fundamentals have been really robust for all of the other components so that's really brought along all of the ethane...I think that's what's really brought Shell to take on the risk of building a project of that size" and that level of investment.
The project "is generational," said Cocklin, who covers Appalachia for NGI. "The last project to be built of this size was Heinz Field," the 1.49 million-square foot stadium/entertainment venue developed by the Pittsburgh Steelers. "Local officials said that building the cracker is like building six or seven of those stadiums." Seven ethylene crackers are scheduled for service along the Gulf Coast in Texas and Louisiana, which remains the nation's No. 1 hub for petrochemical activity. However, Shell's facility would anchor a "second wave" of domestic development in the next decade. Although it has delayed an FID, PTT Global Chemical has proposed a similar facility for Ohio, while Braskem has one on the drawing table for West Virginia.
$6 Billion Price Tag Likely
Shell's cracker sets the stage and provides another much needed end use for Appalachian liquids production. It initially had put a $5 billion price tag on the ethane cracker, but the investment now looks like it will be closer to $6 billion, Brinley said, speaking for Pennsylvania’s economic development arm.
"The number is creeping up," she said. "We're looking at an approximately $6 billion investment made by Shell for the region. It's an extremely important project to our state. I believe it is the first project of its kind since perhaps World War II in terms of scale and magnitude."
DCED is certain the region has enough resources "to fulfill both needs from construction to workforce...We're accelerating on both of those fronts, both at the building trades level, as well as workforce and economic development to fulfill the facility jobs.: The DCED also is "working hand-in-hand with Shell on ensuring that we can provide what they need when they are ready to begin operating the plant.
"What we don’t have a clear vision on yet is the multiplier effect and what the supply chain will look like, the ripple effect that comes out of a massive plant like this. We’re working on articulating those finer points as well, because we believe that the best benefit for the region -- and I’ll speak for my colleagues in West Virginia and in Ohio in hopes that they agree with me -- that using the resource right here in the region creates the most economic impact and long-term benefit to our citizens for jobs and all of the associated benefits that come along with utilizing the resource right where it’s being pulled out of the ground."
A Hub Near The Action
Shell's facility would be as large as the projects now located along the Gulf Coast and around the world, as "world-class" is considered to be a facility with capacity of about 1.5 mmty-plus, Cooper said, speaking for the petrochemical manufacturer’s group.
"You are going to find around the country, as far as new projects being developed, that it’s going to have a very meaningful impact in the region," he said. "What's really unique about this situation is that for the first time in a long time, you are going to see things 'co-located' all along the manufacturing supply chain, which is going to be a very meaningful situation in the United States especially.
"You’ll have stuff coming out of the ground in the Marcellus and Utica, you are going to see it being processed with a lot of separation technology going into feedstocks in a variety of things, including ethylene production. And then you are going to see not just the ethane cracker that's going up," but a lot of ancillary benefits. With a 20-to-30-year commitment, the region likely would gain related businesses.
"You are probably going to see a polyethylene unit, you might see an ethylene glycol unit and you might see a couple different derivatives units in addition to this," Cooper said. "We’re pretty excited to watch this all unfold..."
Anchor Shippers Ready
Pittsburgh-based Consol is one of nearly a dozen Appalachian gas producers that already have inked multi-year, confidential supply agreements with Shell for the cracker. Other producers signing agreements covering 10-20 years include Antero Resources Corp.; Ascent Resources LLC; Eclipse Resources Corp., Hilcorp Energy Co.; Noble Energy Inc., and Penn Energy Resources LLC.
As an anchor shipper, Consol "expects to provide meaningful volumes on a daily basis for the cracker for over a decade after the facility goes into service," Rush said. From the standpoint of the "producer community, it was clear years ago that there would be ample ethane supply for some major projects. There's been a lot of work both on Consol's end and some of our peers in educating the midstream and the downstream companies, as well as local governments and states.
"However, like any project of this size and capital commitment, companies are prudent. They take their time studying why they need it, wait for some further certainty that the ethane will be, can be here for the long-haul.
"For this project in general, you have to give Shell really all of the credit," he said. "Being the first mover...they had the foresight to act on the fundamentals that were at work here in the Appalachian Basin and to use their resources to take this from concept to actually getting it down the road to fruition. We think they have a huge advantage going forward..."
Consol was a natural participant in the cracker project, Rush said. It's one of the biggest leaseholders in the Marcellus and Utica shales, with more than 1 million net acres. "And also we're 150 years old, so we have a substantial track record folks could look to with confidence that we are a trusted business partner for the long haul here...
"With Consol being in this area for a very long time, we immediately recognized the value that a world-scale cracker would provide in terms of not only the ethane price and production assurance but what it would do for the region, what it can provide for a generation of folks in the Tri-State area" of Pennsylvania, Ohio and West Virginia. "We really wanted to make sure that we got onboard early and played our part in ensuring that a project like this got off the ground."
Consol has seen the market evolve a lot in its history, and it’s attempted to change with the times, Rush said. "We don't have a lot of these firm commitments to transport our gas to other basins. We have a very unique acreage footprint, with some wet side of the play, some on the dry side of the play. It has allowed us to process and extract ethane from our gas streams whenever we're able to make money...When it doesn’t make sense to do that way, we put it back in the gas stream and sell it as Btus.”