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Robust Northeast Petrochemical Industry Still In The Offing, Execs Say

Even as business leaders and local officials throughout the Appalachian Basin dream of the role shale gas could play in a petrochemical revolution for the region's manufacturing industry, it could be decades, if ever at all, before that happens, according to remarks from top executives in the midstream industry.

The vision continues to gain momentum across Ohio, Pennsylvania and West Virginia. And as the critical building blocks of industrial plastics and various chemicals, such as ethane, propane and butane continue to be pulled from the Marcellus and Utica shales in increasing volumes, many in Appalachia are hoping the liquids will stay in the region to help shake the rust off some of its manufacturers.

"I feel that here in Pittsburgh we do have a healthy competition going with the Gulf Coast to keep these liquids here," said Michael Krancer, former secretary of the Pennsylvania Department of Environmental Protection, as he moderated a midstream panel during the Northeast Oil and Gas Awards Conference for Excellence last week. "But every time I see a single molecule being contracted to go to the Gulf Coast I cringe."

By many accounts, a compelling argument can viably be made for keeping some of the basin's natural gas liquids (NGL) in the region for industrial use. For starters, production across all three states continues to rise at unparalleled rates. If projections in this month's drilling productivity report from the Energy Information Administration hold, the Marcellus Shale alone could produce 16 Bcf/d by the end of this year, which would surpass all natural gas production in Canada.

Meanwhile, NGL and condensate volumes continue to pose transmission challenges for midstream companies that are ramping up their efforts to take-away more and more liquids from the basin (see Shale Daily, March 10). Late last year, RBN Energy said that rising NGL output in Ohio's Utica Shale would lead to the installation of an additional 4.7 Bcf/d of cryogenic processing capacity there through 2015 (see Shale Daily, Dec. 5, 2013).

What's more, several polymer companies on Fortune Magazine's list of the world's 1,000 largest corporations are located in Northeast Ohio, including Goodyear Tire and Rubber Co., Parker Hannifin and PolyOne Corp., while the Pittsburgh region is home to more than 100 plastics-related companies that employ more than 5,000 people, according to the Pittsburgh Regional Alliance, an economic development group hoping to keep liquids in the region.

But abundant raw materials, competitive electric rates and a skilled workforce may not be enough to grow the region's petrochemical industry anytime soon, as it faces stiff competition both at home and abroad.

"Some have a view that there's a point when local fractionation stops making sense and you have to begin shipping all the y-grade down to the Gulf Coast because of the size of the industry complex there compared to the Northeast" said M3 Midstream LLC CFO George Francisco earlier this month at the Ohio Oil and Gas Association's (OOGA) annual winter meeting.

Currently, there are plans for two major y-grade pipelines, the Bluegrass Pipeline and the Utica Marcellus Texas Pipeline, that would begin carrying a combined 350,000 b/d of NGLs from Appalachia to the Gulf Coast by early 2016 (see Shale Daily, Oct. 25, 2013; Aug. 12, 2013).

Philadelphia's industrial complex, though, has been floated as a possible location for further petrochemical development, while  a number of small-scale gas-to-liquids facilities have been announced in Pennsylvania and Ohio (see Shale Daily, March 5; Sept. 24, 2013).

But larger projects, such as Royal Dutch Shell plc's proposed multi-billion dollar Beaver County, PA cracker and Odebrecht Organization's plans for a $3.8 billion cracker facility in West Virginia remain questionable (see Shale Daily, Nov. 14, 2013; June 7, 2011). Those facilities would process Marcellus natural gas to produce ethylene for petrochemicals.

Last week, Shell officials met with state and local officials in Beaver County, who said the company continues planning for the facility, but a recent announcement that the company will scale-back some of its onshore activity (see Daily GPI, March 13) has created a new round of speculation about the future of a facility first announced in 2011.

While the Odebrecht cracker in West Virginia is thought to be more of a sure thing, a study released in December said West Virginia faces some hurdles, such as major railroad construction, before it can be built (see Shale Daily,March 3).

"I know everyone is thinking all these petrochemical facilities are going to be built up here, but in our view, that's just not going to happen. As you think about all these complexes on the Gulf Coast, there's literally billions of dollars in all these integrated efforts there," said Paul Weissgarber, a senior VP at EnLink Midstream LLC during comments he made during OOGA's meeting. "We may see that up here decades from now, but it won't happen anytime soon."

Weissgarber said one reason why the Gulf Coast remains so much more attractive to producers, midstream companies and plastics industry is because of the steep costs associated with building new refining complexes. He said facilities in Port Arthur, Texas City, Beaumont and Mont Belvieu, all in Texas, have been expanded more affordably in recent years.

"These projects are capital intensive, not to say people won't eventually make these investments here [in the Northeast], but it's just so much more economic to expand an existing site than to build a greenfield site," Weissgarber said.

He added that states such as Texas and Louisiana offer a regulatory environment more conducive to such projects, where companies don't face the potential of a "not in my backyard mentality" from local officials and residents.

Brett Nixon, director of business development at PVR Partners, which provides midstream services in northeast Pennsylvania, said Appalachia also faces stiff competition from industry overseas. That was evident last month when Consol Energy Inc. announced that it would ship ethane on Mariner East to the Marcus Hook terminal near Philadelphia for export to European crackers (see Shale Daily, Feb. 14)

"You need to recognize that it's not just the Northeast, or the Pittsburgh market, versus Mont Belvieu and the rest of Texas," he said during the conference in Pittsburgh last week. "The capabilities of propane and ethane exports is really worldwide competition. Add that together with the fact that there is really no supporting industry throughout the Northeast for a cracker or the kind of storage that’s available on the Gulf Coast."

Several other factors, including a landlocked region and a lack of infrastructure, make long-term petrochemical commitments in the Northeast all the more difficult, Nixon said.

"It really is the total solution, so if you just build a cracker here you're decreasing the costs of sending your ethane elsewhere," he added. "But you have also increased the costs to get your final product to another market that can handle it. Both parts have to be there, it's a chicken and the egg situation."

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