Majors say petrochemical diversification is essential to survival of US industry

More than 80% of North American energy industry executives believe that locational diversification is needed in the U.S. petrochemical market, a recent survey found.

Image: Construction at Shell's ethane cracker in Beaver County, Pennsylvania.

Executives at major U.S. petrochemical firms including Lyondellbasell, Shell, Solvay and SABIC shared thoughts on the Northeast U.S. regional petrochemical market's future and advantages in a Petrochemical Update poll.

The Petrochemical Update Poll was given to U.S. petrochemical executives of major downstream companies; as well as analysts, government entities, and engineering, procurement and construction firms (EPCs) in February 2019.

“Diversifying the petrochemical industry is a big advantage for the industry and the economy, the stability of the U.S. economy and thus National Security,” said Wally Kandel, Senior Vice President and Site Manager for Solvay. “The drivers for investing in the Northeast are economics: lower feedstock cost and lower logistic costs.”

Kanel is also the Co-founder of economic development initiative Shale Crescent USA.

Supply Diversity

“The diversification is clearly identified in what happened during Hurricane Harvey. You can see where there was a lot of the economy that was stagnated because of the lack of availability of petrochemicals,” Kandel said.

Historically, natural gas prices have spiked when hurricanes hit the U.S. Gulf. However, this impact was less severe with Hurricane Harvey for the first time since major hurricanes severely disrupted natural gas prices previously in 2005, 2008 and 2012.

“Hurricane Harvey came in to the Houston Ship Channel and had a huge impact on the petrochemical industry, but it had virtually no impact on the price of natural gas because of the natural gas producing capability in the Shale Crescent region,” Kandel said.

Combined Hurricane Harvey and Hurricane Nate had the largest effect on oil and natural gas production in 2017, reducing production in the Gulf of Mexico by a cumulative 12 million barrels of crude oil and 18 billion cubic feet (Bcf) of natural gas.

Previously, Hurricane Isaac shut in 13.5 million barrels of crude oil and 32 Bcf of natural gas in 2012. Previous disruptions in 2005 and 2008, caused by Hurricanes Katrina, Rita, Ike, and Gustav, had even larger impacts on Gulf of Mexico production.

“The same thing could be true for petrochemicals. If we have this hub and develop it, and it will take a while just like it did the Gulf Coast, but as we develop and create, it will create a path toward national security and stability of pricing from hurricanes that come through,” Kandel said.

Petrochemical projects would be located near the fuel needed to run the facilities: the low-cost natural gas resources in the Marcellus and Utica shales in West Virginia, Eastern Ohio, and Western Pennsylvania. 

“A positive chemical industry outlook depends upon access to abundant and affordable energy, a strong U.S. manufacturing base, a balanced regulatory environment, the state of the U.S. and global economy, access to global supply chains, and access to export markets,” said , Kevin Swift, Chief Economist for the American Chemistry Council (ACC) said.

Natural gas production has surged in the U.S. to 31 Bcf/day over the last 10 years as a result of hydraulic fracturing in the shale plays. The Northeast area accounts for 85% of that growth, according to the U.S. Energy Information Administration (EIA).

During 2020-25, the Northeast U.S. region, will account for 16% of North American petrochemical investment. In dollar terms, Appalachian petrochemical investment is expected to grow from $1.6 billion in the first wave to $13.6 billion in the next wave, according to Taylor Robinson, President of PLG Consulting.

The first major chemical project is under construction by Shell Chemicals along the Ohio River in Beaver County, Pa., 30 miles northwest of Pittsburgh.

Shell's steam cracking plant will break ethane apart and reconstitute it as ethylene gas. Three production units will then link ethylene molecules to create polyethylene plastic pellets, a component of packaging and housewares products. Through the same process, propane winds up as polypropylene fibers and resins, turned into carpets and high-performance plastics.

“This location could provide a feedstock transport cost advantage, even if ethane prices rise in the next few years,” Kandel said.

Early estimates of the Shell project underway were that the project would cost about 105% of the cost to build in the Gulf Coast, and now studies show it will be about 107%, Kandel said.

“The economics the project will realize from the feedstock and logistical advantage of being closer to customers easily offset that,” Kandel said.

Shell's plant is set to open in late 2021 or early 2022. It will generate an estimated $9 million to $12 million in income taxes and more than $3 million in local taxes a year, according to an analysis commissioned by Shell.

Northeast benefits

The biggest attraction to operating in the Northeast is proximity to customers (35%), proximity to feedstock (32%) and cheap feedstock (21%), according to the poll.

“The location is within a day’s drive of 70% of the North American polyethylene customers,” Kandel said. “There are logistical advantages based on not only the supply of the feedstock, but also the distribution of the polyethylene pellets.” 

Northeast hurdles

Producers believe the biggest hurdles to the Northeast becoming another petrochemical hub are the lack of pipelines (27%), construction cost (19%), harsh permitting (13%), and lack of gas storage (11%).

“The biggest hurdle is it takes a long time to change thought processes. For 75 years, the right answer was if I am going to build petrochemicals, I am going to build on the Gulf Coast,” Kandel said. “Getting that mindset change and raising the awareness of the opportunity in Shale Crescent is what we need to do.”

By Heather Doyle