Shell controls Covid-19 after restarting Pennsylvania construction but other risks loom

Shell interrupted on March 18 the construction of this complex where it has a 100% interest and begun a restart in stages on May 4. Once built, it will crack ethane from Northeast shale basins into ethylene to polymerize into 1.6 million tonnes of polyethylene annually.

View of the Ohio River and Pittsburgh, about a half-an-hour drive up the river from the Shell polyethylene complex under construction. Photo courtesy of Christopher Klein/Pixabay

As of early June 2020 Shell has controlled with safety protocols the incremental construction restart of its new planned ethylene and polyethylene complex in Pennsylvania yet other risks brewing before Covid-19 may eventually prove harder to mitigate.

Construction started in 2017. Along with a similar project still under consideration in Ohio, it leads expectations of increased petrochemical activity in the Northeast that could diversify production from the U.S. Gulf Coast hub.

Shell decided to go ahead with the project in the middle of the past decade. It was based on the advantages of being located next to plentiful shale gas-derived feedstock as well as near a customer base. The complex lies within 700 miles of Northeast and Midwest plastic converters.

The site is located within a half-an-hour drive from Pittsburgh. Unlike most plants in Louisiana and Texas, its location along the Ohio River in the center of Pennsylvania isn’t exposed to hurricanes.

Covid-free partial construction restart as of early June

“On March 18, we made the decision to temporarily suspend activities,” Curtis Smith, from Shell U.S. Media, said in an email on June 2.

“That same day we made clear there was no timeline for a restart and that resumption of work would happen in a phased manner,” he added.

A scaled-down crew remained on site to care for equipment and put in place mitigation measures to protect workers from COVID-19, Smith said.

The interruption was in line with instructions by Pennsylvania authorities to stop all non-essential activities. Protocols follow U.S. Center for Disease Control guidelines.

“Beginning the week of May 4th, the Shell construction site safely reintroduced approximately 300 additional workers , bringing the total number of employees on site to approximately 800,” he added.

Safety procedures include lunchroom protocols that allow workers to maintain social distancing by limiting one person per table. Transportation of workers to the site has also been re-designed.

“Now that on-site parking has reached capacity, shuttles are being used to transport workers from adjacent parking lots to the work site,” Curtis said.

“Strict social distancing protocols are in effect for all shuttle riders and passengers are required to wear face masks. The shuttle rides are approximately five minutes in duration (1.5 miles from the site),” he added.

“If safety protocols continue to prove effective, we will reintroduce workers to the site at a measured pace, with approximately 300 workers being added each week,” the email added.

“To date, there are no known cases of COVID-19 associated with the re-start,” Curtis said.

The company did not provide any comment about potential cost increases associated with the construction slowdown or the added safety measures.

According to information posted on Shell’s website to provide information about the project, construction plans estimated the need of 6,000 workers on site. Local newspapers had estimated nearly 8,000 people were working directly or indirectly around the site before the pandemic.

Once operations start, only 600 workers would be needed to run the plant. Bechtel is the contractor on the construction project.

Others risks ahead

While the company keeps the pandemic under control around the site, other risks around the project may become more challenging.

“This complex will not be as profitable as originally presented,” said Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis (IEEFA).

The IEEFA promotes diverse and sustainable energy and gets support from the Rockefeller Family Fund and the Mertz-Gilmore Foundation among other organizations.

“The price of plastics in 2012-2016 was in the $1 per pound range. Today, plastics prices are in the 40 to 60 cents per pound range,” he added, according to a statement by the IEEFA to announce a report citing concerns for risky conditions that predate Covid-19.

“Shell is entering the plastics petrochemical market in resin pellet production, an area where it has no market share,” Sanzillo added.

The likes of Chevron Phillips, ExxonMobil, LyondellBasell and Nova Chemicals will compete offering virgin resin. Shell Polymers will also face competition from recycled material, he added.

Thailand-based PTTGC, which already produces petrochemicals and has a large customer base, has just postponed a final investment decision on a similar project down the Ohio River it began to conceive at about the same time as Shell.

Parent-company Royal Dutch Shell has been experiencing a decade-long decline in profitability, according to Sanzillo, who co-authored the report with Kathy Hipple, also an analyst at IEEFA.

“Since 2013, the company wrote off $33 billion. As this report was being completed, Shell cut its dividend, sold Appalachian gas assets and made plans to cut more jobs,” the IEEFA press release said.

Shell has not provided any cost estimate nor a timeline other than saying operations would begin early in the 2020s. Industry sources familiar with the project have estimated the cost at $6 billion or more.

Shell would do good to disclose information such as the projected final cost and timeline, as most petrochemical plant announcements do, to allow private and public institutions to better measure risks in any activity related to the project, Sanzillo said.

According to S&P Global Ratings, Royal Dutch Shell local currency long-term credit rating as of March 19 was ‘AA-‘ or just three notches below the highest possible rating.

This represents “high-grade” debt within the investment-grade category. It is just a notch above the ‘Upper Medium Grade” rank. S&P on that date lowered the outlook for the rating.

On May 11 Fitch Ratings affirmed its long-term issuer default rating for Royal Dutch Shell also at ‘AA-‘ with a stable outlook. This is also the fourth best possible rating and also represents a high-grade description within the investment-grade category.

By Renzo Pipoli