Shell's new ethylene cracker in Appalachia may be the first of several

26 August 2011 17:44  [Source: ICB]

As Shell capitalizes on its exposure to Marcellus Shale natural gas with its plans to build an ethylene cracker, producers in the Appalachia region may just scramble to get on the bandwagon

The Shell Eastern Petrochemicals Complex in Jurong Island, Singapore, may get a counterpart in the US based on shale gas

The vast tracts of natural gas embedded in the Marcellus Shale under the ­Appalachia states of the US are changing the region's fortunes and have encouraged global energy and chemical giant Royal Dutch Shell to build a new world-scale ethylene cracker there.

The three states Shell is eyeing for the cracker location are Pennsylvania, West Virginia and Ohio. Shell owns or leases the natural gas rights for about 700,000 gross acres in the Marcellus, mostly in Pennsylvania.

According to Shell Oil president Marvin Odum, US natural gas is "abundant and affordable," and the company has the know-how to develop this crucial energy resource, along with its associated product polyethylene (PE), for the domestic market.

Odum says: "With this investment, we would use feedstock from Marcellus to locally produce chemicals for the region and create more American jobs. As an integrated oil and gas company, we are best-placed in the area to do this."

It is inevitable that the natural gas liquids-rich region would attract a major petrochemical ­investment. Shell is well positioned to make such an investment. In the second quarter, the company posted a 74% year-on-year gain in earnings to $8.0bn (€5.6bn), with its Shell Chemicals unit posting a 19% increase in earnings to $530m. Its debt/capital ratio at the end of the second quarter was just 12%, providing plenty of financial flexibility for investment.

As the balance of Shell's production has shifted from crude to natural gas, explains Iain Lo, vice president of new business development and ventures for Shell Chemicals, the company has been seeking opportunities to integrate chemicals with gas.

About a year ago, the company was encouraged by the decoupling of gas from crude oil and its purchase of US energy exploration company East Resources. "Marcellus jumped out as a potential opportunity in terms of availability of feedstock," says Lo.

In 2010, Shell bought privately-owned East Resources and its land in the Marcellus area for $4.7bn. Shell already operates US ethylene capacities at Deer Park, Texas, of 1.18m tonnes/year and at Norco, Louisiana, of 1.45m tonnes/year.

World-scale crackers tend to take four to five years to build, cost roughly $1bn to construct, and when completed can generally produce about 2bn lbs (907,441 tonnes) of ethylene/year.

The Shell project will be the first cracker built in the US since 2001, when Formosa Plastics started a 820,000 tonne/year ethylene facility in Point Comfort, Texas. Also that year, a partnership between BASF and Total Petrochemicals opened a 816,000 tonne/year ethylene cracker in Port Arthur, Texas.

It makes more sense economically for everyone involved to build a cracker in the region, explains Shell's Lo.

"The cracker provides a reliable ethane ­solution to upstream gas producers, which unlocks more gas production in the Marcellus region, thereby making more cracker feedstock available. Our customers in the Northeast will enjoy having a proximate and reliable supply, which is more responsive to their needs given the shorter supply chains."

Shell expects to sell its products primarily in the Northeastern US, where the company projects a growing demand for PE in local industries.

With the US Gulf Coast well supplied with ample ethane from Texas and the mid-continent, "Marcellus ethane is the most competitive feedstock for petrochemicals in the US, so it makes sense to use it there, rather than add to its cost by transporting it across one-third of the country, then sending derivative products back up to the northeast," says Lo.

With PE, the company is considering a mono­ethylene glycol (MEG) unit, "as we have a strong technological position in this as well as being a market leader for MEG. We also expect growth for MEG in the North American market in the coming years," says Lo.

Shell's MEG capacity in the US is 425,000 tonnes/year, and for the rest of the world, 1.355m tonnes/year. UK-based PCI Consulting Group estimates the growth rate for world MEG demand to be 5.9%/year from 2010 to 2015.

Shale gas has already provided an economic boost to the region. Heavy industry has returned to the Marcellus/Appalachia area, and much of it is related to the shale gas industry.

US-based engineering and construction firm CB&I was awarded a $300m contract to construct a natural gas processing project, and France's Vallourec & Mannesmann is building a $650m plant to produce 500,000 tonnes/year of seamless steel tubes for hydraulic fracturing.

This encourages local business and commerce associations, and hope runs high for petrochemical crackers to arrive.

"As more wet gas is delivered to market, we anticipate that the region could become a major hub for America's chemical industry," says Travis Windle, spokesman for the Pennsylvania-based Marcellus Shale Coalition, echoing sentiments of most of the region's business associations.

To build a world-scale plant, a company "would have to be quite large to capture all the scale economies," notes Fred Peterson, director of US-based consultancy Probe Economics.

"Downstream infrastructure and demand would also have to be built, because little ethylene is consumed in the northeast [solely] as ethylene," he adds.

The potential of the Marcellus region becoming another chemical hub like the Gulf Coast is possible, says Lo, "but one has to be confident that ethane rich gas production will be competitive and sustained for decades."

Since April, several petrochemical producers have either made moves, or, like Westlake Chemical, expressed interest in the Marcellus/Appalachia area:

Brazil-based Braskem says it would consider a greenfield investment in an ethylene cracker and PE plant in the US.

US-based Dow Chemical plans to increase its ethylene and propylene production, and integrate feedstock from the Marcellus shales as well as Eagle Ford shales in Texas.

Canada's NOVA Chemicals signed a memorandum of understanding (MOU) with Norway's Statoil for supply of ethane from the region, as well as a MOU with US-based Caiman Energy to buy ethane from West Virginia.

While companies are bullish, others remain more restrained. Peterson does not believe additional crackers in the region will mean greatly expanded exports of PE and other ethylene derivatives. If anything, he says: "Shale gas will keep [current] exports going, or at least slow down the decline that people have been predicting for them."

While the need for economies of scale make some market observers doubt the region's ­future as a chemical hub, there is no doubt that cheap ethane has created a buzz.

With additional reporting by Stephen Burns and Brian Ford in Houston, and Nigel Davis in London

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The first Marcellus well was drilled in 2004, but full-scale production started roughly three years ago.
  • In 2009, the US Department of Energy estimated the Marcellus to contain 262 ­trillion cubic feet of recoverable gas.
  • According to the American Chemistry Council (ACC), in the US, 70% of ethylene is ­derived from natural gas liquids. But in Western Europe, 70% of ethylene is derived from naphtha, gas oil and other oil-based products, all of which are subject to global supply and demand. "The Marcellus is very rich in ethane," says Kevin Swift, chief economist of ACC. "States are interested in ­monetizing that value."
  • In a March report, the ACC projected that a 25% increase in domestic ethane production would mean roughly 17,000 jobs in the chemical industry and $16.2bn in capital ­investments for new and ­expanded plants.
  • In June 2011, Netherlands-based petrochemical company LyondellBasell said that ethane extraction capacity in the US is expected to rise by 380,000 bbl/day, or 53%, ­between 2006 and 2015.

  • By: Ivan Lerner
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