In a move that would have been extremely unlikely even five years ago, Shell Oil Co. has announced plans to develop a cracker making the plastic feedstock ethylene — and possibly downstream polyethylene units — at an undisclosed location in Appalachia, which includes parts of Pennsylvania, West Virginia and Ohio.
The decision is being prompted by discoveries of massive amounts of natural gas in a geological formation known as Marcellus Shale. Natural gas can be used to make ethane, which is then converted into ethylene. The new discoveries are leading the industry's top firms to reconsider their approach to ethylene and related plastic products in the region.
In a June 6 news release, officials with Houston-based Shell said PE is “the leading option” for downstream derivative choices. They described PE as “an important raw material for countless everyday items” and added that most of the resulting PE production will be used by Northeastern industries.
Officials added that North American PE demand is expected to grow, so the economic and efficiency benefits of a regional cracker “make this configuration attractive.”
“U.S. natural gas is abundant and affordable,” Shell Oil President Marvin Odum said in the release. “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.”
Shell spokesperson Kayla Macke declined to provide a timetable for the project, but said via e-mail that a cracker and derivatives complex “typically takes at least five years to build, from the early definition of the project to being on-stream.”
Regarding size, Macke declined to provide specifics but confirmed that world-scale crackers generally produce more than 2 billion pounds of ethylene per year. “The precise size and scope of the proposed ethylene cracker and derivative units, including number of employees, will be determined as part of the study phase,” she said.
From a PE standpoint, Macke said that if Shell does pursue that material, officials “will be discussing with potential customers the advantages of our meeting their needs with a local source of supply and exploring whether or not to partner with an existing PE player.”
“We are looking at different options, from doing it ourselves to working with others,” she said.
Market watchers said that it's possible Shell would want to work with international firms that have been eyeing the North American market — such as Saudi Basic Industries Corp. of Saudi Arabia or Brazil's Braskem SA — to develop new PE sites.
Industry insiders also said it's a bit ironic that Shell is taking this step, since the firm began exiting commodity petrochemical markets in the early 1990s. Shell did retain ownership in some PE and polypropylene assets through its stake in former joint ventures Montell and Basell before selling them off in 2005. Shell produces ethylene and related feedstocks at U.S. plants in Deer Park, Texas, and Norco, La.
Other firms such as Dow Chemical Co. and Westlake Chemical Corp. have announced ethylene expansions to take advantage of the new natural gas, but Shell is the first to place such a project in the Northeast. The Shell project would be the first new ethylene cracker to be built in North America since 2001, according to Chemical Market Associates Inc. in Houston. In that year, Formosa Plastics Corp. USA and a partnership between BASF Corp. and Total Petrochemicals each opened new crackers in Texas,
Shell owns or leases the natural gas rights for 700,000 gross acres in the Marcellus. Most of that acreage is in Pennsylvania, which makes it likely the new cracker would be located there. The firm operates an office in Warrendale, Pa., about 30 miles north of Pittsburgh, and employs almost 250 in natural-gas-related businesses across Pennsylvania. In July, Shell acquired East Resources Inc., a Warrendale-based oil and gas supplier.
Among those who follow plastics and chemicals markets, reaction to Shell's big news was mixed. One observer who was less than thrilled with the announcement was Emily Wurth, water policy director for Food & Water Watch, a non-profit organization in Washington.
Wurth's group and other environmental organizations have questioned the hydraulic fracturing process — know as “fracking” — used to access shale gas because of the possibility of groundwater contamination.
“We have a lot of concerns about the new technologies around fracking and the risk it poses,” Wurth said in a phone interview. “There's a risk to public health and to the environment.”
Fracking also can lead to excessive methane production, she added. Safety also is an issue, since some regions where shale gas has been found are densely populated. Wurth also said that a recent report from the Energy Information Administration indicates that U.S. shale gas levels may be lower than previously believed, meaning that less gas is available for development. Her own group released a report criticizing shale gas development last July, and is set to release a second such report June 13, one that will call for a ban on fracking.
“The prospect of a major petrochemicals player announcing a project in the Marcellus Shale region was inevitable,” said Howard Rappaport, a CMAI market analyst. “There certainly are attractive logistic elements to the project with the available ethane production expected in the region and proximity to a large number of downstream fabricators and converters in the northeast part of the US and eastern Canada.”
He added that infrastructure support “will play an important role in the overall project as well as getting the necessary environmental permitting from local and federal governments.”
Market analyst Nick Vafiadis, also with CMAI, said that an ethylene project in the Northeast “would appear to have access to both feedstocks and derivative consumers … [and] would also likely target the domestic market.”
“It will be interesting to see if all of the expansion announcements that have been made [and have yet to be made] will actually materialize,” he added.
Market analyst Mike Burns with Resin Technologies Inc. in Fort Worth, Texas, said he was doubtful that Shell's ethylene expansion will result in any new PE capacity for the region.
“North America doesn't need any more [PE] based on current supply and demand,” he said.
Burns said high PE prices are hurting plastics firms that might benefit from a new ethylene cracker in the Appalachia region.
“There are a lot of processors in that area, so there's a good customer base already,” he said. “But the way [PE makers] are overpricing resin, I don't know if that base will be there when the new cracker opens.”
U.S./Canadian PE consumption has had its ups and downs in the last five years. It was roughly flat in 2006-07 before falling in 2008-09 as the global economic crisis hit. Consumption recovered modestly in 2010, but even so, the 2010 total was almost 9 percent lower than in 2006 — falling to just over 29 billion.
At a CMAI-hosted conference earlier this year, Vafiadis said North American PE demand growth should average just under 3 percent annually between 2010 and 2015.