Economic Development

Shell Cracks Open New Petrochemical Industry

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YOUNGSTOWN, Ohio — The Canadian city of Sarnia, Ontario, was built on the oil and gas industry.

In 1858, the first commercial oil well in North America started production here – a year before Edwin Drake struck black gold in Titusville, Pa.

Today, the city of 72,000 on the shores of Lake Huron, about 50 miles northeast of Detroit, has transformed itself into a hub of chemical manufacturing and processing – so much so that the city and Lambton County have earned the appellation of the “Chemical Valley” of Canada where thousands in the industry are employed.

In the wake of Royal Dutch Shell’s announcement June 7 that it will move forward with building a $4 billion petrochemical “cracker” plant near Monaca, Pa., on the Ohio River, many development officials in this region are hoping that such a label could someday be affixed to the Ohio Valley.

Shell’s lead – it is the first ethane cracker to be built in the northeastern United States – has opened an entirely new industry for the region, potentially launching a cluster effect that could draw additional petrochemical interests to the Ohio Valley.

Thailand-based PTT Global, for example, is considering building a large cracker in Belmont County, Ohio, on the Ohio River. And, in a turn of events perhaps spurred by Shell’s decision, Braskem, a subsidiary of Brazilian energy giant Odebrecht, said it has revisited its own evaluation of building a $4 billion cracker plant near Parkersburg, W.Va.

Sarnia and Lambton County’s Chemical Valley is home to a string of processing and chemical plants that line the St. Clair River, most of which first located there to produce synthetic rubber during World War II.

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“I’d say there are about 100 industrial companies here” that serve the chemicals and oil and gas business, says George Mallay, general manager of the Sarnia-Lambton Economic Partnership. “Some of these companies have been here 50 or 60 years.”

Mallay estimates the industry directly employs about 4,500 in the region, while another 15,000 to 20,000 jobs are provided through industrial service companies first built around the chemicals industry, but which have also diversified over time. Big oil refining and petrochemical interests dominate the local economy – Royal Dutch Shell, Suncorp, Nova Chemicals and Dow Chemical Corp. all have a presence in the region, he says.

But in recent years, the natural gas produced from the Marcellus and Utica shale formations in Pennsylvania and Ohio has altered the business plans for some of these interests.

Nova Chemicals, for example, has converted part of its large cracker plant in nearby Corunna from accepting oil-based feedstock to one that will process ethane gas from the shale plays into polyethylene – the same product that Shell intends to manufacture at its Monaca plant when it begins operations.

In March, Nova gave final approval to invest $400 million to build a pipeline connection and upgrade its Corunna cracker to use up to 100% ethane feedstock produced from the Marcellus and Utica.

“They’re also considering building a new plant here, so we’re in competition for that,” Mallay says.

While the cluster effect has helped drive the chemical and refining industry in the Sarnia region, it hasn’t produced a large second-tier manufacturing community that uses polyethylene as a raw material for finished products.

“We haven’t seen a lot of that,” Mallay says. “What it has done is make existing plants more competitive. Lower gas prices have been helpful in keeping down energy costs in Ontario for residents and businesses.”

Development of the chemicals industry in the Sarnia region over the last half century has not come without costs. In 2011, the World Health Organization reported that Sarnia is ranked the worst city in Canada for air quality, and chemical spills have contributed to water pollution in the St. Clair.

Chemical companies are interested in the Ohio Valley because it straddles two major natural gas shale plays – Ohio’s Utica and the Marcellus in Pennsylvania and West Virginia. These shale fields are important because they hold vast quantities of ethane – a liquid gas that cracker plants process into ethylene, the major base ingredient for plastics and other materials used in the manufacture of countless products. Shell’s Monaca project would include a plastics processing plant that converts the ethylene to polyethylene, which is easily shipped.

Aside from the economic benefits of a three- to four-year construction project – the Monaca cracker is expected to employ about 6,000 tradesmen throughout the building phase – the prevailing wisdom is that the presence of an operational cracker plant would also encourage new manufacturers to come to the region.

“The construction jobs are going to be big and temporary,” observes Andy Thomas, executive in residence of energy policy at the Levine College of Urban Affairs at Cleveland State University. “The real question is, ‘What does this mean for long-term development?’ ”

Thomas is co-author of a study released last September that analyzed the opportunities for shale development in Ohio. A segment focused on the impact cracker plants would have across the tri-state region. “It so happens that there are many thousands of businesses that use polyethylene,” he says.

In Ohio alone, the study identified more than 2,000 companies that use polyethylene to manufacture specific products. “Pennsylvania has a similar number,” he says. “This is important from a competitive standpoint.”

Whether the presence of a new cracker plant would spark a migration of manufacturers to the Ohio Valley is another matter, Thomas cautions.

“I don’t know if there’s a driving need for manufacturers to co-locate” near a cracker plant, he says. Part of the reason is that polyethylene pellets are easily transported, and most companies that use this material buy it on the spot market instead of signing long-term supply contracts.

“Most of them buy month-to-month,” Thomas says. “They don’t like the idea of having thousands of pounds of polyethylene on site.”

An operation such as Shell’s would prefer longer-term contracts from customers, he says, so the culture on how this business operates throughout the region might change.

Even so, the concept of a petrochemical cluster helps the entire region, Thomas says, and would certainly help the chemical industry in Ohio. These developments move slowly, and it likely would be years before any long-term downstream development would materialize.

“It would help if PTT Global builds their cracker. That’s the beginning of a real cluster,” he says. “We may not see the impact for another 10 years.”

In a recent statement, CEO Toasaporn Boonyapipat said, “PTT Global Chemical America’s decision will be based upon the cost and operational analysis we receive from the firms performing the front-end engineering design.”

Meanwhile, Brazil-based Braskem told the Parkersburg (W.Va.) News and Sentinel that the company continues to explore the potential of developing project A.S.C.E.N.T., which stands for Appalachian Shale Cracker Enterprise, along state Route 892 south of Parkersburg. Braskem’s parent, Odebrecht, last year pulled out of the project, but Braskem is still pursuing the opportunity on its own, the newspaper reported June 10.

The plan, first announced in 2013, calls for construction of a $4 billion ethane cracker that, if built, would be the largest investment project in West Virginia history.

Like Shell, these cracker plants would convert natural gas at reduced costs because they are so close to their sources in the Utica and Marcellus. Otherwise, the exploration companies would have to transport the gas via pipeline to the Gulf Coast, where most of the cracker plants in the United States sit.

Across the country, shale gas has transformed how plastics are produced, especially in the Gulf Coast, observes Bill Gilmer, director of the Institute for Regional Forecasting at the University of Houston’s Bauer College of Business.

“If you were to ask any of the big companies several years ago if there would be another ethylene complex built in America, the answer would not only have been ‘No’, it would’ve been, ‘Hell no,’” Gilmer says, citing the high price of oil and gas a decade ago.

All of that changed with horizontal drilling and hydraulic fracturing, which allowed energy companies to tap into tight underground shale formations and extract large quantities of natural gas and oil. Ethane feedstock in particular is priced at roughly $25 a barrel, still much cheaper than a projected $65 barrel of oil. “It opens up all kinds of opportunities,” Gilmer says.

As such, the advent of shale gas has spurred a “revolution” in Houston related to the race to build new ethane crackers and plastics production centers, Gilmer says.

“I’ve never seen construction on this scale before,” he observes. “We’ve got $60 billion in petrochemical construction underway.”

Houston has four operating ethane crackers, each accompanied by a plastics processing operation, Gilmer says. Other than plastics production related to the crackers, there are few plastics manufacturing companies in the region.

“It’s fairly low,” he says. “We’re not making the plastic products and shipping them out.”

Instead, the Houston economy thrives in part on the production of ethylene, polyethylene and other petrochemical processing operations. “There are probably 10,000 jobs in plastics, 37,000 jobs related to the chemical business and another 10,000 in refining,” Gilmer estimates.

Construction jobs related to the building boom are also very plentiful, a welcome boost in the wake of an otherwise depressed oil and gas market, Gilmer says.

“It’s temporary construction work,” he adds. “But this has been a blessing and a timely blessing.”

Published by The Business Journal, Youngstown, Ohio.