Cheap and abundant natural gas has revitalized the Gulf Coast’s petrochemical industry, after demand for its plastic products took a beating in the recession.
But some of the chemical comeback isn’t coming back to Texas. Discussions about the industry’s growth are increasingly focused a thousand miles northeast, in the booming Marcellus Shale region.
The natural gas cocktail buried in that Appalachian rock is rich in ethane, the raw material used to create the ethylene that produces many types of plastics. While the Eagle Ford Shale in South Texas offers the same bounty, some industry analysts say the Northeast holds a strategic advantage in its proximity to manufacturers who mold plastic consumer goods.
“The amount of ethane in a geography where ethylene derivatives are in strong demand lends itself to the integration of a new petrochemical industry there,” said William Young, managing director of ChemSpeak, a consulting firm. “I’m glad to see some geographic diversification. There are advantages to being close to the markets that you’re serving.”
Historically, the Gulf Coast has been the national hub of ethylene production because of the proximity to oil and gas fields and the established infrastructure that grew up around its port access.
While that dominance won’t completely relocate, the shale gas boom is spreading its wealth.
Shell Oil Co., a major ethylene producer, announced last month that its next ethylene plant will locate in the Marcellus region. It will be the company’s first U.S. petrochemical complex outside the Gulf Coast.
“The Marcellus is a new player, very rich in ethane,” said Kevin Swift, chief economist for the American Chemistry Council. “States are interested in monetizing that value.”
Ethylene is used to manufacture everyday products, from carpeting and tires to diapers and food packaging.
Gulf Coast crackers, the plants that “crack” the ethane moleculesfound in natural gas into ethylene, have been using more of their capacity this year after cutting operating rates to as low as 70 percent during the recession, saidGlenn Giacobbe, a senior consultant for IHS Global.
That growth has been fueled by the recovering economy and the growing natural gas supply. Natural gas production stagnated in Texas from 2000 to 2004, according to data from the federal Energy Information Administration. But over the next five years, production surged 27 percent, reaching 7.6 trillion cubic feet in 2009.
By comparison, Pennsylvania and West Virginia, which cover the majority of the Marcellus Shale formation, produced a combined 538 billion cubic feet of natural gas, according to the energy agency. But production in those states grew more rapidly, 38 percent from 2005 to 2009.
The growing chemical industry is an economic boon for regions that capture a share of it.
In a March report, the American Chemistry Council calculated that a 25 percent increase in domestic ethane production would generate 17,000 jobs in the chemical industry and $16.2 billion in capital investments in new and expanded plants.
The Marcellus appeal
It’s still not clear how much of that economic growth will land in Texas.
Shell estimates that its Northeast complex will create about 10,000 construction jobs there and several hundred staffing positions. Ethylene crackers typically take four or five years to build.
Shell hasn’t determined the exact location of the new complex.
Dan Carlson, Shell Chemicals general manager of new business development-Americas, said locating the plant in the Marcellus region makes logistical sense, providing easier access to the ethane feedstock and to the regional demand for plastics.
“The economics of bringing feedstock from the Appalachian region to the Gulf Coast to convert into petrochemicals that you take back to the region isn’t an efficient supply chain,” he said.
Skeptics point to the relative newness of gas production in the region, however, noting that it lacks the Gulf Coast’s complex system of facilities and pipelines to produce, store and transport chemicals. But Carlson sees the virgin terrain as a benefit, too.
“We are looking at a clean sheet of paper,” he said. “As gas fields are being developed, we have an opportunity to build the right type of supply chain from the outset.”
Key to global market
So far, Shell is in the minority. While the Northeast provides proximity to regional manufacturers, the Gulf Coast’s ports allow access to global markets.
Exports are a growing share of U.S. plastics production, according to industry experts. Foreign demand is growing faster than domestic demand and America’s low-cost natural gas feedstock gives U.S.-made plastics a competitive edge globally.
Asian and European chemical manufacturers rely largely on oil-based raw materials, with prices tied to crude.
As a result, many petrochemical companies are modifying their existing Gulf Coast plants to take better advantage of the natural gas supply in both Texas and the Northeast.
A partnership of oil and gas transporters is preparing a network of pipelines and storage facilities to ship Marcellus ethane to the Gulf Coast. MarkWest Liberty Midstream & Resources and Sunoco Logistics Partners say their system will be able to ship up to 50,000 barrels of ethane a day to the Gulf Coast at its launch, expected by mid-2013.
“That’s what makes the most sense, build a pipeline from Pennsylvania to Texas and build your new capacity down here,” said Giacobbe, a Houston-based consultant.
Dow Chemical is planning a new Gulf Coast ethylene plant and is working on agreements to transport Marcellus Shale feedstocks to its Gulf Coast facilities, spokesman Greg Baldwin said.
By 2018, the company expects its Gulf Coast ethylene capacity will grow by about 20 percent and add as many 500 jobs.
Companies responding to domestic demand in Marcellus and those preparing for exports on the Gulf Coast are making big bets on shale gas.
Whether larger profit margins will justify the capital investments, “that is the million-dollar question,” Giacobbe said.
All the new ethylene capacity brings risk of oversupply, he noted.
“There’s a lot of hype right now. There’s a lot of excitement, and they’re making so much money,” Giacobbe said. “But if they all do it at the same time, that’s when you get into overbuilds.”