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Two of the world's largest shale plays - Marcellus and Utica - lie beneath a large swath of Pennsylvania, Ohio, and West Virginia. These two plays are some of the largest in the world. If considered as a separate country, production from the Marcellus and Utica shales exceeded the production in all other countries in the world except the United States and Russia. In 2017, natural gas from these two shale plays accounted for about 27% of natural gas produced in the United States. By 2040, natural gas from these two shale plays is expected to account for more than 37% of the nation's natural gas production. Trapped within these plays lie valuable gas liquids, also known as natural gas liquids or NGLs. Two of these high-value NGLs are ethane and propane. In addition to powering your outdoor grill, these gases are also used in basic petrochemical production to produce plastics and a wide range of other products. What do these resources mean for the future of the region which has seen multiple manufacturing plants shutter their doors in the last few decades?
The natural gas price advantage in the Marcellus-Utica region
As Economics 101 instructors often repeat - demand is a function of price. If one were to compare prices in this market, they would come across the term "natural gas hubs." Natural gas hubs are physical trading points typically at the intersection of several transportation options that link production to consumers. Prices at hubs represent benchmark prices at points in time at that location. An often-quoted natural gas hub price is the Gulf Coast Henry Hub price. The 2017 annual average Henry Hub price was around $2.98/MMBtu (1 million British thermal units). A comparable hub in the Marcellus-Utica region is the Dominion South Point (DSP) hub in Allegheny, PA. The 2017 average DSP hub price was around $2.12/MMBtu, or 29% less than the Henry Hub price, a price discount that is likely to continue for quite a few years. This is a huge price difference and is a significant incentive for attracting petrochemical investment to the area because of the lower price for raw materials.
In 2017, we published an independent assessment analyzing the economic impact of the rapid increase in natural gas production from the Marcellus-Utica plays on petrochemical manufacturing. The report was sponsored by the Team Pennsylvania Foundation, a nonprofit that works to boost economic growth through public-private partnerships. The study, Prospects to Enhance Pennsylvania's Opportunities in Petrochemical Manufacturing, forecasted an increase in the supply of ethane in the region great enough to support up to five world class ethylene crackers, including the $10 billion Shell Chemicals plant currently under construction in Monaca, PA. In addition, the study predicted significant new investments in energy infrastructure such as gas gathering lines, pipelines, storage facilities, and fractionation plants. These energy and chemical-related investments are expected to also attract additional manufacturing plants to the region to convert basic plastics into more valuable consumer and industrial products to serve the packaging, food and beverage, transportation, and automotive industries.
In 2018, we published another study analyzing the economic benefits and risks of significant petrochemical investments in the Marcellus-Utica region and compared them with competing opportunities in other US regions. The report was sponsored by the Shale Crescent USA, a nonpartisan, nonprofit of business leaders, regional economic development partners, area Chambers of Commerce, and foundations among others. The study, Benefits, Risks, and Estimated Cash Flows: Ethylene Project Located in the Shale Crescent USA versus the US Gulf Coast, found that the predicted financial returns for a Shale Crescent USA project will produce a net present value on EBITDA of $930 million over the life of the project - four times higher than the expected returns of an identically-size Gulf Coast project. The financial model was tested under different feedstock, capital cost, utilization rates, and product price scenarios, and the results were robust.
Customers in the neighborhood
The first large-scale NGL-based petrochemical investment in Pennsylvania will be the Shell ethane cracker in southwestern Pennsylvania. We expect construction, including the transportation infrastructure required, to be completed by 2021-22. The plant will convert ethylene into high-density polyethylene and linear low-density polyethylene - two high-growth plastics. Other companies are exploring ethane cracker opportunities in Ohio and West Virginia and formal go-ahead announcements are expected in the near future. Why are these companies willing to commit billions of dollars to build ethylene and polyethylene plants in the region?
There are three basic types of polyethylene: low-density, linear low-density, and high-density polyethylene. Each type has the same chemical structure, but different mechanical, physical, and other properties. As a group, polyethylene is the most commonly used plastic. North American production of polyethylene in 2017 was over 40 billion pounds, more than twice the volume of the next largest plastic resin. Applications of polyethylene range from retail carry-out bags, milk jugs, detergent bottles, bubble wrap, food storage containers, and toys. This is where the Marcellus-Utica region has a significant geographical advantage. We estimate that about 70% of the United States' and Canada's demand for polyethylene resins fall within a 700-mile radius of Pittsburgh and manufacturing facilities located in the Marcellus-Utica region are well-positioned to serve these customers.
Can the region become a petrochemical cluster?
Our studies provide a solid case for the economic advantages of energy intensive industries to locate in the Marcellus-Utica region. The region produces an abundant supply of low cost natural gas and NGLs that can be economically converted to petrochemical building blocks and downstream plastics; the region has a large installed base of customers; and, it has an adequate supply of skilled labor that can be further trained to build, operate, and maintain these facilities. The strategic question is: should the energy resources continue to be exported elsewhere, or should they be used to create value-added manufacturing within the region? If the latter, leadership is needed to develop and implement a master plan to identify and encourage the development of cluster economic zones that utilize locally-produced natural gas and NGLs. These leaders need to act with a sense of urgency and focus before these opportunities slip away.
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