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Ethane cracker in Appalachia 4 times more valuable than on Gulf Coast: IHS study

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Ethane cracker in Appalachia 4 times more valuable than on Gulf Coast: IHS study

Ethane crackers built in the Ohio River Valley will return four times the value of similar plants on the U.S. Gulf Coast, according to a new report released by the Shale Crescent USA economic development group March 20.

It will likely be international investors who jump on this "compelling economic advantage," not domestic firms, Shale Crescent USA executives said.

The Ohio River Valley, which includes southwestern Pennsylvania, part of West Virginia and eastern Ohio, a region that inspired the Shale Crescent USA name, has advantages over the Gulf Coast. Chief among these are cheap ethane from Marcellus and Utica shale gas wells and plenty of local and Midwest demand. The valley also has easy access to water and a skilled labor force. According to the report's author, Ron Whitfield, who is vice president of applied economics for consulting group IHS Markit, two-thirds of the demand for polyethylene plastic, which needs ethane for a feedstock, is within a day's drive of the Ohio River.

The study said that even under stress test scenarios for high and low commodity prices, a theoretical ethane cracker in Appalachia will cost $3 billion and will generate $3 billion more cash over 20 years than a competing plant on the Texas Gulf Coast.

"The [net present value] cash flow is over four times higher in the Shale Crescent USA project than in the U.S. Gulf Coast project," the study's summary said. "Without considering the time value of money, the pre-tax cash flow of the Shale Crescent USA project from 2020 to 2040 amounts to $11.5 billion, compared to $7.9 billion for a similar Gulf Coast project, a pre-tax cash flow advantage of $3.6 billion."

The ethane that crackers convert to ethylene, the first step on the way to the polyethylene pellets used to make plastic products, is 32% cheaper than on the Gulf Coast, the study said. The cost of getting the polyethylene pellets to plastics plants would be 23% less than on the Gulf Coast, the study said.

U.S. petrochemical companies such as DowDuPont Inc. have probably taken a pass on Appalachia because of their sunk costs along the Gulf Coast, Shale Crescent USA and Ohio-based Artex Oil Company President Jerry James told reporters on a conference call March 20. This makes international companies the likely builders of Appalachian shale crackers.

Wally Kandel, senior vice president and Marietta site manager for Solvay Specialty Polymers USA LLC, acknowledged that the region is fighting history to attract gas liquids consumers to Appalachia's shale plays. Natural gas production from the Marcellus and Utica shales upended traditional U.S. gas flows.

"For 75 years, the right place to put a cracker was on the Gulf Coast," Kandel said.

Shell Chemical Appalachia LLC is building the only cracker in the region in Beaver County, Pa. Thai chemical company PTT PCL and the petrochemical arm of South Korean industrial conglomerate Daelim Corp. are exploring construction of a second plant in Belmont County, Ohio. The region has room for at least three more crackers in addition to those two projects, according to the IHS Markit analysis.

Kandel and James said they did not think potential developers would wait to see if Shell's Beaver County cracker is successful. "If you wait five to six years, you'll miss the boat," Kandel said.

The report was produced in time for Shale Crescent USA to distribute it this week at the World Petrochemical Conference in Houston.