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Appalachia gaining NGL manufacturing advantage over Texas, study says

Appalachia's shales will produce 45% of the United States' natural gas by 2040, and the region has a growing cost advantage in natural gas liquids over the U.S. Gulf Coast, according to an IHS Markit study highlighting the region's advantages for industrial developers.

The study, sponsored by economic development groups Shale Crescent USA and JobsOhio, was released March 19 at the World Petrochemical Conference in San Antonio and echoes a similar study on ethane crackers released in 2018. The thesis of both studies is that Appalachia's production is bountiful and cheap, and chemical plants in the Marcellus and Utica shales benefit from the lower costs of feedstocks and close proximity to customers.

IHS predicted that the region's NGL production will double by 2040 and said there are substantial savings to be had using liquids such as propane, butane and ethane at plants inside Appalachia rather than transporting them to the massive NGL complex at Mont Belvieu, Texas, or exporting them around the world.

By 2020, Appalachia will have a 6% to 26% production cost advantage over the Gulf Coast with roughly a 10-cent-per-gallon transportation discount for NGLs, IHS said. To calculate the discount, the group compared the tariffs on Energy Transfer LP affiliate Sunoco Pipeline LP's Mariner East 1, which is aimed at delivery to Philadelphia for export, and Enterprise Products Partners LP's TEPPCO pipeline, which is geared toward delivery to Mont Belvieu.

The NGL with the biggest cost advantage in Appalachia is ethane, according to a 2018 study from Shale Crescent. Royal Dutch Shell PLC's Appalachian unit, Shell Chemical Appalachia LLC, is already building a $6 billion plant outside Pittsburgh to take ethane processed out of the natural gas stream and "crack" it with heat to produce polyethylene pellets for plastics. Thai petrochemical giant PTT Global Chemical Public Co. Ltd. committed $100 million to engineering studies for a cracker in the Utica Shale in Belmont County, Ohio.

After ethane, the NGL with the largest cost advantage is Appalachia's propane, particularly if used in an integrated propylene-to-polypropylene plant making the raw material for plastics. Appalachia's only cost competitors for propane in plastics are similar plants in Alberta, IHS said, but any Canadian advantage is erased when transportation of the eventual plastics products is included; 77% of U.S. and Canadian demand for polypropylene is within 700 miles of West Virginia, Ohio and Pennsylvania.

"Access to ample supplies of locally produced propane leads to a competitive manufacturing cost for propylene, and subsequently polypropylene, which is augmented by the region's close proximity to over three-quarters of the U.S. polypropylene end use market," Anthony Palmer, IHS's vice president for chemical consulting, said in a statement.

Officials with JobsOhio and Shale Crescent said they are talking with manufacturers looking to move to the Ohio River Valley. "The abundance of natural gas and natural gas liquids has impacted our project pipeline," JobsOhio Vice President Dana Saucier Jr. said in a statement. "We are in conversations with companies seeking to expand as well as construct new plants in the region. The IHS Markit study quantifies the economic advantages of investing in the Marcellus and Utica formations."

Saucier did not miss the chance to point out one of Mont Belvieu's handicaps: its location in the hurricane alley of the Texas Gulf Coast.

"In addition to the significant cost advantages, the Shale Crescent has the benefit of being located in an area of the country rarely impacted by extreme weather," Saucier said. "Investors are taking notice."