Waiting Game for Chemical Cracker Developers

In the long run, low oil prices will create more demand for chemicals, which will make it easier for companies like Royal Dutch Shell and Odebrecht to pump billions of dollars into new ethylene crackers.

In the short run, such projects may be delayed while crude oil prices, which have dropped by 50 percent since the summer, feel around for a new normal.

To understand why several proposed petrochemical crackers recently announced delays or hesitations about going forward, it’s necessary to separate the oil from the gas.

“The reason everybody was betting on building ethane crackers is because there was a very large difference between oil and natural gas prices,” said Maria Mejia, a natural gas liquids analyst with Bentek Energy, which is headquartered in Colorado.

Ethane crackers turn hydrocarbons into ethylene, a starting point for a variety of chemical products. As feedstock, these plants can use either naphtha, a crude oil-based product, or ethane, a natural gas liquid. Where ethane is significantly cheaper than naphtha — such as in swaths of the Marcellus and Utica shales where wet gas is plentiful — crackers using the natural gas liquid have a significant upper hand.

At least three ethane crackers have been proposed in the Appalachia Basin, which contains the Marcellus and Utica shales, and each is a multibillion dollar proposition. The biggest guessing game has been around Shell’s plans for the former Horsehead Industries site in Beaver County, where the Dutch energy and chemical giant already has spent three years and millions of dollars to demolish the site and buy adjacent properties. Just last month, it purchased another Potter Township parcel for $5 million in order to reroute and widen a highway ramp.

Despite all the money and work already embedded in the venture, Shell has not made a final decision to build or not. It expects to decide sometime this year or next, according to its investor guidance.

The ASCENT cracker project in Parkersburg, W.Va., is similarly in the pre-decision phase, but recently an official from the developer, Odebrecht, said the company is rethinking the wisdom of such a plant.

The Appalachian region doesn’t have the price advantage than it did two years ago, said David Peebles, a vice president at the Brazil-based company, according to an article in the Charleston Gazette

“We have to take a long-term view. We have to rethink what we are doing and figure out what’s the best thing for our shareholders and what’s the best thing in terms of strategic analysis in the use of our assets.”

“It’s riskier for a cracker in the Northeast”

The impact isn’t unique to Appalachia.

Already, several major chemical projects on the Gulf Coast have been delayed because of market conditions. South African company Sasol said it would postpone its gas-to-liquids proposal for Westlake, La. Last month, Georgia-based Axiall Corp. delayed making a decision on an ethane cracker in the same location.

Those Gulf Coast projects were buoyed by existing pipeline and takeaway infrastructure and a built-in customer base, Ms. Mejia noted. Proposed Appalachian crackers have that many more hurdles to overcome.

“You might say it’s riskier for a cracker in the Northeast,” she said.

High on that list of risks is ethane supply, Ms. Mejia added. Because ethane requires processing plants and fractionators to separate it from the natural gas stream, a massive buildout of such facilities is needed to feed the proposed projects. That already has been going on for several years, with Colorado-based MarkWest Energy Partners leading the way.

But as natural gas producers slow their drilling and perhaps even move to drier gas areas due to the extra cost of processing natural gas liquids, which aren’t getting that much of a premium in the current market, that infrastructure buildout is also bound for delays and contractions, Ms. Mejia said.

In MarkWest’s fourth quarter earnings call, the company said it was decreasing its capital expenditures for 2015 and 2016 and delaying the start date on 10 of the 18 major projects under construction, “in response to the current pricing environment and reduced drilling programs,” said Frank Semple, chairman, president and CEO.

“Our goal is to complete new facilities on a just-in-time basis,” he said.

At the same time, MarkWest, which says it operates 61 percent of all processing facilities in the Marcellus and Utica, stressed that its long-term growth projections are based on assurances from producers that they will continue to aggressively develop their wet gas assets because they still are the most economical.

Shell cautions against overreaction

Shell declined to talk about its thinking regarding the Marcellus ethane cracker, however company leaders addressed their pending projects more generally during the last earnings call in January.

At that time, Shell announced it was cancelling some $15 billion worth of projects and deferring decisions on others. But company officials repeatedly cautioned against overreacting to spot prices.

“Our volatility is a fact of life. It is what it is, and we have to manage through it,” said Shell’s CEO Ben van Beurden. “And there are some very important lessons to learn from history here.”

Mr. van Beurden said Shell has not changed its long-term oil price assumptions and warned that “under-investment today simply leads to more upside risk in oil prices in the future.”

Nevertheless, he acknowledged the company does need to deal with current oil prices and that “we don’t have much visibility as to how long this downturn will last — months or years.”

That, more than anything, is responsible for whatever delays companies are building into their decision making deadlines, said Stephen Zinger, a principal chemicals analyst with Wood Mackenzie, a Houston-based research and consulting firm.

“The best data point you have is what the current price is,” he said. “After that, everything’s a forecast.”

Mr. Zinger and his firm are confident that in five years, which is how long it would take for the proposed crackers to become operational, oil prices will be back around $90 per barrel to $100 per barrel. But for companies readying to invest $5 billion to $8 billion on a project, it’s not surprising they might want to take a step back and see what oil prices might be up to next year before pulling the trigger, he said.

“I think they want a little bit more visibility about how this is going to resolve itself,” he said.

Mr. Zinger believes that if the proposed Appalachian crackers were already built and running today, they would be competitive and cash-flow positive, even with crude oil at $50 per barrel.

“The big question comes in, since these plants aren’t running today, they need to be cash-flow positive enough to pay off the capital investment,” he said.

By Anya Litvak | Pittsburgh Post-Gazette via PowerSource  |  March 10, 2015