Shell Chemical Appalachia’s long-awaited decision on a multibillion-dollar ethane cracker arrived early Tuesday and it’s a go. The company plans to build the petrochemical complex on the site of the former Horsehead zinc smelter in Potter and Center townships, Beaver County.
The site will house the cracker; three units that will convert ethylene into polyethylene pellets; a natural gas-fired power plant; a loading dock; and a wastewater plant. Main construction will start in about 18 months, with commercial production expected to begin early in the next decade, the company said in a statement.
Shell has said constructing the plant would employ 6,000 workers, giving way to 600 permanent operational positions when it opens. Shell had previously put the number of permanent jobs at 400 or 500, but spokesman Ray Fisher said Tuesday that those were just “speculation.”
The company gave credit for the decision, in part, to the tax incentives offered by Pennsylvania — incentives that former Gov. Tom Corbett, who was in office when the courting began, said were justified because of the huge plant’s potential to be a catalyst for a new industry.
Shell, which has been pulling back in parts of its global operation, said the Pennsylvania cracker was a particularly competitive project because it will use ethane from the Appalachian Basin, the lowest-cost shale gas basin in North America.
A long waiting game
A division of Netherlands-based Royal Dutch Shell, the company has been mulling the decision for the past five years. Shell picked the location in 2012, signing and thrice extending a land option agreement with Horsehead for $3.9 million. It finally bought the 340-acre site in November 2014 for $13.5 million.
In January 2015, Horsehead began demolishing the former smelter site, with Shell footing the bill. The energy giant has committed $80 million to deal with environmental contamination inherited from Horsehead and its predecessors; $60 million to shuffle roadways; and $69 million for the Center Township Water Authority to relocate its water intake site and build a new water treatment plant.
Pennsylvania, too, will spend money to bring the cracker to life.
In 2012, then-Gov. Corbett pushed through a tax break for Shell that would give the company a $2.10 credit for every barrel of ethane it buys from Pennsylvania’s oil and gas operators. The company also will reap 15 years of tax cuts and exemptions because the site is an expanded Keystone Opportunity Zone.
Gov. Tom Wolf said on Tuesday that while it’s unclear how much money Shell and other manufacturers will pull from the state, he’s confident the investment will more than pay for itself. Beyond the immediate job figures, he said, the project will inspire interest from many industries that use polyethylene to locate close to the cracker.
“The feedstock is here. The work force is here. Let’s go,” he said.
The Democratic governor gave credit to Mr. Corbett for starting the enticement process, while Mr. Corbett — a Republican who lost his re-election battle to Mr. Wolf in 2014 — celebrated the announcement on Tuesday with an early morning call from Shell and a bittersweet thought: “I could have used it two years ago.”
Mr. Corbett said it was Shell that approached the state with an incentive package and asked the government to look into it. The state maintained a close relationship with the company, trading calls at least once a week.
“We looked at it as the ability to build an entire industry,” Mr. Corbett said, likening the opening of the cracker, perhaps, to the birth of Pittsburgh’s steel era.
While seemingly everyone from politicians, to the Marcellus Shale Coalition, to real estate agents rejoiced at the announcement, several environmental groups took issue with the air pollution that the cracker has in store for the region.
For his part, Mr. Wolf said he has been pleased with Shell’s environmental chops. “They understand they cannot come into an area and trash it and leave,” he said.
The ethane cracker is intended to capitalize on the historic price spread between more expensive oil and less expensive natural gas, from which ethane molecules are extracted. Both can be “cracked” to produce ethylene — a building block of pharmaceuticals, industrial chemicals and consumer goods.
Production from the Marcellus and Utica shale formations, with their large reserves of natural gas liquids, has driven up supply and plunged the cost of ethane. On Tuesday, ethane was trading at a 30 percent of the price it was when Shell first announced its intentions to build a cracker in Beaver County. That was almost five years ago to the day.
Until about a year ago, ethane stood at a significant advantage to oil. But oil prices, too, plunged because U.S. shales unlocked a huge new source of supply and the advantage has since narrowed.
During a presentation to analysts Tuesday, Shell said it is expecting only minor improvements in oil prices and is basing its financial decisions on a long-term forecast of oil at $60 per barrel. It was trading at $51.41 per barrel Tuesday.
In that context, the Pennsylvania cracker decision caught Kendall Puig, senior analyst at Platts Analytics, by surprise. “I wasn’t expecting them to move forward,” she said.
By Ms. Puig’s estimates, there are eight ethane crackers in various stages of construction on the Gulf Coast now, with the first scheduled to come online in 2017. That will boost demand for ethane and raise the price of the ethane feedstock, she said.
Shell’s advantage will be its proximity to the so-called wet gas of the Marcellus and Utica shales, she said. Still, Ms. Puig expects it will be hard to compete with global crackers that use oil as a feedstock.
The Beaver County cracker will consume about 105,000 barrels of ethane per day. Shell said it has signed supply contracts with 10 operators — its anchors are Antero Resources, Ascent Resources Utica, Consol Energy, Eclipse Resources, Hilcorp Energy, Noble Energy and Penn Energy Resources.
Each year, the facility will pump out about 1.6 million tons of polyethylene in small balls or pellets that will be sold to clients to mold into products.
All along, Shell has been careful about not overpromising and officials explained that the company had delayed or canceled other projects that were further along than the Beaver County cracker.
In fact, company leaders said at an analyst conference in London on Tuesday that Shell is paring its spending and refocusing on the most advantageous opportunities.
It identified the chemicals business as one of two growth drivers for the company.
Anya Litvak: email@example.com or 412-263-1455.
First Published June 7, 2016 7:30 AM