Location and tax breaks key to Shell’s Pennsylvania cracker plant approval
The market will have absorbed the additional supply of polyethylene from the first wave of U.S. Gulf Coast petrochemical projects by the time Shell Chemicals' ethane and derivatives complex in Beaver County, Pennsylvania comes on stream in the early 2020s, according to Ate Visser, vice president of Shell’s Pennsylvania Chemicals Project.
Speaking at Petrochemical Update’s Northeast U.S. & Canada Petrochemical Construction Conference in Pittsburgh on June 28, Visser said Shell's final investment decision on June 7 to build the facility came down to three key considerations: proximity to low-cost ethane feedstocks, proximity to customers and local fiscal incentives.
The decision to give a go-ahead to the project in June and to start construction 18 months later was also consistent with both the expectations about the market and with “managing [the company’s] capital situation, capital discipline, affordability in the current low-oil price environment,” he added.
The schedule gives Shell time to finish design work and preparation of the construction area, which began more than a year ago at the site of Horsehead Corp’s former zinc-smelting plant between the Ohio River and State Route (SR) 18 in Potter and Center townships.
“The timing fits the market and fits the development of the site and also capital discipline. These are very nicely synced,” Visser said.
Shell’s facility, which is expected to begin commercial production in the early 2020s, will use 100,000 barrels a day (b/d) of ethane and have 1.6 mtpa of polyethylene capacity.
There are currently seven ethane crackers under construction on the U.S. Gulf Coast - for a total of about 8.75 million metric tons of new annual ethylene capacity – scheduled to come on stream in 2017-2019, as well as 1.45 mtpa of ethylene expansions that have been announced for the same period.
The ethylene market in the U.S. through 2020 will be balanced with 6.5 million metric tons of downstream polyethylene capacity - mostly LLDPE (gas phase and solution processes) and HDPE (gas phase, slurry and solution technology) - 1.7 million tons of monoethylene glycol capacity and a small increase in ethylene dichloride capacity brought on stream over the same time frame.
How much of the additional production will be sold to domestic vis-à-vis international markets will largely depend on domestic demand, but unlike many of its U.S. Gulf Coast counterparts, Shell’s Pennsylvania complex will likely cater mostly to the regional domestic market.
U.S. demand for plastic resins is expected to increase 3% – 4% annually in the short and mid-term, slightly higher than the projected GDP growth, at around 2.4%. By contrast, in 2014 the demand for polyethylene in North America grew by 2.5% compared with 2013 to over 31 billion pounds (about 14 million tonnes), and sales volumes in 2015 were marginally higher than in 2014.
Excess North American polyethylene production available for export could be 2.7 – 4.1 mtpa through 2020, with Northwest Europe, Brazil, South Korea, and China offering the best export opportunities, based on regional demand-supply imbalances and U.S. total supply cost competitiveness, according to Petrochemical Update estimates.
Feedstock, location, incentives
Shell’s proposed steam cracker and three polyethylene units would be located very close to ethane supplies and gas processing infrastructure in the heart of the “wet” Marcellus/Utica natural gas liquids production region, which will provide a significant feedstock transport cost advantage versus Gulf Coast crackers, even if ethane prices rise in the next few years.
Shell has already secured 10 gas suppliers for the Pennsylvania complex, including 10-20-year deals with seven anchor suppliers - Antero Resources, Ascent Resources – Utica, Consol Energy, Eclipse Resources, Hilcorp Energy, Noble Energy and Penn Energy Resources.
The proximity to the end user market is another advantage since about 70% of the primary base of the facility's target downstream customers, such as plastics processors and fabricators, is located within 700 miles of the plant, Visser said. Shell expects this will offer its clients shorter and more reliable supply chains, working capital savings and lower costs compared to similar products from the Gulf Coast (see map below).
Source: Royal Dutch Shell.
Pennsylvania's fiscal incentive package — which includes a large tax credit along with job-training incentives — was also crucial to the company's decision to both proceed with the project and locate it in Pennsylvania, Visser said.
In 2012, state lawmakers authorized a tax credit for companies that use ethane that invest more than $1 billion and employ more than 2,500 workers during construction. Shell was given a 25-year tax break worth about $66 million a year starting in 2017, or about $1.65 billion in total. The state also extended a tax-free Keystone Opportunity Zone in Beaver County and provided other grants.
“I can tell you with the hand on my heart that without these fiscal incentives, we would not have taken this investment decision,” Visser said.
Also key was the approval by the state of Shell's Act 2 Plan, which outlines the plans for environmental remediation of the site from its previous use as a zinc smelter facility.
Meanwhile, Shell is continuing with the project site preparation, including the development and expansion of roads and other supporting infrastructure. The company is believed to have already spent hundreds of millions of dollars in acquiring the Beaver County property, demolishing the zinc smelter and preparing the site for development.
Shell has moved 7.2 million cubic yards of dirt to cap the site according to the approved Act 2 closure plan and has completed a heavy-haul bridge over SR 18 to eliminate traffic exposure.
Shell has also relocated the CSX rail line and SR 18 to open up space at the site, and plans to construct two docks, with its On-Load Off Dock nearing completion, to bring modules to the site, Visser said.
The project is expected to create about 6,000 construction jobs at the peak of construction and 600 permanent positions, but will also generate a lot more indirect jobs in the region, Visser said.