CEO: Shell cracker plant decision 'years away'

| Tuesday, March 13, 2012

Pennsylvania is fighting more than just Ohio and West Virginia for a new petrochemical plant.

So many companies have joined Royal Dutch Shell plc in considering new gas-fed plants called crackers, it's clear that not every proposal is going to make it, analysts said on Monday. It will take several years for any construction, and that may happen for only about half the proposals, according to an estimate from an executive at Chevron Phillips.

Shell, which has announced plans to build in Pennsylvania, Ohio or West Virginia, is still "quite a few years away from a potential final investment decision," Chief Executive Officer Peter Voser said last week at CERAWeek, a Houston conference held by energy research and consulting firm IHS.

That timetable isn't surprising because of the project's cost and complexity, experts said.

"There's no question in my mind, the first guy will make money and the last guy in the game is going to have a tough time justifying what they did," said Ray Orriss, a former KBR Inc. vice president who oversaw the company's division that built and designed cracker plants. "Frankly, the issue is not going to be that gas is cheap. The issue is going to be how much of these products can we sell in the marketplace. And the growth, I think, is not going to support that ... many projects in this timeframe."

Five companies have announced plans to build chemical plants that help convert ethane to plastic, according to business and trade news reports. Most are destined for the Gulf Coast. A West Virginia businessman has publicly stated interest in building one there, according to news outlets in West Virginia.

Cheap natural gas and ethane from shale drilling have fueled the growing interest and can support five new U.S. plants, Mark Lashier, an executive vice president at Chevron Phillips, said at CERAWeek, according to Bloomberg News. Each will cost $5 billion to $6 billion and take more than a decade to build, he said.

Chevron Phillips is a chemical producer jointly owned by Chevron Corp. and ConocoPhillips.

The volatile economy, gas prices and politics, international competition and supply chain costs all affect these decisions, said Richard G. Mallinson, an engineering professor at the University of Oklahoma. Once a company decides to invest, it can take another four years to evaluate bids and technology, complete the design and do the building, Orriss said.

"Uncertainty in pricing is a huge obstacle. It is a big investment, and if lots of people build them, the product price may not justify it," Mallinson wrote in an email. "All of these create uncertainty, and that is the thing that slows decision-making and kills projects."

Three of the companies, including Shell, have targeted the Appalachian basin. Despite the industry hub on the Gulf Coast, gas from the Marcellus and Utica shales costs so little to produce and is so rich in ethane and similar chemicals that it makes sense to build at least one cracker here, said Kent Moors, Scholar in Residence at Duquesne University's Institute for Energy and the Environment.

Gov. Tom Corbett said he's "very hopeful" of Pennsylvania's prospects. He said he can't discuss specifics, but "I think we're very close to a decision."

Moors said Shell has invested so much -- not just in drilling, but in pipelines and other projects -- that, to maximize its investment and control its revenues, it makes sense to invest in processing, too. If Shell doesn't build a cracker plant, it probably would have to end up selling its shale gas land holdings, he said.

"It's a large investment, but let's face it, if they don't do it, they're out of business. So they've got to build it somewhere," Moors said. "It makes sense for them to build it closer to the location of the actual raw material. ... I'd be shocked if we don't end up with one here."

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