1
December 2013
Building Value from Shale Gas:
The Promise of Expanding
Petrochemicals in West Virginia
Author
Tom S. Witt...
This study was supported by funding from Braskem America. The opinions herein are the
opinions of the author and do not ne...
Economic Opportunities
for West Virginia
Overview
Development of Ethane Crackers and
Associated Petrochemical Plants
01
BO...
1
Overview of Economic Opportunities for West Virginia:
Development of Ethane Crackers & Associated Petrochemical Plants
I...
2
Executive Summary
Shale-gas-based petrochemical development offers
tremendous opportunity to West Virginians and others
...
3
2
All costs and impacts are presented in 2012 dollars.
In addition, moving NGLs to market requires infrastructure
to con...
4
Building a profitable PE industry can also contribute to
building a successful product manufacturing industry.
The major...
5
Additional Considerations
Optimizing the Opportunity in West Virginia
Promoting an Industry Cluster: The Ohio River Basi...
6
Developing the right workforce: 		
Availability of skilled labor and educational programs
West Virginia has a strong his...
7
cost disadvantage to serve export markets where ocean
freight is often favored. In addition, West Virginia
suffers from ...
The Development of Shale
Gas & Energy Use and
the Chemical Industry02
BOOK
8
The Development of Shale Gas & 			
Energy Use and the Chemical Industry
The Development of Shale Gas
One of the more int...
9
been known for decades to contain significant amounts
of natural gas, but it was not economically feasible
to develop, g...
10
With these innovations in natural gas drilling and
production, the productivity and profitability of
extracting natural...
11
By 2012, North America featured some of the lowest cost
natural gas in the world. Figure 2-5 illustrates this. Prices
i...
12
of water and potential contamination of underground
aquifers used for drinking water.7
The concern exists
even though f...
13
diesel fuel, and heating oil — usually after desulfurization.
Some gas oil is used as olefin feedstock. Naphtha is the
...
14
The falling cost of ethane and other light feedstocks
(propane, butane, etc.) in the United States since 2008
contrasts...
15
The shift toward ethane cracking in the United States
has reduced supplies of propylene and butadiene, two
important pe...
Understanding the
Ethylene Value Chain
03
BOOK
16
Understanding the Ethylene Value Chain
Ethylene is a basic organic chemical; it forms the
building block for a wide arr...
17
Ethylene Demand
The worldwide demand for ethylene is driven primarily
by the rate of global GDP growth and demand for
p...
18
The focus of this report is on ethylene and its application
in the polyethylene industry, so the following primarily
di...
Oil and Gas Production
and Petrochemicals
in West Virginia04
BOOK
19
Oil and Gas Production and Petrochemicals in West Virginia
History of the Oil and Gas
Industry in West Virginia
Natural...
20
E.I. Du Pont De Nemours & Co., Inc. (hereafter DuPont)
helped develop the explosives plant, but the federal
government ...
21
Creation of the Chemical Alliance Zone
In 1996, the Business and Industrial Development
Corporation released The Chemic...
Shale Resources in West
Virginia and Appalachia
Growth and Opportunity
05
BOOK
22
Shale Resources in West Virginia and Appalachia: 			
Growth and Opportunity
The Marcellus Shale geological formation un...
23
Shale formation is an emerging shale play in eastern
Ohio and western Pennsylvania. With production in its
early stages...
24
Start-Up Status Plant Name Owner State
Capacity
(MMcf/
day)
1/1/2012 Current Langley MarkWest Energy Partners KY 175
6/...
25
However, given its location in the heart of the Marcellus
Shale development, West Virginia and the Appalachia
region ha...
26
Year Operator(s) Location/Comment
Output
(thousand tons)
Output
(million lbs.)
2013
BASF/Total, Eastman, Equistar, Ineo...
Economic Impact of a
New Ethane Cracker and
Downstream Polyethylene
Plants in West Virginia
06
BOOK
27
Economic Impact of New Ethane Cracker and Downstream
Polyethylene Plants in West Virginia
This section examines the eco...
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
Study of Economic Impact from Ethane Cracker Plant in WV
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Study of Economic Impact from Ethane Cracker Plant in WV

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A study titled "Building Value from Shale Gas: The Promise of Expanding Petrochemicals in West Virginia," researched and written by Dr. Tom Witt, economist and former director of West Virginia University’s Bureau of Business and Economic Research and professor emeritus at WVU. Witt's research shows the incredible economic benefits that will ripple for generations in WV and beyond when a new ethane cracker plant and associated petrochemical plants are built in the Parkersburg, WV area by Odebrecht.

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Study of Economic Impact from Ethane Cracker Plant in WV

  1. 1. 1 December 2013 Building Value from Shale Gas: The Promise of Expanding Petrochemicals in West Virginia Author Tom S. Witt, PhD Managing Director and Chief Economist Witt Economics LLC Referenced Authors Dr. Thomas Kevin Swift, American Chemistry Council Martha Gilchrist Moore, American Chemistry Council
  2. 2. This study was supported by funding from Braskem America. The opinions herein are the opinions of the author and do not necessarily represent those of Braskem America. © Copyright 2013 by Witt Economics LLC and Braskem America Inc. All rights reserved. SUMMARY Book 1 provides an overview of the study, issues addressed, economic drivers and associated economic impacts of a potential petrochemicals expansion in West Virginia. Book 2 gives an overview of the shale gas industry. In collaboration with the American Chemistry Council and reproduced with permission, this section is an excerpt from the recent report, Shale Gas, Competitiveness, and New US Chemical Industry Investment: An Analysis Based on Announced Projects by Dr. Thomas Kevin Swift and Martha Gilchrist Moore (May 2013, pp. 10-22). Figure numbers and figure references have been renumbered to be consistent with this overall report. Book 3 discusses the ethylene value chain, including a review of the world market supply and demand for ethylene, which is used as a raw material for a wide array of consumer packaging, transportation, and construction industry products. Book 4 reviews how West Virginia oil and natural gas production contributed to the development of the regional chemicals industry. At one time, the chemicals industry was a bedrock of the West Virginia economy but has declined in recent years. Yet the extraction of natrual gas liquids (NGLs)-rich shale gas in the Appalachia region could serve as a catalyst that renews the chemicals industry, resurrects the region’s manufacturing sector, bolsters the state’s economy, and creates an important new pool of jobs for the region. Book 5 focuses on the opportunity that shale gas development presents to the West Virginia economy. Specifically, it addresses how the development of an ethylene industry, and its application in the polyethylene industry, would enhance the local industrial and employment base of West Virginia. It assesses how recent investments in natural gas infrastructure enable producers to move natural gas and NGLs to markets outside the state, as well as provide an opportunity to revitalize the petrochemical industry inside the state. Book 6 evaluates the positive economic impacts associated with the construction and operation of a world-scale ethane cracker and polyethylene plants in West Virginia. It examines a generic, integrated plant complex, including associated pipeline infrastructure, on-site ethane storage and rail/truck terminals, with an assumed cost of approximately $4 billion.
  3. 3. Economic Opportunities for West Virginia Overview Development of Ethane Crackers and Associated Petrochemical Plants 01 BOOK
  4. 4. 1 Overview of Economic Opportunities for West Virginia: Development of Ethane Crackers & Associated Petrochemical Plants Introduction The advent and development of natural gas produced from shale rock formations create a new dawn for the oil, gas and petrochemicals industries in the United States, particularly in West Virginia and the Appalachia region. This region sits atop two of the most prolific shale deposits in the country, namely the Marcellus and Utica shale formations. The technological advances of horizontal drilling and hydraulic fracturing, combined with almost a decade of shale gas production experience, have unleashed a tremendous new set of natural resources and a rebirth of the natural resource economy in Appalachia and the wider United States. Existing shale gas regions, as well as ones yet to be explored, are groundbreaking for the US economy. Natural gas production from shale that is rich with associated natural gas liquids (NGLs), such as ethane, propane, butane, and natural gasoline, presents new opportunities for the regional petrochemical industry. This research provides a detailed study of the economic impacts associated with the potential construction of new petrochemical facilities in West Virginia, including an ethane cracker and downstream polyethylene manufacturing plants, as a means to better understand how such an investment would impact the state economy. State government, local manufacturers, and the oil, gas and chemical industries are all excited about the potential expansion of manufacturing in natural-resource- rich places like West Virginia. This report builds on the 2011 American Chemistry Council study Shale Gas & New Petrochemicals Investments in West Virginia using new data and a deeper analysis of the economic impacts associated with the creation of an ethane cracker and downstream polyethelene plants. Study Organization Book 1 provides an overview of the study, issues addressed, economic drivers and associated economic impacts of a potential petrochemicals expansion in West Virginia. Book 2 gives an overview of the shale gas industry. In collaboration with the American Chemistry Council and reproduced with permission, this section is an excerpt from the recent report, Shale Gas, Competitiveness, and New US Chemical Industry Investment: An Analysis Based on Announced Projects by Dr. Thomas Kevin Swift and Martha Gilchrist Moore (May 2013, pp. 10-22). Figure numbers and figure references have been renumbered to be consistent with this overall report. Book 3 discusses the ethylene value chain, including a review of the world market supply and demand for ethylene, which is used as a raw material for a wide array of consumer packaging, transportation, and construction industry products. Book 4 reviews how West Virginia oil and natural gas production contributed to the development of the regional chemicals industry. At one time, the chemicals industry was a bedrock of the West Virginia economy but has declined in recent years. Yet the extraction of NGL- rich shale gas in the Appalachia region could serve as a catalyst that renews the chemicals industry, resurrects the region’s manufacturing sector, bolsters the state’s economy, and creates an important new pool of jobs for the region. Book 5 focuses on the opportunity that shale gas development presents to the West Virginia economy. Specifically, it addresses how the development of an ethylene industry, and its application in the polyethylene industry, would enhance the local industrial and employment base of West Virginia. It assesses how recent investments in natural gas infrastructure enable producers to move natural gas and NGLs to markets outside the state, as well as provide an opportunity to revitalize the petrochemical industry inside the state. Book 6 evaluates the positive economic impacts associated with the construction and operation of a world- scale ethane cracker and polyethylene plants in West Virginia. It examines a generic, integrated plant complex, including associated pipeline infrastructure, on-site ethane storage and rail/truck terminals, with an assumed cost of approximately $4 billion.
  5. 5. 2 Executive Summary Shale-gas-based petrochemical development offers tremendous opportunity to West Virginians and others in Appalachia. The advent of ready access to globally competitive, low-cost ethane feedstock in the United States is fueling a renaissance in the US chemicals industry. Already, the chemicals industry has announced over 10 million tons of new ethylene capacity investments in North America by 2018 with more expansion being considered over the coming decade. Thus, the conditions are ripe for Appalachia to redevelop a regional petrochemicals industry that uses locally available, high-value raw materials from the Marcellus Shale formation, which is the most prolific natural gas play in the United States. Policy Considerations The key policy question facing West Virginia is: How do we best capture the full value of local raw materials to stimulate, develop, and sustain the local economy? With North America becoming a focus region for natural resources and petrochemical expansion due to the discovery of significant new hydrocarbon reserves and given the state’s proximity to critical feedstock, the opportunity exists for West Virginia to re-emerge as a center of chemical manufacturing. Figure 1-1 The Ethylene Chain ETHYLENECHAIN Ethane Intermediate Products CrackerNatural Gas Tires Sealants Paint Antifreeze Food Packaging Bottles Cups Housewares Crates Pool Liners Window Siding Trash Bags Sealants Carpet Backing Insulation Detergent Flooring Pipes PVC Vinyl Chloride Ethylene Glycol Styrene Polystyrene Polyethylene Footwear Clothes Diapers Stockings Toys Textiles Adhesives Coatings Films Paper Coatings Models Instrument Lenses Source: American Chemistry Council Natural resources support the manufacture of consumer goods through the ethylene value chain (See figure 1-1). Investment in natural gas processing and in natural gas liquids (NGLs) fractionation facilities drives follow- on investments in pipeline and storage infrastructure. This can enable further investment in value-capturing chemicals manufacturing plants that use NGL products as raw materials. Chemicals like ethylene are manufactured and converted into intermediate products such as polyethylene and then further converted into consumer products. These products – ranging from food and product packaging, textiles, automobile components and appliance parts, to construction materials and industrial machinery – use polyethylene as a major raw material. Manufacturers rely on competitively priced polyethylene to thrive. The ethylene market is extremely competitive with access to cost-competitive feedstock being the primary cost driver. The pervasiveness of polyethylene products in the world economy is growing, with per-capita use rising globally, particularly in the developing world. The strongest demand growth will continue in the Asian region, where high GDP growth rates drive increasing consumption by populations with increasing disposable income. Furthermore, as polyethylene capacity around the world continues to grow in the Middle East and Asia, North American feedstock competiveness, with its more than 10 million tons of new North American polyethylene capacity on the horizon, will drive increased exports from North America to other regions. West Virginia could participate in this tremendous expansion. Building an ethane cracker and associated polyethylene (PE) manufacturing facilities is a watershed economic opportunity for the state and region. This opportunity would expand a high-value manufacturing industry that creates high-wage jobs, new technologies, and the prospect for expanding downstream plastics industry investments. Significant New Investments in the Region to Move Natural Gas and NGLs to Market In response to the growth in both reserves and production, significant investments have been announced in the Marcellus and Utica shale plays to process and deliver natural gas and NGLs to markets inside and outside the region. While West Virginia has existing gas processing and fractionation capacity, the growth of the Marcellus and Utica Shale plays has dramatically increased regional gas production and, consequently, investments in gas processing and fractionation. Bentek Energy forecasts gross natural gas production in the Appalachian Basin, which includes both shale plays and extends from New York to Tennessee, to increase from an anticipated 10.9 billion cubic feet per day (Bcf/d) in 2013 to 19.4 Bcf/d in 2023, an 8.4 Bcf/d increase. This growth is largely being driven by the liquids-rich plays in the Marcellus/Utica region. Adequate processing capacity will be built to accommodate this increase. In fact, approximately 5 Bcf/d of incremental processing capacity is slated to come online by the end of 2016, for a total regional capacity exceeding 8 Bcf/d.1 1 BENTEK Energy. Son of a Beast: Utica Triggers Role Reversal, Oct 2013, p.20.
  6. 6. 3 2 All costs and impacts are presented in 2012 dollars. In addition, moving NGLs to market requires infrastructure to connect gas processing and fractionation facilities to manufacturing facilities. NGL pipelines are being developed to carry NGLs from the Appalachia region to established markets in the US Gulf Coast, Ontario, and Europe. Local opportunities exist as well in West Virginia, which has had a heritage of and appreciation for the chemicals industry since the 1930s. A strategic effort on the part of the state and local government to promote the physical and social infrastructure required for a renewed local petrochemicals industry would be a signal to investors that the state looks to once again become a serious player in the US chemicals manufacturing sector. Without it, these high-value raw materials would find alternate markets. Economic Impacts Associated with Petrochemical Industry Development Economic Impacts of an Ethylene Cracker and Associated Polyethylene Plants The study evaluates the economic impacts associated with the construction and operation of a world-scale ethane cracker and associated polyethylene plants in West Virginia.2 A generic integrated plant complex is examined with an assumed start-up date in 2018 and an assumed cost of $3.8 billion, with an additional $150 million in pipeline infrastructure, $20 million in on-site ethane storage, and $20 million in rail and truck terminals. The economic impacts are estimated using the IMPLAN® input- output modeling system (IMPLAN Group LLC, implan.com). Table 1-1 summarizes the construction impacts. Impact Type Employment (job-years) Employee Compensation (million) Output (million) Direct Effect 18,156 $893 $1,346 Indirect Effect 976 46 134 Induced Effect 5,087 178 563 Total Effect 24,118 $1,116 $2,043 Table 1-1 One-Time Economic Impacts Associated with Construction of New Ethane Cracker and Associated Polyethylene Plants in West Virginia ($2012) Note: The economic impacts from construction are spread over the construction period and are one-time impacts. For example, the direct employment of 18,156 full- and part-time jobs are spread over a four- year construction period and would be at multiple locations within the state. Table totals do not add due to rounding. The study also examines the economic impacts associated with the yearly operation of the plant complex. Table 1-2 reports the annual economic impacts from the plant complex at full operation. Impact Type Employment (job-years) Employee Compensation (million) Output (million) Direct Effect 325 $35 $585 Indirect Effect 1,229 62 196 Induced Effect 534 19 59 Total Effect 2,088 $116 $840 Table 1-2 Annual Economic Impacts Associated with Operation of an Ethane Cracker and Associated Polyethylene Plants in West Virginia at Full Operation ($2012) Note: Totals may not add due to rounding. The study found that the development of an ethane cracker and associated polyethylene plants in West Virginia would have a multibillion dollar positive impact on the state’s economy in both the short and long terms by employing an estimated 325 full-time staff annually and generating hundreds of millions of dollars in annual economic output over a 40+ year operating period. In addition, the project is expected to generate at least $36 million in state and local taxes, exclusive of property taxes and government incentives, when at full operation and for each year thereafter. Economic Impacts of Additional Downstream Product Manufacturing Plant Development The positive economic impact of building a world- scale ethane cracker and associated polyethylene plants also brings with it a significant opportunity to advance and expand the regional industrial base by attracting new polyethylene product manufacturers to the state. Ethylene is one of the primary building block chemicals in the chemicals industry, and its primary end-use product sector is for conversion into polyethylene (PE). From PE pellets, PE converters create an array of manufactured products across the spectrum of consumer products, as shown in figure 1-2. Figure 1-2 Types of Polyethylene Products Produced by Converters Source: Data from American Chemistry Council, Plastics Industry Producers Statistics (PIPS), 2012.
  7. 7. 4 Building a profitable PE industry can also contribute to building a successful product manufacturing industry. The major drivers of profitability in end-use polyethylene converter plants are: 1. The price of delivered polyethylene raw material 2. The cost of electricity 3. Proximity to product distribution and retail centers for finished goods 4. The availability of a skilled workforce The presence of an ethane cracker and polyethylene plants, local raw material advantage, competitive electricity rates, and a skilled workforce would place West Virginia in a position to attract downstream polyethylene converters. Beyond the tremendous economic potential, the study recognized and analyzed the value-added downstream opportunity that a polyethylene manufacturing complex presents to consumer products manufacturers using plastics. The report further studies the economic impact associated with an ethane cracker and polyethylene complex seeding the creation of downstream manufacturing in consumer and industrial products made from plastics. While it is challenging to estimate the pace and scope of downstream development, the study estimated two potential scenarios to gauge the range of potential economic impact associated with PE product manufacturers moving to West Virginia. Downstream investments have the potential to create upwards of over 900 jobs and $280 million in output annually. Attracting such polyethylene product manufacturers could be a tremendous opportunity for West Virginia and surrounding region to further capture the downstream value-added benefits of its NGL resources. Creating the conditions for manufacturers to thrive would drive significant economic impact in the years following the startup of an ethane cracker and polyethylene plants. Non-quantifiable Economic Impacts Associated with Construction and Operation of an Ethane Cracker and Associated Polyethylene Plants In an effort to be comprehensive, the study recognized that many important economic impacts are challenging to quantify, yet vitally important contributions to the local economy. The project analyzed in this study would also create the following non-quantifiable impacts: ƒƒ The presence of a cracker complex sends a signal to other chemical and manufacturing companies to make similar investments in ethane crackers or downstream plants using the petrochemicals produced at this complex. Out-of-state suppliers to the new plant may perceive expanded economic opportunities and may relocate operations within the state.3 ƒƒ The increased demand for ethane may necessitate considerable expansion in natural gas drilling plans, resulting in additional lease acquisition, permitting, drilling, and natural gas production. The resulting increases in natural gas supplies may be attractive to firms using a significant amount of natural gas in their production processes. This increased supply might also necessitate development of more midstream processing and pipeline extensions in the state. ƒƒ Expanded economic activity rooted in the sciences should reinforce the teaching of science, technology, engineering, and mathematics in public schools, community colleges, and colleges and universities. ƒƒ The additional economic activity will probably result in more charitable giving and volunteering with nonprofit institutions, thereby adding to the quality of life of the communities impacted by the plant and its employees. ƒƒ Consistent with other petrochemical plants within the state, considerable investment in maintaining a safe operating environment will result in employees being trained on fire-safety and suppression procedures. Some of the trained employees may also be members of volunteer fire and ambulance organizations. ƒƒ The resulting expansion of economic activity should generate more deposits in regional and state financial institutions, increasing the latter’s ability to provide loans and support to families and businesses. ƒƒ Consistent with bringing technologically advanced industry to the state, the demand for a highly skilled workforce will attract a population with advanced science and mathematics skill levels and drive educational advancement. ƒƒ Finally, the resulting chemical industry renaissance will provide an endorsement of the state’s economic viability to global markets. 3 Similar phenomena occurred when Toyota announced its engine (and now transmission assembly) plant in Buffalo, West Virginia. The Toyota Manufacturing facility has undertaken considerable expansion since 1996, and its success has attracted other automotive equipment manufacturers to the state, including NGK Spark Plugs, Diamond Electric, K.S. West Virginia, and Hino Motors.
  8. 8. 5 Additional Considerations Optimizing the Opportunity in West Virginia Promoting an Industry Cluster: The Ohio River Basin as a geographic center for interconnected businesses A geographic cluster of businesses can increase productivity, drive innovation, and stimulate new businesses. Collaborative links with regional universities, leveraging human and social capital, and incentives to magnet investors who, in turn, attract other business can facilitate the transition from an extractive economy to a manufacturing and innovation economy. In the chemicals industry, feedstock hubs are important. A feedstock hub usually requires close proximity to feedstock sources, pipeline infrastructure, storage capabilities, and access to a ready market for feedstock consumption. As such, focused regional investment in storage and pipelines is critical to establishing a feedstock hub because any one entity would be hard-pressed to bear the cost of this infrastructure alone. Hubs tend to grow incrementally over time, as they achieve the economies of scale needed for the industry to thrive; potentially, they can become a catalyst that creates a petrochemical industry business cluster. West Virginia and the greater Ohio River Basin, stretching from Pittsburgh to Kenova and beyond, have the advantage of being at the center of NGL-rich shale gas development, but they face the challenge of building a well-established storage capability and product pipeline network. Fortunately, the region already has the beginnings of a robust natural gas and ethane pipeline network as established players like MarkWest Energy, Blue Racer Midstream, Williams, and M3 Midstream have each grown their respective gas processing networks over the last ten years. Figure 1-3 shows a partial map of the Appalachian regional NGL infrastructure. What the region lacks is a unifying strategy for focusing these disparate private sector developments on establishing a high-value local market for NGL products in the form of a regional petrochemical manufacturing hub. Figure 1-3 Appalachia Regional NGL Infrastructure Map Source: BENTEK Energy. Map by Maria Majia, Energy Analyst. December 16, 2013.
  9. 9. 6 Developing the right workforce: Availability of skilled labor and educational programs West Virginia has a strong history of petrochemicals production in the Kanawha Valley and Charleston area, as well as in the Mid-Ohio Valley. The state also has a strong industrial base and with it, an existing labor pool capable of fielding many of the required skill sets needed for an expanding petrochemical sector. Innovative programs within West Virginia’s Community and Technical College System for the training of chemical plant operating personnel already exist and have the capacity to be expanded as the petrochemical and related industries come online. For example, the Associated Construction Trades assessed the Parkersburg and Wood County region to have over 34,000 total skilled workers available in the immediate vicinity, as shown in figure 1-4. Figure 1-4 Local Skilled Workforce Profile - Wood County Source: Associated Construction Trades, ACT Parkersburg Maps, 2013. While no one project would ever employ an entire region’s skilled labor force, the availability and diversity of a skilled labor pool are critical for the development of large scale capital projects. The labor pool of skilled trades required to build and operate petrochemical facilities — particularly for the thousands of craft workers, such as welders, pipe fitters, carpenters, electricians, iron workers, scaffold builders, and construction hands — will be crucial. Supporting the development of an ethane cracker and downstream industries will require a volume of workers and a myriad of skill sets that may not all be present in the Ohio River Basin. Thus, significant workforce training programs will also be needed to be effective. It will take a strong commitment from government, industry, unions, and the public to develop the workforce and attract the vendors needed to develop, build, and operate a petrochemical cluster. Enabling the growth of an educated workforce with the requisite skill sets needed to construct, operate, and maintain a new world-scale petrochemical industry will require collaboration with local high schools, colleges, and trade schools during the years leading up to construction and continuing on well after the complex is operating. Developing a robust market: Promoting incremental value in petrochemical production Producing ethylene through cracking produces co- products that are part of the conversion process. These co-products include: hydrogen, methane, propylene, butadiene, butylene, pyrolysis gas, benzene, toluene, C8 aromatics, and fuel oil. While the majority of the output stream of an ethane cracker is ethylene, significant co- products are produced. The sale of those co-products into the chemicals market is an important factor in business sustainability. In addition, many of these co-products are volatile materials that are expensive to transport, so selling them to users in the market region has tremendous value. The Appalachia chemicals industry needs to identify market opportunities for selling cracker co-products such as butadiene, pyrolysis gas, and other potentially high-value products. The ability to market those products to downstream customers and optimize economic value is a strategic priority. The Importance of transportation: Getting products to market The majority of polyethylene pellets are delivered to market using either railroad transportation (for domestic consumption) or waterborne vessels (for export). Furthermore, polyethylene is priced on a delivered basis, meaning that the polyethylene producer is responsible for paying to transport the finished goods to its customers. Hence, cost competitive logistics proves very important when selecting the site location for an ethane cracker and polyethylene complex. Generally, waterborne and rail transportation are the least expensive forms of bulk transportation. Furthermore, geographies with competitive rail transportation markets generally have more competitive freight rates. West Virginia has a mix of opportunities and challenges with respect to logistics. West Virginia may have a regional advantage because of its proximity to the eastern US markets, where a significant portion of US national demand for polyethylene products resides. Shorter domestic transportation logistics may give a petrochemical company developing a West Virginia ethane cracker and polyethylene complex advantaged delivery times in serving major polyethylene markets, provided the company has well-negotiated, cost competitive rail and truck contracts. That said, being inland with river access but no ocean access, a cracker in West Virginia would be challenged with a potential transportation
  10. 10. 7 cost disadvantage to serve export markets where ocean freight is often favored. In addition, West Virginia suffers from elevated railroad freight rates due to limited railroad infrastructure and a lack of railroad competition; 93% of all West Virginia rail stations are captive to one Class I railroad.4 Yet, given the opportunity that a local cracker and polyethylene complex represents, it would certainly be in the best interest of the state and the region for West Virginia to consider employing policy tools to mitigate high local rail transportation rates and unlock the latent potential of an industry serving regional markets. Investments in additional rail, port, and truck infrastructures would create greater competition in intermodal transportation and expand options to local industry for shipping locally produced products to other regions. Strategies for success: Progressive policy and selective economic development tools The state of West Virginia has a tremendous set of tools at its disposal to close the competitive gap that may exist as industry players consider building new petrochemical facilities. Targeted tax incentives, workforce training incentives, and infrastructure incentives can be deployed to address and mitigate the types of challenges that the state faces to make West Virginia a competitive center for petrochemicals, as is done for other core industries in the region. Applicable state programs that could be considered for such a project include, but are not limited to: ƒƒ Five for Twenty-five Program: Program to provide special salvage-value property tax valuation, which applies to a certified facility with a capital investment of over $2 billion. The special tax valuation for real and personal property lasts for a period of 25 years and was designed specifically to attract large oil, gas, and petrochemical facilities to the West Virginia economy. ƒƒ Five for Ten Program: Program to provide salvage- value property tax treatment on a certified addition to facilities with initial capital investment of at least $100 million. The certified capital addition must be at least $50 million. In the case of natural gas-related manufacturing, the addition must be at least $410 million to an existing facility with an original capital investment of at least $20 million. ƒƒ Manufacturing Investment Tax Credit: 5% of capital investment for new and existing businesses pro-rated over 10 years. Tax credit may offset up to 60% of state corporate tax liabilities. ƒƒ Manufacturing Property Tax Adjustment Credit: Non-refundable 100% state tax credit equal to the amount of local property tax paid on manufacturing inventory. ƒƒ Economic Opportunity Tax Credit: Investment tax credit for those who create new jobs. Tax credit may offset between 80% and 100% of state business tax liability directly attributable to new employment created. ƒƒ Strategic Research and Development Tax Credit: Credit that can offset up to 100% of corporate net income tax and business franchise tax, based on qualified expenditures for R&D projects with the goal of attracting high-value R&D jobs and programs to West Virginia. ƒƒ Governor’s Guaranteed Workforce Program: Flexible, customized training program under the West Virginia Development Office; offers assistance to eligible companies and businesses by providing funding that directly supports the transfer of knowledge and skills to new employees. Developing infrastructure and the necessary business environment to seize opportunities takes time and resources. Transforming West Virginia from a region focused on resource extraction to one focused on chemical manufacturing requires West Virginia to become a hub for petrochemicals with key assets like NGL storage, pipeline connectivity, and expanded transportation corridors. Working together, West Virginia’s government and workforce can partner with the business community to invest in the growth of an entire petrochemical industry in the mid-and upper-Ohio valleys. As this study shows, such development can yield billions of dollars in ongoing economic impact for West Virginia and its extended regional economy. However, this requires a long term commitment to expand the petrochemical industry and revive the manufacturing sector of West Virginia’s economy. As the petrochemical industry enters its next period of growth, there is tremendous promise for the United States and potentially for West Virginia. The time is right for West Virginia to re-invest in the petrochemical industry. 4 Rail Price Advisor. Volume 22, Number 8. August 2013, p.1.
  11. 11. The Development of Shale Gas & Energy Use and the Chemical Industry02 BOOK
  12. 12. 8 The Development of Shale Gas & Energy Use and the Chemical Industry The Development of Shale Gas One of the more interesting developments in the last five years has been the dynamic shift in natural gas markets. Between the mid-1960s and the mid-2000s, proved natural gas reserves in the United States fell by one-third, the result of restrictions on drilling and other supply constraints. Starting in the 1990s, government promoted the use of natural gas as a clean fuel, and with fixed supply and rising demand from electric utilities, a natural gas supply shortage occurred, causing prices to rise from an average of $1.92 per thousand cubic feet in the 1990s to $7.33 in 2005. The rising trend in prices was exacerbated by the effects of hurricanes Katrina and Rita in 2005, which sent prices over $12.00 per thousand cubic feet for several months due to damage to gas production facilities. Shale and other non-conventional gas were always present geologically in the United States. Figure 2-1 illustrates where shale gas resources are located in the United States. These geological formations have Figure 2-1 Shale Gas Resources Source: Energy Information Administration based on data from various published studies; updated May 9, 2011.
  13. 13. 9 been known for decades to contain significant amounts of natural gas, but it was not economically feasible to develop, given the technology available. However, uneconomic resources often become marketable assets as a result of technological innovation, and shale gas is a prime example. Over the last five years, several factors have combined to stimulate the development of shale gas resources. First was a new way of gathering natural gas from tight- rock deposits of organic shale through horizontal drilling combined with hydraulic fracturing. Horizontal drilling allows producers to drill vertically several thousand feet and then turn 90 degrees and drill horizontally, expanding the amount of shale exposed for extraction. With the ability to drill horizontally, multiple wells from one drilling pad (much likes spokes on a wheel) are possible, resulting in a dramatic expansion of shale available for extraction, which significantly boosts productivity. A typical well might drill 1½ miles beneath the surface and then laterally 2,000 – 9,000 feet. The second innovation entailed improvements to hydraulic fracturing (or fracking). This involves fracturing the low- permeability shale rock by using water pressure. Although these well stimulation techniques have been around for nearly 50 years, the technology has significantly improved. A water solution injected under high pressure cracks the shale formation. Small particles, usually sand, in the solution hold the cracks open, greatly increasing the amount of natural gas that can be extracted. Fracturing the rock using water pressure is often aided by chemistry (polymers, gelling agents, foaming agents, etc.). A typical well requires two – three million gallons of water and 1.5 million pounds of sand. About 99.5% of the mixture is sand and water.5 Figure 2-2 provides a simple illustration of these technologies. Another important technology is multi-seismology that allows a more accurate view of potential shale gas deposits. Figure 2-2 Geology of Shale Gas and Conventional Natural Gas Source: US Energy Information Administration and US Geological Survey 5 Report Note: While this water consumption is significant, it is important to put it in perspective. Nationwide, the EPA estimates that landscape irrigation consumes about nine billion gallons of water a day, which is 20 times the highest estimate for the amount of water used annually in fracking. See “Water for Fracking, In Context,” Forbes, July 7, 2013.
  14. 14. 10 With these innovations in natural gas drilling and production, the productivity and profitability of extracting natural gas from shale deposits became possible. Further, unlike traditional associated and non- associated gas deposits that are discrete in nature, shale gas often occurs in continuous formations. While shale gas production is complex and subject to steep production declines, shale gas supply is potentially less volatile because of the continuous nature of shale formations. Many industry observers suggest that the current state of shale gas operations is more closely analogous to manufacturing operations than traditional oil and gas exploration, development, and production. These new technical discoveries have vastly expanded estimates of natural gas resources and will offset expected declines in conventional associated-gas production. Estimates of technically recoverable shale gas were first assessed by the National Petroleum Council (NPC) at 38 trillion cubic feet (TCF) in 2003. More recently, the Potential Gas Committee (PGC) estimated US shale gas resources of 1,073 TCF at the end of 2012. The United States is now estimated to possess nearly 2,700 TCF of potential (or future) natural gas supply, 40% of which is shale gas that could not be extracted economically as recently as eight years ago. This translates into an additional supply of 47 years at current rates of consumption of about 23 TCF per year. Total US natural gas resources are estimated to be large enough to meet over 115 years of demand. Due to the emergence of new shale gas supplies, the US sharply reduced gas imports from Canada and liquefied natural gas (LNG) receipts over the past several years. Higher prices for natural gas in the last decade (especially after hurricanes Katrina and Rita) and the advances in horizontal drilling and hydraulic fracturing (i.e., chemistry in action) changed the dynamics for economic shale gas extraction. These technologies allowed extraction of shale gas at about $7.00 per thousand cubic feet, which was well below the historical trend. With new economic viability, natural gas producers have responded by drilling, setting off a “shale gas rush.” As learning curve effects took hold, the cost to extract shale gas (including return on capital) fell, making even more supply (and demand) available at lower cost. Moreover, natural gas liquids have become paramount in changing the economics of shale gas production. It is the sales of ethane and other liquids that have enabled producers to extract and sell natural gas at less than $3.50 per thousand cubic feet. Although the path was irregular, average daily consumption of natural gas rose from 60.3 billion cubic feet (BCF) per day in 2005 to 62.0 BCF per day in 2009. Moreover, since the mid-2000s, US-proved natural gas reserves have risen by one-third. In economists’ terms, the supply curve has shifted to the right, resulting in lower prices and greater availability. As a result, average natural gas prices fell from $7.33 per thousand cubic feet in 2005 to $3.65 per thousand cubic feet in 2009. In 2010 and 2011, a recovery of gas-consuming industries and prices occurred. Average daily consumption rose to 66.9 BCF and prices strengthened to $4.12 per thousand cubic feet. But the mild winter of 2011-12 resulted in a record level of stocks and pushed prices even lower to $2.79 per thousand cubic feet. Figure 2-3 illustrates how this new technology’s entrance into the market expanded supply and pushed prices lower. Before the development of shale gas, the US was a gas- importing nation. The US is now a gas-surplus nation and has become the leading global producer. Shale gas is thus a “game changer.” In the decades to come, unconventional gas could provide half of US natural gas needs, compared to only 8% in 2008. The US’s favorable position is illustrated in figure 2-4. As natural gas prices have fallen in the US in wake of the emerging shale gas revolution, prices in other major nations have risen. Figure 2-3 The Advent of Shale Gas Resulted in More, Less Costly Supply of US Natural Gas Figure 2-4 Trends in Natural Gas Prices across the World Source: EIA, Petrobras, IMF, World Bank, various national statistical agencies $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 $18.00 02 03 04 05 06 07 08 09 10 11 12 United States Belgium Germany Japan Brazil China India Sources: EIA, Petrobas, IMF, World Bank, various national statistical agencies $ per million BTUs
  15. 15. 11 By 2012, North America featured some of the lowest cost natural gas in the world. Figure 2-5 illustrates this. Prices in Russia and Iran have appreciated beyond that of the United States. Prices in Saudi Arabia are set at $0.75 per million BTUs by government decree. These prices were originally due for adjustment in 2012, but a decision on this has been delayed. Prices at this level are artificial and would actually be around $3.00 per million BTUs if a free market existed. The availability of low-priced natural gas improves US industry competitiveness. Lower natural gas prices mean lower input prices for major US manufacturing industries. Leading industries, including aluminum, chemicals, iron and steel, glass, and paper, are large consumers of natural gas and, thus, benefit from shale gas developments. Lower input costs have boosted capital investments and expanded output. These manufacturers add a great deal of value to the natural gas they consume. Manufacturers in these industries compete globally, and small cost advantages can be all it takes to tip the balance for some companies. In their recent study – U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much? – the Boston Consulting Group uncovered a “tipping point” in cost- risk among seven key industries (computers and electronics, appliances and electrical equipment, machinery, furniture, fabricated metal products, plastic and rubber products, and transportation goods). They found that as these industries “re-shore” to the US, the US economy will gain $80 billion – $120 billion in added annual output and two million to three million jobs. With a growing and increasingly affluent population and economic growth, demand for electricity will rise in the US. In addition, clean air regulations are promoting natural gas use in electricity generation. This will increase natural gas demand, and economic theory suggests that barring any increase in supply, market prices will rise. There is a risk that higher gas prices could partially offset some of the positive gains achieved during the past five years. Further technological developments in drilling and fracturing, however, could generate additional low-cost natural gas supplies. The use of hydraulic fracturing in conjunction with horizontal drilling has opened up resources in low permeability formations that would not be commercially viable without this technology and has led to many positive gains in US industry and the economy. However, there are some policy risks as there is public concern regarding hydraulic fracturing due to the large volumes Figure 2-5 Average Natural Gas Prices by Nation6 6 Note: Prices generally reflect domestic wellhead/hub process or imported prices via pipeline. Some nations (e.g., Japan and Korea) import LNG; thus, the higher prices. Other nations import LNG if it is a minor share of demand, but the graphic does not generally reflect these prices.
  16. 16. 12 of water and potential contamination of underground aquifers used for drinking water.7 The concern exists even though fracturing occurs well below drinking water resources. Limiting the use of hydraulic fracturing would impact natural gas production from low permeability reservoirs. Ill-conceived policies that restrict supply or artificially boost demand are also risks. Local bans or moratoria could present barriers to private sector investment. A final issue is the need for additional gathering, transport, and processing infrastructure. The Marcellus and some other shale gas deposits are located outside the traditional natural gas supply infrastructure to access the shale gas. The United States must ensure that our regulatory policies allow us to capitalize on shale gas as a vital energy source and manufacturing feedstock, while protecting our water supplies and environment. ACC supports state-level oversight of hydraulic fracturing, as state governments have the knowledge and experience to oversee hydraulic fracturing in their jurisdictions. Furthermore, ACC is committed to transparency regarding the disclosure of the chemical ingredients of hydraulic fracturing solutions, subject to the protection of proprietary information. Energy Use and the Chemical Industry Excluding pharmaceuticals, firms in the $587 billion chemical industry produce a variety of chemistry products including chlorine, caustic soda, soda ash and other inorganic chemicals, bulk petrochemicals and organic chemical intermediates, industrial gases, carbon black, colorants, pine chemicals, other basic chemicals, adhesives and sealants, coatings, other specialty chemicals and additives, plastic compounding services, fertilizers, crop protection products, soaps and detergents, and other consumer chemistry products. Although pharmaceuticals are classified by the government as part of chemicals, for the purposes of this analysis, pharmaceuticals were excluded because of the different industry dynamics. The chemical industry transforms natural raw materials from earth, water, and air into valuable products that enable safer and healthier lifestyles. Chemistry unlocks nature’s potential to improve the quality of life for a growing and prospering world population by creating materials used in a multitude of consumer, industrial, and construction applications. The transformation of simple compounds into valuable and useful materials requires large amounts of energy. The business of chemistry is energy-intensive. This is especially the case for basic chemicals, as well as certain specialty chemical segments (e.g., industrial gases). The largest user of energy is the petrochemical and downstream chemical derivatives business. Inorganic chemicals and agricultural chemicals also are energy- intensive. Unique among manufacturers, the business of chemistry relies upon energy inputs, not only as fuel and power for its operations, but also as raw materials in the manufacture of many of its products. For example, oil and natural gas are raw materials (termed “feedstocks”) for the manufacture of organic chemicals. Petroleum and natural gas contain hydrocarbon molecules that are split apart during processing and then recombined into useful chemistry products. Feedstock use is concentrated in bulk petrochemicals and fertilizers. Petrochemical Feedstocks There are several methods of separating or “cracking” the large hydrocarbon chains found in fossil fuels (natural gas and petroleum). Natural gas is processed to produce methane and natural gas liquids (NGLs) that are contained in the natural gas. These natural gas liquids include ethane, propane, and butane, and are produced mostly via natural gas processing. That is, stripping the NGLs out of the natural gas (which is mostly methane) that is shipped to consumers via pipelines. This largely occurs in the Gulf Coast region and is the major reason the US petrochemicals industry developed in that region. Ethane is a saturated C2 light hydrocarbon, a colorless and odorless gas. It is the primary raw material used as a feedstock in the production of ethylene and competes with other steam cracker feedstocks. Propane is also used as a feedstock, but it is also used primarily as a fuel. Butane is another NGL feedstock8 . The revolution in shale gas has pushed ethane prices down from a peak of 93 cents per gallon in 2008 to an average of 41 cents per gallon during 2012. That is a 56% decline. In recent months the price fell to as low as 23 cents per gallon. Petroleum is refined to produce a variety of petroleum products, including naphtha and gas oil, which are the primary heavy liquid feedstocks. Naphtha is a generic term for hydrocarbon mixtures that distill at a boiling range between 70°C and 190°C. The major components include normal and isoparaffins, naphthenes and other aromatics. Light or paraffinic naphtha is the preferred feedstock for steam cracking to produce ethylene, while heavier grades are preferred for gasoline manufacture. Gas oil is another distillate of petroleum. It is an important feedstock for production of middle distillate fuels — kerosene, jet fuel, 7 Report Note: Numerous studies are underway to study the environmental impact risk related to hydraulic fracturing with varied results. At the request of the U.S. Congress, the U.S. EPA is conducting a study to better understand any potential impacts of hydraulic fracturing on drinking water resources that is expected to be released in 2014. http://www2.epa.gov/hfstudy 8 Report Note: NGL feedstock includes ethane (C2), propane (C3), butane (C4), natural gasoline (C5), and condensate (C6+), all of which can be used as feedstock for manufacturing petrochemicals.
  17. 17. 13 diesel fuel, and heating oil — usually after desulfurization. Some gas oil is used as olefin feedstock. Naphtha is the preferred feedstock in Western Europe, Japan, and China. The price of naphtha is highly correlated with the price of Brent oil. As a result, naphtha prices in Western Europe rose from an average of $793 per metric ton in 2008 to $942 per metric ton in 20[12]. That is a 19% increase. Petrochemical Products and Their Derivatives Naphtha, gas oil, ethane, propane, and butane are processed in large vessels or “crackers,” which are heated and pressurized to crack the hydrocarbon chains into smaller ones. These smaller hydrocarbons are the gaseous petrochemical feedstocks used to make the products of chemistry. In the US petrochemical industry, the organic chemicals with the largest production volumes are methanol, ethylene, propylene, butadiene, benzene, toluene and xylenes. Ethylene, propylene, and butadiene are collectively known as olefins, which belong to a class of unsaturated aliphatic hydrocarbons. Olefins contain one or more double bonds, which make them chemically reactive. Benzene, toluene, and xylenes are commonly referred to as aromatics, which are unsaturated cyclic hydrocarbons containing one or more rings. The figures in the Appendix A illustrate supply chains of several building block chemicals from feedstock through intermediates and final end-use products. Ethane and propane derived from natural gas liquids are the primary feedstocks used in the United States to produce ethylene, a building block chemical used in thousands of products, such as adhesives, tires, plastics, and more. While propane has additional non-feedstock uses, the primary use for ethane is to produce petrochemicals, in particular, ethylene. Ethane is difficult to transport, so it is unlikely that the majority of excess ethane supply would be exported out of the United States. As a result, it is also reasonable to assume that the additional ethane supply will be consumed domestically by the petrochemical sector to produce ethylene. In turn, the additional ethylene and other materials produced from the ethylene are expected to be consumed downstream, for example, by plastic resin producers. Increased ethane production is already occurring as gas processors build the infrastructure to process and distribute production from shale gas formations. Chemical producers are starting to take advantage of these new ethane supplies with crackers running at 95% of capacity, and several large chemical companies have announced plans to build additional capacity. And because the price of ethane is low relative to oil-based feedstocks used in other parts of the world, US-based chemical manufacturers are contributing to strong exports of petrochemical derivatives and plastics. Another key petrochemical feedstock — methane — is directly converted from the methane in natural gas and does not undergo the cracking process. Methane is directly converted into methanol. Methanol is generally referred to as a primary petrochemical and is the chemical starting point for plastics, pharmaceuticals, electronic materials, and thousands of other products that improve the lives of a growing population. Methane is also directly converted into ammonia. Ammonia is a starting point for a variety of chemical intermediates used in manufacturing synthetic fibers used in apparel, home furnishing, and other applications. Ammonia is also the starting point for a variety of nitrogenous fertilizers used to enhance crop growth and feed a growing population. The Shale Advantage Energy represents a significant share of manufacturing costs for the US business of chemistry. For some energy- intensive products, energy for both fuel and power needs and feedstocks can represent 85% of total production costs. Because energy is a vital component of the industry’s cost structure, higher energy prices can have a substantial impact on the business of chemistry. Figure 2-6 illustrates the energy intensity of some of these products. Figure 2-6 Fuel, Power, & Feedstock Costs as a Percentage of Total Costs for Selected Chemical Products 20 Chlorine/Caustic Soda (Sodium Hydroxide) Sodium Carbonate (Soda Ash) Acrylonitrile Adipic Acid Aniline Benzene Butadiene (1,3-1) Cumene Ethylbenzene Ethylene Ethylene Dichloride (EDC) Ethylene Glycol Ethylene Oxide Methanol Phenol Propylene Styrene Terephthalic Acid Vinyl Acetate Polyethylene (LDPE) Polyethylene (LLDPE) Polyethylene (HDPE) Polypropylene (PP) Polystyrene (PS) Polyvinyl Chloride (PVC) Anhydrous Ammonia Urea Energy Costs 40 60 80 100 Other Costs
  18. 18. 14 The falling cost of ethane and other light feedstocks (propane, butane, etc.) in the United States since 2008 contrasts with rising costs for naphtha and other heavy liquid feedstocks in Western Europe. Indeed, prices for North American NGL feedstocks have fallen in half since 2008 [as illustrated in figure 2-7]. This has advantaged US production of ethylene, the main product for which these two feedstocks are used. As a result, the production cost to manufacture ethylene in the United States is 35% of that in Western Europe. As figure 2-8 illustrates the United States is now one of the low cost producing nations for ethylene, the bellwether petrochemical. Because of US shale gas resources, this position will likely be maintained, placing low production costs as a strong incentive to invest in the US chemical industry. Moreover, falling energy costs and renewed competitiveness are not limited to ethylene but encompass a broad variety of downstream derivative products (plastic resins, synthetic rubber, etc.) and other chemical products. For example, chlorine (and co-product caustic soda) production uses large amounts of electricity in what is an electrolytic process and with low natural gas prices favorably affecting electricity costs, chlor-alkali production in the United States is favored. These cost advantages have improved margins, which provide the funding for capital investment. Figure 2-7 US Ethane Prices vs. Western European Naphtha Prices Western European Naphtha ($/metric ton) US Ethane ($/gallon) $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 $1.00 $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 Figure 2-8 Change in the Global Cost Curve for Ethylene and Renewed US Competitiveness Global Supply (Cumulative in billions of pounds) ProductionCosts($/pound) $0.00 0 73 136 172 247 307 Middle East United States China China 2005 2012 Western Europe Western Europe Other Northeast Asia Other Northeast Asia United States $0.20 $0.40 $0.60 $0.80 $1.00 $1.20
  19. 19. 15 The shift toward ethane cracking in the United States has reduced supplies of propylene and butadiene, two important petrochemical products. As seen in figure 2-9, while ethane cracking has higher ethylene yields, cracking ethane yields comparatively less propylene, butadiene, and other chemical products. Because of lower propane and butane costs (from shale gas) and reduced supply of these chemicals from the shift to ethane steam cracking, a number of “on-purpose”5 propylene and butadiene projects have also been announced. Abundant and low cost natural gas plays a key role for a low cost feedstock and production cost position. This is engendering a massive expansion of the US chemical industry. Abundant supplies of ethane are destined for ethylene production while new supplies of propane will be used to produce on-purpose propylene, among other uses. Figure 2-9 Relative Olefin Yields by Feedstock 100% Other Aromatics C-4 Propylene Ethylene Ethane Naphthas LPG Mix (80/20) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
  20. 20. Understanding the Ethylene Value Chain 03 BOOK
  21. 21. 16 Understanding the Ethylene Value Chain Ethylene is a basic organic chemical; it forms the building block for a wide array of industrial chemical products ranging from polymer plastics, fibers, and other chemicals that are ultimately used in applications such as packaging, transportation, and construction materials. As one of the highest volume petrochemical products in the world, ethylene is most often converted into three types of polyethylene: high density polyethylene (HDPE), low density polyethylene (LDPE) and linear low density polyethylene (LLDPE). Each of these plastics has different properties and can be converted into an array of consumer products, including food packaging, plastic film and sheet, trash bags, housewares, crates, and food containers. Ethylene is also a building block for polyvinyl chloride (PVC) or vinyl. Building materials such as pipe, home siding, window frames, and flooring are manufactured using PVC. Finally, the manufacture of antifreeze, polyester fibers for clothing, and plastic bottles is also rooted in ethylene. Ethylene Supply Manufacturing ethylene involves converting crude oil and/or natural gas components as feedstock materials into ethylene using a high temperature cracking process. Naphtha, gas oil, ethane, propane, and butane are all used as feedstock for producing ethylene. Typically, the choice of feedstock depends on its availability in a geographic region, and that choice drives the marginal cost of ethylene production. The vast majority of ethylene is produced from naphtha/ gas oil feedstock, though the volume produced from ethane, propane, and butane has continued to rise since 1990, and many industry forecasts expect that trend to continue to rise over the next ten years. Asia, North America, and the Middle East are the largest supply regions for ethylene in the world. Because natural gas liquids (ethane, propane, and butane) are abundant and low-cost in the Middle East and North America, these regions have a manufacturing cost advantage when petroleum prices are higher than natural gas prices. Also, a run-up in crude oil prices in recent years has given the Middle East and North America a cost advantage over Asia and Western Europe, which rely on naphtha cracking to manufacture ethane. Furthermore, the advent of shale gas and the emergence of significant new low-cost sources of natural gas and natural gas liquids (NGLs) in North America, second only to the Middle East, have exacerbated the trend. In the last decade, capacity expansions have been centered in Asia, where ethylene demand growth is strongest, and in the Middle East where feedstock is most competitive. However, North America has recently re-emerged as a competitive region and is currently the second most cost-advantaged region for new capacity expansions. The recent advent of shale gas and the emergence of significant new low- cost sources of NGLs in North America have turned the focus to this region for new capacity expansions. Also, North America is set to see significant capacity expansions beginning in 2016 and beyond. According to Wood Mackenzie, there are over 10 million tons of new ethylene capacity investments poised to come online in the United States by 2018 (see table 3-1). Table 3-1 New Planned Investments in Ethylene in North America Source: Wood Mackenzie, “Chemical Markets Forum” Presentation, Houston, TX. May 2, 2013. Year 2013 2019+ 2014 2015 2016 Operator(s) BASF/Total, Eastman,Equistar, Ineos, Westlake, Williams Aither, Appalacian Resins, Axiall, Braskem, Indorama, Sabic, Shell Expansions/ Restarts Publicly Announced New Cracker Interest Expansions/ Restarts Expansions/ Restarts Equistar, Westlake Dow, Equistar, Westlake Braskem Idesa Nanchital 817 445 810 1000 1070 1790 2200 1800 Output (thousand tons) Output (million lbs.) Location/ Comment 2017 CP Chem Cedar Bayou 1500 3310 2017 Dow Freeport 1500 3310 2017 ExxonMobil Baytown 1500 3310 2017 Formosa Point Comfort 1040 2290 2017 Sasol Lake Charles 1500 3310 2018 Occidental Ingleside 544 tbd tbd 1200
  22. 22. 17 Ethylene Demand The worldwide demand for ethylene is driven primarily by the rate of global GDP growth and demand for polyethylene, its primary end use product. HDPE, LDPE, and LLDPE production remain the largest drivers of ethylene demand, with the largest growth coming from LDPE and LLDPE, especially in emerging markets. Ethylene-derivative product demand is seeing its largest growth in Asia where emerging economies are growing and consumers are beginning to have more disposable income. Another growing ethylene demand region is the Middle East, where polyethylene derivative plants are being built alongside ethylene manufacturing to drive manufacturing for export. Conversely, developed economies in Europe are seeing stagnant growth rates in the consumption of plastics and other ethylene derivatives. Overall, ethylene demand continues to grow worldwide as product applications for polyethylene in product packaging, plastic films, blow molding, and injection molding for consumer products continue to expand as the world economy becomes more consumer based. Ethylene Conversion to Downstream Products Ethylene is one of the primary building block organic chemicals in the chemicals industry. Its primary end-use product sector is for conversion into polyethylene (PE). However, there is an array of end-use products that are derived from ethylene. Figure 3-1 illustrates the variety of products that stem from the downstream conversion of ethylene and its derivatives into end-use products. Figure 3-1 Simplified Ethylene End-Use Flow Chart Source: American Chemistry Council. Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing (March 2011), p.5. Miscellaneous Chemicals Miscellaneous Miscellaneous Ethylene Glycol Vinyl Chloride Vinyl Acetate Ethane Ethylene Linear Alcohols Detergent StyreneEthylbenzene Instrument Lenses Housewares Carpet Backing, Paper Styrene Butadiene Latex Tires, Footwear, Sealants Pantyhose, Clothing, Carpets Food Packaging, Film, Trash Bags, Diapers, Toys, Housewares Siding, Wndow Frames, Swimming Pool Liners, Pipes Models, Cups Automotive Antifreeze High Density Polyethylene (HDPE) Ethylene Dichloride Ethylene Oxide Housewares, Crates, Drums, Bottles, Food Containers Low Density Polyethylene (LDPE) and Linear Low Density Polyethylene (LLDPE) Polyester Resin Bottles PVC Fibers Styrene Butadiene Rubber Styrene Acrylonitrile Resins Polystyrene Resins Adhesives, Coatings, Textile/ Paper Finishing, Flooring
  23. 23. 18 The focus of this report is on ethylene and its application in the polyethylene industry, so the following primarily discusses these end-use markets. Downstream conversion of polyethylene into products that people use every day is where the ethylene value- chain touches the consumer. As detailed in figure 3-2, products ranging from food and product packaging, trash bags, building and construction materials, home furnishings, to industrial machinery all use polyethylene as a major raw material. These businesses rely on competitively priced polyethylene to thrive. Many of these downstream PE conversion industries follow consumer buying patterns of the general economy, growing during periods of economic expansion and contracting during periods of economic slowdown. Yet, per-capita use of polyethylene products is rising around the world, particularly in the developing world. Demand growth will continue in the Asian region, where high GDP growth drives increasing consumption by people with increasing disposable income. Furthermore, as polyethylene capacity around the world continues to grow in the Middle East and Asia, the economic competitiveness of North American feedstock and the more than 10 million tons of new North American capacity on the horizon will drive continued and expanded exports from North America to other regions. Worldwide, significant exports will come from the Middle East and North America, with net trade flowing toward the large consuming markets in Asia, Latin America, Europe, and Africa. Figure 3-2 Major Polyethylene End Uses Source: Data from American Chemistry Council, Plastics Industry Producers Statistics (PIPS), 2012. U.S. Polyethylene Volumes 2012 All volumes are in million of tons Total Volumes, by PE Resin Type 6,111 2012 1,090 2,231 2,790 LDPE LLDPE HDPE Selected Major PE End Users 1,121 721 457 190 136 63 50 20 Packaging Film Non-Packaging Film Injection Molding Liquid Food Bottles Pails Pipe and Conduit Caps and Closures Tubs and Containers
  24. 24. Oil and Gas Production and Petrochemicals in West Virginia04 BOOK
  25. 25. 19 Oil and Gas Production and Petrochemicals in West Virginia History of the Oil and Gas Industry in West Virginia Natural gas has been one of West Virginia’s essential natural resources since the state’s founding. Early settlers first discovered natural gas in “burning springs” on the Kanawha River just north of Charleston. The natural gas industry was developed many years after this discovery as an outgrowth of the state’s salt industry. While drilling for salt, developers would frequently hit oil or natural gas. In 1841, William Tompkins was the first to use natural gas found while drilling for salt as a fuel in the salt manufacturing process. Once the value and usefulness of natural gas were realized, drillers began to drill deeper into the earth and use the natural gas in West Virginia. By the 1860s, the natural gas industry had been developed, and towns using natural gas to produce home and street lighting sprung up near drilling operations in the state. From 1906 to 1917, West Virginia was the leader in natural gas exploration and development in the United States. Since then, West Virginia has continued to grow its natural gas industry and, combined with the state’s strong position as a coal producer, is ranked third in the US for total energy production and tenth for total natural gas marketed production.9 History of the Chemical Industry in West Virginia The chemical industry has a long history in West Virginia.10 Native Americans used the salt deposits found along the banks of the Little Kanawha River, giving rise to trade with settlers in the latter part of the 1770s. These rich deposits led Elisha Brooks to construct a salt furnace in 1797. With the relative abundance of other natural resources (natural gas, coal, oil, limestone, et al.), the region saw the development of bromide and potassium salt production after the Civil War. In 1898, ferrometal alloys were produced at the Wilson Aluminum plant at Alloy using river-run electricity produced at the Kanawha Falls. In 1901, the company purchasing this plant was known as Electromet and produced more than 50% of the ferroalloys used in the world. In 1917, the merger of The Union Carbide Corporation, Electromet, Linde Products, Prest-o-Lite and National Carbon Co. resulted in the Union Carbide and Carbon Corporation. Union Carbide played a key role in the development of the chemical industry.11 With the advent of World War I, the United States needed to substantially increase its production of chemicals for the war effort. Major developments and investments by the federal government in the Kanawha Valley included: ƒƒ Explosives plant ‟C” at Lock Seven and Sattes (now known as Nitro) on the Kanawha River ƒƒ Naval ordnance plant at South Charleston ƒƒ Mustard gas plant at Belle 9 US Energy Information Administration. State Profile and Energy Estimates: West Virginia; 2011 data. 10 This section relies extensively on Nathan Cantrell, “West Virginia’s Chemical Industry,” West Virginia Historical Society, Volume XVIII, No. 2, April 2004 and the article by Charles J. Denham, “Chemical Industry,” in the West Virginia Encyclopedia, http://www.wvencyclopedia.org 11 Detailed historical timeline for Union Carbide, http://www.unioncarbide.com/history
  26. 26. 20 E.I. Du Pont De Nemours & Co., Inc. (hereafter DuPont) helped develop the explosives plant, but the federal government completed the actual construction of the plant and surrounding town. Nathan Cantrell (“West Virginia’s Chemical Industry”) notes that the Warner- Klipstein Chemical Company and Rollins Chemical Company were among the first formal chemical companies established in the Kanawha Valley at the beginning of World War I. Warner-Klipstein produced chlorine, caustic, carbon disulfide, and carbon tetrachloride, ultimately becoming the largest chlorine producer in the world in 1930. With the ending of the war, however, the Rollins plant was never able to begin production. During the 1920s, the industrial infrastructure established through the war effort by the federal investment led to the formation of plants and companies primarily centered around Nitro, Belle, and South Charleston. In 1920, the Belle Alkali Company purchased the federal investments in the mustard gas plant and began producing chlorine, hydrogen, and caustic soda. In 1926, DuPont began construction of a plant in Belle to make ammonia from coal. In 1927, this plant began making synthetic wood alcohol. By the 1930s, the DuPont Belle Works started producing the first synthetic urea for fertilizers and plastic polymers, using coal and other resources available in the Kanawha Valley. South Charleston also saw considerable chemical industry growth between the wars. The Warner-Klipstein Company was reorganized as Westvaco Chlorine Products Corp. and became the largest chlorine manufacturer in the world by the end of the 1920s. Meanwhile, Union Carbide initiated petrochemical production at the former Clendenin Gasoline Company facility in 1920, with the subsequent production of propane or Pyrofax in 1924. By 1925, Union Carbide was producing ethylene glycol, subsequently named Prestone, for use as antifreeze. In 1926, Union Carbide established a research and development laboratory in the valley. According to Cantrell,12 the advent of World War II led to the search for a replacement for rubber, with the result being further expansion of the chemical industry. The production of synthetic rubber required both butadiene (produced from butane extracted from natural gas) and styrene, both of which were being produced in the valley. Union Carbide and U.S. Rubber Company operated a federal synthetic rubber plant at Institute, WV. After purchasing the plant from the federal government in 1947, Union Carbide established the Technical Center at South Charleston. The 1950s mark the peak of the chemical industry in the valley, with the presence of chemical giants like Union Carbide, DuPont, American Vicose, and others. In the 1950s, the American Vicose Plant in Nitro was the largest stable fiber plant in the world. The plant was subsequently sold to FMC in 1963; FMC operated it until 1976, when it sold the plant to Avtex. The plant was subsequently closed in 1980 due to the decline of the US textile industry. During the 1950s, the valley was home to as many as six ethylene crackers, processing the NGLs from West Virginia and other regional suppliers into butadiene and other downstream products.13 During the 50s, 60s, and 70s, Union Carbide expanded the Tech Center, which became the company’s largest center for engineering, research, and development with R&D laboratories, chemical pilot plants, and 1,800 employees, of whom over 200 had PhDs, located on 651 acres. In 1999 Union Carbide and The Dow Chemical Company announced an $11.6 billion transaction under which Union Carbide became a wholly owned subsidiary of Dow. The transaction was finalized on February 6, 2001, after which Dow downsized Carbide’s facilities and employees. The West Virginia Higher Education Policy Commission accepted the donation of the Center facilities from Dow and now manages the bulk of the Center as the West Virginia Regional Technology Park.14 But not all of the chemical industry development occurred in the Kanawha Valley. In the period after World War II, plants were built along the Ohio River, stretching from the Northern Panhandle to Huntington. Among the notable plants and original developers were: ƒƒ American Cyanamid plant near Willow Island to produce pigments and dyes ƒƒ Monsanto and Bayer joint venture (Mobay) polyurethane foam plant in New Martinsville ƒƒ GE Plastics and DuPont plastics plants in Wood County ƒƒ Union Carbide silicones plant near Sistersville ƒƒ Goodyear rubber chemicals plant near Apple Grove From a high of 26,893 employees in 1970, the chemical industry had declined to 9,467 by 2010.15 DuPont’s Washington Works plant is their second-largest manufacturing facility in the world with an employee base of over 1,800 people. The remaining parts of the state’s chemical industry continue to downsize, merge, or close as a result of technological innovations, changing market conditions, and foreign competition; the downsizing has led to significantly lower employment in the industry. 12 P .5. 13 Casey Junkins, “Four Companies Consider Ethane Cracker,” The Intelligencer/Wheeling News-Register, May 5, 2011. 14 www.wvtechpark.com 15 Bureau of Economic Analysis, US Department of Commerce.
  27. 27. 21 Creation of the Chemical Alliance Zone In 1996, the Business and Industrial Development Corporation released The Chemical Attraction, a study documenting the chemical industry’s economic impact on the Kanawha Valley (the Charleston Metropolitan Statistical Area [MSA]).16 From nearly 12,500 employees in 1980, the chemical industry in the Kanawha Valley had declined to 5,900 employees in 27 facilities in 1995. Even with this decline, the average wages paid to chemical workers was well above the regional average. During 1995, the wages paid by the chemical industry were nearly 11% of total wages paid by all employers even though the share of total employment was only 4.9%. This study also calculated the economic impact of the chemical industry, finding that the industry accounted for nearly three additional jobs in other economic sectors. A subsequent report laid out recommendations for an economic development strategy to grow the chemical industry in the Kanawha Valley.17 On December 7, 1999, Governor Cecil H. Underwood signed an executive order creating a Chemical Alliance Zone (CAZ) in Cabell, Kanawha, Putnam, and Wayne Counties. The nonprofit CAZ comprises a collaborative of citizens, labor leaders, educators, government officials, chemical executives, and business leaders focused on maintaining and expanding the chemistry industry in West Virginia.18 Using a synergistic approach, the CAZ promotes the region to chemical companies, to businesses that use chemical products, and to those that produce related consumer end goods. Specific programs include participation in economic development efforts, trade missions and trade shows, education, and related areas. CAZ is housed at the West Virginia Regional Technology Park (WVRTP) in South Charleston. Previously housing Union Carbide Corporation’s Research Center, the WVRTP, is the state’s newest research, technology, and education campus. CAZ supports the establishment of chemistry-based companies in the incubator space located at WVRTP, and its facilities are open to these innovative companies. The Chemical Alliance Zone can play an important role in the expansion and deepening of the chemicals industry in West Virginia and the larger Appalachian region by helping to build links between existing chemical companies, innovative new R&D in the region, and companies looking to build new facilities locally. 16 Mark A. Thompson and David Greenstreet (1996). The Chemical Attraction, Marshall University Center for Business and Economic Research and West Virginia University Bureau of Business Research.. The report was commissioned by the Business and Industrial Development Corporation, Charleston, West Virginia 17 David Greenstreet (June 1998). Economic Prospects of the Central West Virginia Chemical Industry with Recommendation Regarding a Potential Chemical Alliance Zone, West Virginia University Bureau of Business and Economic Research. 18 www.cazwv.com
  28. 28. Shale Resources in West Virginia and Appalachia Growth and Opportunity 05 BOOK
  29. 29. 22 Shale Resources in West Virginia and Appalachia: Growth and Opportunity The Marcellus Shale geological formation underlies an area of approximately 95,000 square miles from southern New York across Pennsylvania and into western Maryland, West Virginia, and eastern Ohio. The Utica Shale geological formation sits beneath central and eastern Ohio and parts of Pennsylvania (see figure 5-1). The Marcellus Shale formation is wedge-shaped, as it is thicker in the east and thins to the west, at an average thickness of 200 feet to 50 feet. The thicker sections of the Marcellus Shale are composed of sandstone, siltstone, and shale, while the thinner sections consist of finer grained, organic, rich black shale interblended with organic lean gray shale. Since 2002, drilling and development operations in the Marcellus Shale play have become an important component of the natural gas industry in West Virginia and Pennsylvania.19 The Marcellus Shale play is the top gas producing region in the country, currently producing 10.8 billion cubic feet per day (Bcf/d) and projected to grow to 16.6 Bcf/d by year-end 2023.20 The Marcellus Shale has a wet gas region containing high natural gas liquids (NGL) content in southwestern Pennsylvania and northern West Virginia and a dry gas region in northeastern Pennsylvania that has produced many prolific natural gas wells in recent years. The Utica Figure 5-1 Map of Marcellus and Utica Shale Formations Source: Projecting the Economic Impact of Marcellus Shale Gas Development in West Virginia: A Preliminary Analysis Using Publicly Available Data, National Energy Technology Laboratory (NETL), March 2010, p.6; Assessment of Undiscovered Oil and Gas Resources of the Ordovician Utica Shale of the Appalachian Basin Province, US Geological Survey, 2012, p.1. 19 A “play” is an area where hydrocarbon accumulations or prospects of a given type (natural gas, oil) occur. 20 BENTEK Energy (Oct. 2013). Son of a Beast: Utica Triggers Role Reversal, p.20.
  30. 30. 23 Shale formation is an emerging shale play in eastern Ohio and western Pennsylvania. With production in its early stages of development, the Utica play is still being characterized. However, early results indicate the presence of a dry gas region, a wet gas region, and a light-oil rich region. Production of hydrocarbons in the Utica region is expected to rise tenfold from current levels and presents a significant economic development opportunity for Ohio, Pennsylvania, and the surrounding region. Development of the Marcellus Shale has led to a significant amount of job creation in West Virginia’s natural gas industry and has raised the wage level for the industry.21 Drilling operations in the shale play have increased the amount of state tax collected from the industry while also raising new policy questions focused on how to best capture the full value of development beyond simply resource extraction. Continued investment in downstream natural gas processing and NGL fractionation facilities has spurred follow-on investments in pipeline infrastructure and creates the opportunity for continued investment in value-capturing manufacturing plants that use the raw materials from gas processing and NGL fractionation. Thus, given its proximity to critical feedstock, West Virginia has an opportunity to re-emerge as a center of chemical manufacturing. Significant New Investments in the Region to Move Natural Gas and NGLs to Market In response to the growth in both reserves and production, significant investments have been announced in the Marcellus and Utica shale plays to process and deliver dry gas and, increasingly, NGL to markets. While West Virginia has had existing gas processing and fractionation capacity, the growth of the Marcellus and Utica Shale plays have dramatically increased regional gas production and, consequently, investments in gas processing and fractionation. Bentek Energy forecasts that gross natural gas production in the Appalachian Basin, which includes both shale plays and extends from New York to Tennessee, is expected to increase from an anticipated 10.9 Bcf/d in 2013 to 19.4 Bcf/d in 2023, an 8.4 Bcf/d increase. This growth is largely being driven by the liquids-rich plays in the Marcellus/Utica region. Gas producers anticipate that adequate processing capacity will be built and available to handle this increase. In fact, approximately 5 Bcf/d of incremental processing capacity is slated to come online by the end of 2016 with 1.77 Bcf/d of newly installed capacity already available as of November 2013, for a total regional capacity expected to exceed 9 Bcf/d.22 Table 5-1 lists announced processing projects; table 5-2 lists announced fractionation projects; and table 5-3 lists some of the existing NGL pipeline and pipeline projects as of November 2013. Farther downstream, major fractionation capacity additions to process the gas from the Marcellus and Utica shale plays have also been announced. Table 5-2 provides a list of these announcements along with their projected startup dates. Finally, additions to the existing pipeline networks have been announced and are listed, with expected capacities and lengths where available, in table 5-3. These NGL pipelines represent critical infrastructure for bringing high-value ethane, propane, butane, and pentane to market. To date, these pipelines are designed to serve petrochemical industry manufacturing markets in the US Gulf Coast, Sarnia (Ontario), and Western Europe via the Sunoco Logistics export terminal at Marcus Hook, PA. Opportunity for Petrochemicals in West Virginia As the development of new shale gas resources continues and the cost of hydrocarbon extraction falls, North America in general and the United States in particular are poised for a tremendous expansion in petrochemical manufacturing. Domestic and international chemical companies have announced plans for new large-scale projects (see table 5-4). However, the vast majority of announced projects are slated to be constructed in the US Gulf Coast region. The driver for this site selection is rooted primarily in the presence of significant existing petrochemical infrastructure, such as pipelines, railroad access, and export terminals in the Gulf Coast region, and close proximity to large NGL feedstock and feedstock storage facilities in Texas and Louisiana. As with many capital-intensive industries, the economies of scale associated with shared infrastructure can be compelling, and the US Gulf Coast region has the historical advantage of being close to NGL feedstock, geological salt dome storage caverns, and a networked feedstock and olefins pipeline infrastructure. 21 Witt, Tom S. et al. “The Economic Impact of the Natural Gas Industry and the Marcellus Shale Development in West Virginia in 2009.” Bureau of Business and Economic Research, College of Business and Economics, West Virginia University. Available at www.bber.wvu.edu 22 BENTEK Energy (Oct. 2013). Son of a Beast: Utica Triggers Role Reversal, p.20.
  31. 31. 24 Start-Up Status Plant Name Owner State Capacity (MMcf/ day) 1/1/2012 Current Langley MarkWest Energy Partners KY 175 6/1/2012 Current Bluestone MarkWest Energy Partners PA 50 8/13/2012 Current Arrowhead MarkWest Utica OH 40 9/1/2012 Current Sherwood I MarkWest Liberty Midstream WV 200 11/23/2012 Current Cadiz Interim MarkWest Utica OH 60 3/5/2013 Current Mobley I, II MarkWest Liberty Midstream WV 320 5/25/2013 Current Cadiz I MarkWest Utica OH 125 5/30/2013 Current Natrium/404 - Phase I Blue Racer Midstream, LLC WV 200 5/30/2013 Current Sherwood II MarkWest Liberty Midstream WV 200 6/17/2013 Current Renfrew XTO Energy Inc. PA 125 6/30/2013 Current Fort Beeler III Williams Partners WV 200 7/28/2013 Current Kensington Utica East Ohio Midstream, LLC OH 200 10/30/2013 Current Seneca I MarkWest Utica OH 200 11/1/2013 Current Majorsville V MarkWest Liberty Midstream WV 200 12/1/2013 New Build Hickory Bend Pennant Midstream, LLC OH 200 12/1/2013 Expansion Kensington II Utica East Ohio Midstream, LLC OH 200 12/1/2013 Canceled Seneca Interim MarkWest Utica OH 45 12/1/2013 Expansion Sherwood III MarkWest Liberty Midstream WV 200 12/31/2013 Expansion Mobley III MarkWest Liberty Midstream WV 200 1/1/2014 Expansion Seneca II MarkWest Utica OH 200 3/1/2014 Expansion Kensington III Utica East Ohio Midstream, LLC OH 200 3/1/2014 Expansion Majorsville IV MarkWest Liberty Midstream WV 200 3/1/2014 Expansion Natrium/404 - Phase II Blue Racer Midstream, LLC WV 200 3/1/2014 New Build Oak Grove I Williams Partners WV 200 6/1/2014 Expansion Blue Stone II MarkWest Liberty Midstream PA 120 6/1/2014 Expansion Cadiz II MarkWest Utica OH 200 6/1/2014 New Build Leesville Utica East Ohio Midstream, LLC OH 200 6/1/2014 Expansion Seneca III MarkWest Utica OH 200 6/1/2014 Expansion Sherwood IV MarkWest Liberty Midstream WV 200 9/1/2014 Expansion Sherwood V MarkWest Liberty Midstream WV 200 12/1/2014 Expansion Majorsville VI MarkWest Liberty Midstream WV 200 12/1/2014 New Build Tuscarawas I MarkWest Utica/Kinder Morgan JV OH 200 1/1/2015 Expansion Oak Grove II Williams Partners WV 200 3/1/2015 Expansion Mobley IV MarkWest Liberty Midstream WV 200 6/1/2015 Expansion Houston MarkWest Liberty Midstream PA 200 6/1/2015 New Build Three Rivers Three Rivers Midstream PA 200 Table 5-1 New Natural Gas Processing Infrastructure in Appalachia (as of November 2013)23 23 BENTEK Energy. NGL Facilities Databank, November 18, 2013.
  32. 32. 25 However, given its location in the heart of the Marcellus Shale development, West Virginia and the Appalachia region have a clear opportunity to reintroduce chemical manufacturing. The primary cost advantage in the ethylene value chain is access to cost-competitive feedstock. The Marcellus Shale region is the largest, most prolific natural gas play in the United States in recent years, and the availability of NGL feedstock is robust. The conditions exist for the region to capture the opportunity to develop a local petrochemicals industry that uses locally manufactured, high-value raw materials. Building an ethane cracker and associated polyethylene manufacturing facilities in West Virginia is a watershed economic opportunity for the state. It would bring high- value manufacturing, and with it, create high-wage jobs, technology development, and the prospect for expanding downstream plastics industry investments.     Start-Up Status Plant Name Owner State Capacity (Mb/ day) 3/1/2014 New Build Cadiz MarkWest Utica OH 40 3/1/2014 Expansion Harrison II Utica East Ohio Midstream, LLC OH 45 6/1/2014 Expansion Harrison III Utica East Ohio Midstream, LLC OH 45 1/1/2014 New Build Hopedale MarkWest Utica OH 60 12/1/2014 New Build Seneca MarkWest Utica OH 38 7/28/2013 Current Harrison Utica East Ohio Midstream, LLC OH 45 7/1/2013 Current Houston De-ethanizer MarkWest Liberty Midstream PA 38 3/1/2014 Expansion Keystone Complex MarkWest Energy Partners PA 20 Operating Current Hastings Dominion Transmission, Inc. WV 14 Operating Current Holden Gas Processing Facility (HGP) Greystar Corporation/NiSource WV 15 9/1/2013 New Build Ft. Beeler Williams Partners WV 30 Operating Current Houston Fractionator MarkWest Liberty Midstream PA 60 3/1/2014 Expansion Majorsville De-ethanizer II MarkWest Liberty Midstream WV 38 12/1/2013 New Build Majorsville De-ethanizer I MarkWest Liberty Midstream WV 38 1/1/2014 Expansion Moundsville II Williams Partners WV 30 10/1/2013 Expansion Moundsville III Williams Partners WV 30 3/1/2014 Expansion Natrium/404 Blue Racer Mistream, LLC WV 23 3/1/2014 New Build Oak Grove Williams Partners WV 40 3/1/2015 New Build Sherwood MarkWest Liberty Midstream WV 38 Operating Current Moundsville I Williams Partners WV 12.5 5/30/2013 Current Natrium/404 Blue Racer Mistream, LLC WV 36 Operating Current Siloam Fractionation Plant MarkWest Liberty Midstream KY 24 Table 5-2 NGL Fractionation Units in Appalachia (as of November 2013)24 24 BENTEK Energy. NGL Facilities Databank, November 18, 2013.
  33. 33. 26 Year Operator(s) Location/Comment Output (thousand tons) Output (million lbs.) 2013 BASF/Total, Eastman, Equistar, Ineos, Westlake, Williams Expansions/Restarts 817 1800 2014 Equistar, Westlake Expansions/Restarts 445 1070 2015 Dow, Equistar, Westlake Expansions/Restarts 810 1790 2016 Braskem Idesa Nanchital 1000 2200 2017 CP Chem Cedar Bayou 1500 3310 2017 Dow Freeport 1500 3310 2017 ExxonMobil Baytown 1500 3310 2017 Formosa Point Comfort 1040 2290 2017 Sasol Lake Charles 1500 3310 2018 Occidental Ingleside 544 1200 2019+ Aither, Appalachian Resins, Axiall, Braskem, Indorama, Sabic, Shell Publically Announced New Cracker Interest TBD TBD Table 5-4 New Planned Investments in Ethylene in North America Source: Wood Mackenzie, Chemical Markets Forum, Presentation, Houston, TX, May 2, 2013. Start-Up Status Name (Segment) Owner Primary Product Capacity (Mb/ day) Expandable to (Mb/day) Miles 3/31/2014 Proposed ATEX Express Enterprise Products Partners L.P. Ethane 190 1,230 9/1/2015 Proposed Bluegrass Williams & Boardwalk Joint Venture Y-Grade 200 400 12/1/2013 Proposed Butler-Houston MarkWest Energy Partners Y-Grade 3/1/2013 Operational Cadiz-Harrison MarkWest Energy Partners Y-Grade 3/1/2014 Proposed Majorsville-Harrison MarkWest Energy Partners Y-Grade 50 9/1/2012 Operational Majorsville-Houston MarkWest Energy Partners Y-Grade 43 33 9/1/2013 Proposed Majorsville-Houston MarkWest Energy Partners Ethane 33 9/1/2014 Proposed Mariner East MarkWest/Sunoco Ethane 70 3/1/2015 Proposed Mariner South Lone Star NGL/Sunoco Propane/Butane 200 7/21/2013 Operational Mariner West MarkWest/Sunoco Ethane 50 65 12/1/2014 Proposed TBD Kinder Morgan & MarkWest Utica JV Y-Grade 200 1,100 3/1/2014 Proposed Seneca-Harrison MarkWest Energy Partners Y-Grade 40 5/1/2013 Operational Sherwood-Mobley MarkWest Energy Partners Y-Grade 30 Table 5-3 Pipeline Announcements for Appalachia (as of November 2013)25 25 BENTEK Energy, NGL Facilities Databank, November 18, 2013. Note that Sherwood-Mobley and Seneca-Harrison pipeline segments are listed as Y-Grade (mixture of NGL products transported as a single stream) product lines, but industry sources indicate possible consideration for purity ethane service.
  34. 34. Economic Impact of a New Ethane Cracker and Downstream Polyethylene Plants in West Virginia 06 BOOK
  35. 35. 27 Economic Impact of New Ethane Cracker and Downstream Polyethylene Plants in West Virginia This section examines the economic impacts in West Virginia associated with a world-scale ethane cracker and three downstream polyethylene plants. The study assumes a complex with a total construction cost of $3.8 billion ($2012).26 In addition, it is estimated that $150 million ($2012) in pipeline infrastructure, $20 million ($2012) in ethane storage equipment, and $20 million ($2012) in rail and truck terminals would also be needed to bring ethane to the facility and to ship resulting polyethylene products to markets out of state and in West Virginia.27 Research Methodology The IMPLAN® input-output modeling system was used to determine the economic significance associated with new petrochemical investments in West Virginia.28 Witt Economics LLC acquired the 2011 IMPLAN® data for West Virginia and used this data and modeling system for this study. This analysis quantified the direct, indirect, induced, and total economic impacts that will occur as a result of construction and operation of new petrochemical investments in the state. The IMPLAN® input-output modeling system was used to determine the economic significance associated with new petrochemical investments in West Virginia. Witt Economics LLC acquired the 2011 IMPLAN® data for West Virginia and used this data and modeling system for this study. This analysis quantified the direct, indirect, induced, and total economic impacts that will occur as a result of construction and operation of new petrochemical investments in the state. Direct impacts are those associated with expenditures made within the state by the companies that are constructing and operating the complex. Indirect economic impacts are those economic activities, such as sales, that result from contractor purchases. For example, a contractor may purchase concrete and steel fabrication materials from other firms that have a physical presence within the state. These firms, in turn, purchase manufactured goods, utility services, and other procured items to manufacture and deliver their goods and services to the contractors. The continued backward linkages from firms purchasing from their suppliers and so on result in a continued re-spending of these funds. If the necessary suppliers are not located in the state, some funds will leave West Virginia, while others will remain within the state and produce local economic benefit. Induced economic impacts represent the expenditures by households of the income they receive associated with the direct and indirect impacts. For example, construction workers earn wages, a portion of which they spend locally on the consumption of goods and services, which, in turn, creates additional economic activity. The economic multipliers associated with the indirect and induced economic impacts are a clear indication of the strong economic linkage between the construction and operation of a new petrochemical industry and the rest of the West Virginia economy. The sum of the direct, indirect, and induced economic impacts is the total economic impact associated with this investment. This study examines four types of economic impacts: employment, employee compensation, output, and taxes. Employment is both full- and part-time. In the case of multi-year construction projects, employment is defined in terms of job-years. For example, 1,000 job-years for a 24-month construction project would average 500 full- and part-time employees each year for the two-year period. Employee compensation represents wages and salaries, plus employers’ contributions to social insurance (social security, unemployment insurance, workers compensation, etc.) as well as other labor income, such as pension contributions and health benefits. IMPLAN uses economy-wide estimates of wages and salaries as well as non-wage and salary benefits for both full- and part-time employees. Output is the sales of the respective industrial sectors to which are added net inventories and the value of intra- corporate shipments. In both retail and wholesale trade sectors, output is the sales of these sectors minus the cost of goods sold. 26 All dollar figures in this report are expressed in terms of 2012 dollars. This adjusts for the effects of inflation over the time periods associated with the construction and operation of the various plans examined in this study. 27 Assumes the cost for a single ethane delivery pipeline. For estimation purposes, the study considers a hypothetical pipeline 60 miles long at a cost of $2.5 million per pipe mile. Actual pipeline cost would depend on site selection and proximity to existing NGL pipeline infrastructure, if any. 28 More information regarding the IMPLAN input-output modeling system can be found in Appendix A.

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