By Irina Slav
Appalachia is about to turn into the largest gas-producing region in America, accounting for 37 percent of the total by 2040, a study by IHS Markit commissioned by a lobby group has suggested. The group, dubbed Shale Crescent USA, is on a mission to promote the attractive business conditions for petrochemical producers in a bid to find a replacement for coal as a revenue stream in the region.
Some of the highlights from the study are that ethane costs some 32 percent less in Appalachia compared with the Gulf Coast and that polyethylene deliveries from the Appalachia are 23 percent cheaper than deliveries from the Gulf Coast. Further undermining the Gulf Coast, IHS Markit said it had estimated that a new petrochemical plant project in Appalachia could generate US$11.5 billion in pre-tax cash flow over a 20-year period starting 2020, at an initial investment of US$1 billion. The same project on the Gulf Coast would generate US$7.9 billion, the market researcher said.
Ohio, Pennsylvania, and West Virginia are seeing an influx of investments in petrochemical production driven by the cheap and abundant natural gas. There are already 900 chemicals plants in the region, which holds an estimated 141 trillion cubic feet of recoverable gas. But these are small potatoes, even though they are creating jobs.
Late last year, China Energy Investment Corp. inked a memorandum of understanding with U.S. officials to invest US$83.7 billion in a large-scale project dubbed the Appalachian Storage Hub. The hub would include storage facilities for liquefied gas, a market trading index center, pipelines, and refining facilities.
Right now, in light of what is increasingly looking like a real trade war between the United States and China, there may be doubts if China Energy Investment Corp. will cough up the sum needed to make the project a reality, but others are already building.
Shell, for one, is working on a US$6-billion ethane cracker in Pennsylvania—the first ethane cracker outside the Gulf Coast built in the last two decades. Thailand-based PTT Global Chemical is also preparing to give the final go-ahead to an ethane cracker in Ohio later this year, spending US$100 million a front-end engineering design for the facility so far. The value of the project has been estimated at US$10 billion.
There are many industrial clients in close proximity to the Shale Crescent, mainly from the steel, chemical, and fertilizers industries, among others, which should additionally stoke the appetite of investors.
All this sounds great for the local gas industry, but the horizon is not totally clear. There is environmentalist opposition, although not as large-scale as the protests against the Dakota access pipeline, for example. The latest in the protest activity was a “tree sit” against the construction of the Mountain Valley pipeline along its route. The pipeline will cross the Appalachian Trail, which has angered environmentalists.
It remains to be seen whether the protesters would be able to stop the pipeline project, but the protests do highlight a problem: shortage of pipeline capacity similar in scale to that experienced by Alberta’s heavy oil producers.
Appalachian gas is trading at a discount to other grades because of the shortage, and this is affecting producers’ performance. At the same time, opponents to new pipeline projects—regardless whether it’s oil or gas—are becoming more vocal in their opposition.
Building a gas refining industry close by the deposits would in all likelihood help producers place a larger part of their output. Yet a lot will remain to be shipped in a raw state to feed gas-fired power plants, the national grid, as well as Gulf Coast refineries. Meanwhile, pipeline protests are becoming a trend that could compromise a lot of the growth potential of the industry.