Kevin DiGregorio: Study verifies Appalachia's petrochemical advantage (Daily Mail)
It’s nice when someone else’s data corroborates your own newfound conventional wisdom. It’s icing on the cake when that same data reverses the more longstanding conventional wisdom of others.
Since the development of the Marcellus shale, we have known that West Virginia and the Appalachian Region, including Pennsylvania, Ohio and Kentucky, offer significant economic advantages for petrochemical investments. That knowledge was based on intuition, experience and insight.
On the other hand, the decades-long conventional wisdom of others clashed with our understanding, suggesting that any major U.S.-based petrochemical investment should be made in the Gulf Coast. That knowledge was based on tradition, history and decades of profits from just such investments.
But neither our newfound wisdom nor the old, traditional wisdom was based on hard economic data and comparisons.
That has changed. Shale Crescent USA recently released a new study by IHS Markit that shows the most profitable place to build a large petrochemical facility is no longer the Gulf Coast. Instead, it is Appalachia.
Importantly, the report provides the kind of data that petrochemical executives need to make multibillion dollar investment decisions, and the bottom line from that is simple and quite significant.
A new $3 billion ethane-to-ethylene-to-polyethylene facility in the Appalachian Region would generate $3.6 billion more in pre-tax profits over 20 years compared to a similar facility in the Gulf Coast.
Read the above paragraph again, then continue.
In other words, Shell, which is building a cracker plant near Pittsburgh, is going to make lots of money, especially if you consider that their investment — and thus the return on that investment — is much higher than the $3 billion scenario laid out by IHS Markit. PTT Global and its new partner, Daelim Chemical, are in the same financial boat, assuming they move forward in Belmont County, Ohio.
And Braskem, if they decide to build in West Virginia, along with any other petrochemical giant that makes the good financial decision to come to the region, will be poised to make large profits as well.
And yes, we already knew that. Sort of. We have been touting it for some eight years now as our newfound conventional wisdom suggested — quite strongly — that the Appalachian region held significant economic advantages for ethane crackers and downstream manufacturing facilities.
How did we know? We have the most abundant and cheapest feedstock in the world thanks to the Marcellus and other shale plays. We also don’t have to transport ethane for long distances (say, to the Gulf Coast) and then turn around and send the product (mostly polyethylene) back to the Midwest and Northeast where some two-thirds of polyethylene users are located.
It’s that simple. It’s that intuitive. Experience and insight tells you so.
But Shale Crescent took the matter out of the realm of just intuition and experience and put it in the realm of hard numbers.
Get this. The independent study by IHS Markit, a leading provider of information and analysis for executives and decision-makers, quantified the Appalachian feedstock advantage, showing that ethane costs are 32 percent lower in Appalachia compared to the Gulf Coast. IHS Markit also showed that the delivered costs of polyethylene, taking transportation into account, are 23 percent lower in Appalachia.
The upshot? A $3 billion ethane-to-polyethylene project in Appalachia provides a pre-tax cash flow of $11.5 billion from 2020 to 2040 compared to $7.9 billion in the Gulf Coast. That’s where the additional profit of $3.6 billion comes in.
And remember, that’s for a $3 billion facility and not for a $6 or even $10 billion facility. You can bet any such investment will last much longer than 20 years as well, increasing the long-term profits substantially.
As you might expect from an extensive report, there’s even more to the story and analysis than just that. For example, IHS Markit considered both high- and low-price environments along with various capital costs, operating rates, market access variations and other risk factors as well.
And the study took into account higher capital costs for an ethylene facility and the less-developed infrastructure for pipelines and storage in Appalachia. Of course, that’s something we are addressing with the Appalachia Storage and Trading Hub, so in time, that disadvantage will at least be minimized if not eliminated.
But no matter how you slice the numbers and assumptions, the bottom line is clear. The most profitable place to build a large petrochemical facility is no longer the Gulf Coast. Instead, it is Appalachia.
It’s nice that we’ve known that for some time, but it’s even better that we now have the numbers to back it up.
This op-ed was authored by Kevin DiGregorio, executive director of the Chemical Alliance Zone, for the Charleston Gazette Mail's Daily Mail Opinion page. Click here to read it on the publication's website.