By Joe Eddy
We are in the midst of the largest energy boom in our nation’s history, and most people still don’t realize it. It’s extraordinary that the ingenuity and innovation of the natural gas and oil industry have unlocked more than 100 years of U.S. shale gas reserves in just the last five years. Shale gas production has increased from practically nothing in 2005 to more than 38 percent of U.S. supply today and is heading toward 50 percent. The significance of this is captured in the International Energy Agency’s (IEA) prediction that the U.S. will become the world’s largest producer of natural gas and oil by 2020, surpassing Russia and Saudi Arabia.
A boom for the energy industry is also a boom for manufacturing, especially chemical manufacturers and other energy intensive industries. The security and stability of an affordable, abundant supply of natural gas to be used for heating, processing, electric power generation and a chemical feedstock have helped make U.S. manufacturing more competitive in the global marketplace. An expanding manufacturing sector is also important to the natural gas industry, as it represents more than 30 percent of the natural gas market. This shared energy and manufacturing expansion is helping transform the U.S. energy outlook and is opening up new opportunities for the future of manufacturing.
Cal Dooley, president and CEO of the American Chemistry Council (ACC), in his keynote presentation to the West Virginia Manufacturers Association’s Marcellus to Manufacturing Ethane Development Conference, noted that “natural gas is to the chemical industry as flour is to the baking industry” and that “in 2008 no chemical company was planning investments in the U.S.; today they all are.” That’s mainly because we’re now able to produce natural gas so cheaply that the entire global chemical industry is relocating here. Many companies that spent decades moving chemical production to the Middle East and Asia are now leading the biggest expansion back into the U.S. as shale gas revives the chemical industry’s economics.
Benefits for West Virginia
West Virginia lies in the middle of the Appalachian Basin, on top of two of the most prolific shale plays in the U.S.: the Marcellus and the Utica. The Marcellus Shale is considered one of the largest shale fields in the world and has the key benefit of producing wet gas, which contains not only methane but also the valuable natural gas liquids ethane, propane, butane and pentane. West Virginia is already realizing significant economic benefits from both upstream leasing, drilling, completions and production, as well as midstream pipelines, gas separation and fractionation plant construction and utilization. This activity is literally in the beginning stages of development and is expected to continue for at least the next 20 years, with investments in the Marcellus Shale estimated as high as $200 billion for upstream and midstream assets in the next 10 years.
Current Benefits Realized
The downstream economic benefits for West Virginia from the Marcellus Shale could be considered as both kinetic and potential. Kinetic, as the availability of a secure supply of low-cost natural gas is restoring a global competitive advantage to West Virginia’s many energy-intensive industries such as chemicals, aluminum, steel, glass, cement and polymers, some of which are beginning to invest millions of dollars to increase their operations. This new globally advantaged gas supply is attracting international companies like Spanish automotive parts maker Gestamp and Italian gas meter and valve manufacturer Pietro Fiorentini to West Virginia and enabling Williamstown’s Fenton Art Glass to restart operations. Lower gas costs are also helping hold down electricity prices as natural gas’ share of power generation increases. IHS Global Insight estimates an average reduction of 10 percent in electric costs as a result of shale gas production. The development of shale gas infrastructure has also given a considerable boost to manufacturing by increasing demand for steel tubular goods used for drilling, production, transportation and distribution, as well as increased demand of chemicals, cement, safety products and heavy equipment used in the gas industry.
Ethane to Ethylene is Key
The most important potential downstream economic benefit lies in the fact that the chemical industry also utilizes the natural gas liquid, ethane, as the primary feedstock in the production of ethylene, the world’s largest volume petrochemical and the basic building block used to manufacture products in many industries, including construction, food packaging, textile, apparel and automotive. Ethane supply conditions are so favorable it is now cheaper to produce ethylene in the U.S. ($300/ton) than in Saudi Arabia ($455/ton) or Asia ($1,700/ton).
The U.S. ethane supply is projected to increase an additional 50 percent by 2016 to 1.4 million barrels per day (BPD), which doubles the supply since the shale gas boom. This increased availability of inexpensive ethane affords a significant competitive advantage to manufacture ethylene domestically. A recent ACC study notes a 30 percent increase in ethane supply and a 15 percent decrease in natural gas prices should result in 1.2 million additional jobs, $72 billion in capital investment, a 7 percent increase in U.S. manufacturing expansion, $342 billion in total economic expansion and more than $26 billion annually in federal, state and local tax revenue. Chevron, Dow, ExxonMobil, Formosa, LyondellBasell, Occidental, Indorama and SABIC have all announced intentions to build new ethane crackers to support this chemical industry expansion, most of which would be located in the Gulf Coast region.
Build a Cracker in West Virginia
A cracker represents the potential nature of the downstream economic benefits, as the real value proposition is found in being able to keep the raw material, cracking, converting and downstream manufacturing here in the middle of the northeast auto and plastic molding markets. Currently, plans call for a large portion of our ethane to be transported by pipeline to the Gulf Coast or to Canada to be cracked into ethylene, converted to polyethylene and shipped back to the northeast by rail to the same markets at a higher cost.
The ACC estimates that a world-scale ethane cracker in West Virginia would require a $3.2 billion investment. The real value comes from the operating phase, generating $7 billion in annual industry revenue, $95 million in West Virginia tax revenue and up to 12,000 jobs and $729 million in worker wages. Smaller regional-sized crackers would require a $500 million investment and generate a scalable amount of operating and tax revenues, jobs and wages. Producing the ethylene in West Virginia would allow for additional downstream industry expansion to produce polyethylene, polypropylene and hundreds of other chemicals and finished products.
Royal Dutch Shell has indicated an interest in building a world-scale cracker in Monaca, PA, and Aither Chemicals and Appalachian Resins have both indicated an interest in building smaller crackers in West Virginia. A world-scale cracker requires about 65,000 BPD of ethane and a regional cracker about 20,000 BPD of ethane. Ethane makes up about 15 percent of the Marcellus Shale gas stream, and current Appalachian Basin production of ethane is at 250,000 BPD and is expected to grow to 450,000 BPD in the next few years.
Thanks to abundant and affordable supplies of shale gas, West Virginia is poised for a manufacturing renaissance that starts with the chemical industry and ripples throughout the state’s economy. After years of high energy costs and industrial decline, the new economics of shale gas create a competitive advantage for West Virginia and U.S. chemical manufacturers in the global marketplace, which translates into increased investment, economic growth and tens of thousands of jobs with the big prize of growing the manufacturing base in West Virginia.
