NATURAL GAS:

Gulf Coast ethane 'crackers' may face air quality hurdles

Third in a series. Read part one here and part two here.

A cluster of multibillion-dollar petrochemical plant projects proposed for the U.S. Gulf Coast are counted on to absorb a glut of ethane and other natural gas liquids from expanding shale gas production.

But some projects may be delayed or blocked by tight air quality restrictions in the Houston-Galveston-Beaumont chemical industry corridor, already burdened by high ozone and other hazardous plant emissions, experts predict.

The brightest scenarios for the shale gas boom all include forecasts for a surge in petrochemicals production and exports based on globally competitive U.S. gas liquids production. Thousand-mile pipeline projects are underway to deliver gas liquids to the center of U.S. petrochemical operations in Texas and Louisiana.

"There are emission regulations around these plants," cautioned Mark Chung, manager of natural gas liquids analytics at BENTEK Energy. "It could very well limit the number of plants that are built. We don't know that for certain. It is a risk to the forecast" for petrochemical plant expansion, he said.

The air emissions limits under the federal Clean Air Act, administered by Texas regulators, affect plans for plants that employ heat and pressure to "crack" ethane, propane and other gas liquids into ethylene and related feedstocks used by the plastics industry. The crackers' furnaces discharge ozone precursors, particulate matter, carbon monoxide and volatile organic chemicals, which are all subject to air quality controls.

Because emissions limits are capped for companies in the region, a firm planning to add a cracker to an existing petrochemicals plant might have to find room for the new emissions under the plant's existing overall emissions ceiling. Otherwise, it would have to purchase emission reduction credits (ERCs) from companies with leeway under their emissions caps. The credits would offset the new facility's air pollution releases.

Prices for the credits, which are traded among industrial firms, have shot upward as plans for the new cracker facilities have moved ahead, said Randall Lack, chief marketing officer at Houston-based Element Markets LLC, an environmental commodities company.

"In the Houston-Galveston area, with the industrial buildup, there has been a run on the bank and the majority of ERCs have been bought up," Lack said. Credits for volatile organic compounds have gone from several thousand dollars a ton to $300,000 per ton, he said.

"It is going to be a permit-by-permit issue," Lack added. "This will be an ongoing obstacle for projects. Some companies are funding emission reduction projects to create new credits. But some projects will be held up all along the Gulf Coast because of the lack of supply of emission credits."

Exxon Mobil's permit precedent

Critics of the Texas Commission on Environmental Quality contend that the state's air regulator will find a way to move the projects forward if it can. They cite a preliminary permit that TCEQ has granted to Exxon Mobil Corp. to build a "world-class" cracker project at its Baytown refinery and chemicals complex east of Houston, claiming that Exxon Mobil has not adequately confirmed its compliance with air pollution limits.

"I would love to see a proposed project that was not permitted by the TCEQ," said Adrian Shelley III, executive director of Air Alliance Houston. TCEQ "is a regulatory agency that assures business continues. It's a great thing for our city and state economy, but it comes at a high cost" to air quality, Shelley said.

Shelley's organization is part of a group that has challenged TCEQ's Exxon Mobil permit. A hearing on the dispute is scheduled before state judges in October.

Exxon Mobil says the cracker project will employ best available control technologies to keep emissions well under control. "The permit proposal is within existing federal permit limits, implements the most stringent emissions control for all sources ... and incorporates the latest monitoring technology, including online, real-time meters to measure emissions for every major piece of equipment," the company said.

"Over the past decade, the site has invested over $1.3 billion in environmental improvements," ExxonMobil Chemical Co. President Stephen Pryor told an energy conference in March. Nitrogen oxides and volatile organic chemicals emissions have been reduced by more than half. "The new cracker project will be contained within the site's existing footprint. State-of-the-art environmental technology will maintain total site emissions within existing permitted levels," he said.

TCEQ agreed.

Gabriel Clark-Leach, an Austin attorney with the Environmental Integrity Project who represents Air Alliance Houston and the Sierra Club in the dispute, counters that Exxon Mobil's air emissions modeling is inadequate and does not show that the project will keep emissions below harmful levels. Some actual plant emissions already exceed existing limits because some facilities were not included in the baseline assessment, he says.

Much of the evidence Exxon Mobil submitted to TCEQ has been shielded until now by the company's claim of confidentiality.

"When ExxonMobil submitted its application for [the] permit ... it provided a vast amount of technical information about the proposed project, including design specifications and emissions calculations, some of which ExxonMobil marked 'confidential,'" TCEQ said in its review of the dispute.

The commission concluded that Exxon Mobil's emission modeling was acceptable. "TCEQ staff used the modeling data from the proposed facility to verify that ground level concentrations are not likely to adversely impact off-property receptors."

"All of ExxonMobil's emission calculations for the proposed projects -- the math and assumptions -- we haven't been able to see any of it. We just get the numbers," said Clark-Leach. "The detailed process information for the new project is confidential." He said his side will get restricted access to the data shortly before the state hearing on the dispute.

The company "bears the burden of proof to demonstrate they are complying with all requirements including protection of the public and that the plant will perform as required," he added. "A limit is meaningless unless you have a good way to assure it's being met. If you don't know how much pollution is coming out of the plant, you don't know what is being breathed in."

EPA and Texas tangle over air rules

The impact of air quality regulations on Texas olefin cracker projects is tied into the complex and sometimes adversarial relationship between U.S. EPA and TCEQ, which share responsibilities under the Clean Air Act. EPA establishes requirements for state implementation plans, and states determine methods for meeting the requirements, subject to EPA's approval.

TCEQ supports Exxon Mobil's position that the project comes under a 2005 emissions permit that applied to the entire facility called a "PAL," for a plantwide applicability limit. There is room under the overall emissions cap established by the PAL to accommodate the discharges from the cracker facility, Exxon Mobil says. The crucial effect of that position is that the cracker facility would not be bound by most stringent federal Clean Air Act standards, Clark-Leach said.

"ExxonMobil represented in its application that the projected emissions from the new ethylene plant will be below the annual applicable PAL limit; therefore, federal review is not required," TCEQ said.

EPA has not passed judgment on the Exxon Mobil air permit application or TCEQ's preliminary approval. "We're simply trying to get TCEQ to clarify the history and the actions they're taking," said Jeff Robinson, chief of the air permits section for EPA's Region 6 office in Dallas. "We're waiting on a response to our questions."

Whether the Exxon Mobil case becomes a model or an exception remains to be seen. Other major cracker projects proposed in Texas do not appear to be covered by the same PAL provision that Exxon Mobil is proceeding under.

In addition to the Exxon Mobil facility, which has a 2016 projected startup date, Chevron Phillips Chemical Co. has announced a cracker project at its plant at Cedar Bayou, east of Houston. Dow Chemical Co. wants to do a cracker project at Freeport, Texas, and Formosa Plastics Corp. has plans for a facility in Point Comfort, Texas. Other companies are considering new plants.

Clark-Leach said that if Exxon Mobil's permit stands, it may gain a significant advantage over competitors that are obliged to reduce emissions or purchase emission reduction credits. Exxon Mobil could wind up under less regulatory oversight than competitors, he added.

"If Exxon doesn't have to offset pollution from the new units, there will be less headroom for other sources to expand" without violating Clean Air Act limits, he said.