Shell’s go-ahead for Marcellus ‘cracker’ plant anchors strategy shift

By Nathanial Gronewold | 06/08/2016 08:43 AM EDT

Royal Dutch Shell PLC is backing the U.S. expansion into petrochemical manufacturing.

The global oil and gas giant yesterday announced a final investment decision to build a multibillion-dollar petrochemical complex at the former site of a zinc smelter in Beaver County, Pa., northwest of Pittsburgh.

The ethylene cracker will be built along the banks of the Ohio River, where old mill towns have struggled since the early 1980s to replace jobs lost to the collapse of the U.S. steel industry. Shell estimates its petrochemical project will generate 6,000 temporary construction jobs and about 600 permanent positions. The company plans to start building within 18 months.


Shell proposed the plant in 2012 at the height of the region’s natural gas boom. Northwestern Pennsylvania is adjacent to the Marcellus and Utica gas basins, where liquid ethane can be shipped to the plant and converted to ethylene, a building block for plastics and chemicals production.

But the decision to build the plant also coincided with an oil price crash that forced Shell and other energy majors to make hard financial choices. For Shell, it came down to its expanding emphasis on petrochemicals.

"As a result of its close proximity to gas feedstock, the complex, and its customers, will benefit from shorter and more dependable supply chains, compared to supply from the Gulf Coast," the company explained. It estimates that about 70 percent of the customer base for the facility is located within a 700-mile radius.

The oil price drop has slowed construction. Still, companies are dramatically increasing U.S. petrochemical manufacturing near Houston and along the Gulf of Mexico, with some production coming online in 2017. The American Chemistry Council (ACC) reports that about 260 projects are in the planning or construction stages, a $184 billion overall investment.

But the United States isn’t the only place adding capacity. China and the Middle East are also building up their petrochemical business. Some industry analysts are worried that global production could far exceed demand, creating imbalances in the future market (EnergyWire, March 18).

About 60 percent of the new investment in U.S. petrochemicals is foreign investment like Shell’s. The draw is the abundant supplies of cheap shale gas and gas liquids.

ACC celebrated Shell’s announcement. Council President and CEO Cal Dooley called it in a release "another sign that a renaissance in American chemistry is under way."

Cash engines

The petrochemical expansion is just one small part of a larger announcement Shell made yesterday. The company provided investors and media a glimpse at how it plans to transform the business through 2020 and during a post-oil price crash period. The shifting business strategy comes on the heels of its acquisition of BG Group PLC’s liquefied natural gas (LNG) production capacity.

"This is all about reshaping Shell following our BG acquisition," said CEO Ben van Beurden. He said a complete restructuring of Shell’s business was critical during a time of a "long-term transition to lower carbon intensities," a nod to recently increasing efforts to address global warming.

Out to 2020, Shell’s emphasis will be on making the most of its acquisition of BG Group, which was finalized in February, and capitalize on expanding production and sales of LNG. That includes LNG sales through ports such as Sabine Pass along the U.S. Gulf Coast and along the coast of Equatorial Guinea, Africa. On oil, assuming an average price of $60 per barrel out to 2020, Shell sees further growth in deepwater offshore drilling.

The company also sees itself withdrawing entirely from five to 10 countries over the coming years, part of a divestment program that aims to raise about $30 billion. Van Beurden said capital expenditures will be kept to $25 billion to $30 billion for the rest of the decade.

Christian Stadler, a professor at Warwick Business School who is researching Shell, said the announcements show Shell is adopting a more centralized model along the lines of Exxon Mobil Corp. in an effort to bring costs under control. Investor anger over excessive capital spending at Shell prompted executives there to pledge a reorganization well before yesterday’s announcement, going back to before the price of crude oil started slipping in 2014.

Stadler said the move to pull out of some markets makes sense for the company.

"A less-active profile in some countries, therefore, can only be a good thing," he said. "Shell focusing on where it is more established and more confident … makes sense from a cost-cutting perspective."

Canadian oil sands and offshore drilling include some of Shell’s most expensive energy projects. Yet Shell says it will stay the course in both those areas. Deepwater offshore projects in the Western Hemisphere are already in motion, and van Beurden indicated that investors can expect more to come.

"Growth in deepwater, especially Brazil and the Gulf of Mexico, should result in these things becoming cash engines early in the next decade," he said.