NATURAL GAS

Shell may pull back on Pa. cracker project, crown jewel of region's shale plans

Royal Dutch Shell PLC's second thoughts about the multibillion-dollar ethylene plant it has considered building in western Pennsylvania are another powerful sign of the competitive pressures that are building as natural gas liquids production from the Marcellus and Utica shale plays takes off.

Shell told investment analysts last week that considering both its global investment opportunities and some project reverses, it could not proceed immediately with all three of the North American capital projects it has been studying.

The trio are the proposed cracker near Monaca, Pa., a Louisiana gas-to-liquids plant and a Canadian liquefied natural gas project.

"We cannot afford to take all three together at once, and if we could, I am not sure we have the engineers and the project managers to do so. So we will need to make choices which go forward," said Peter Voser, CEO of the Anglo-Dutch major, speaking to securities analysts Thursday.

The proposals represent an "embarrassment of riches of high-quality opportunities," said Shell Chief Financial Officer Simon Henry. "We can't do all of these," he added. "Some of these essential projects are reaching critical planning milestones over the next few months, and each project is potentially individually material. So we are expecting to make choices of that in the future.

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"This is as much about what we choose not to do as what we choose to do," he added.

On Thursday, Shell reported a 32 percent drop in third-quarter profit from a year ago to $4.5 billion, below what investment analysts were expecting. Production problems in Nigeria and weaker performance from its refining operations were major factors, the company said (EnergyWire, Nov. 1). But it is also pulling back from a plunge into North American shale oil and gas development that has not yet paid off as hoped.

Now the company plans to continue scaling back capital investment and selling nonpriority assets, including some shale gas assets in the United States, company officials said.

Just two years ago, Shell's possible location of an ethane cracker in the heart of the Marcellus and Utica "wet" gas region promised to be a capstone on the Northeastern shale boom. The governors of Pennsylvania, Ohio and West Virginia offered financial inducements to secure the project for their states with Pennsylvania winning the day with nearly $2 billion in tax incentives.

For Ohio, the prospects for a cheap source of ethane and other gas liquids in its backyard, and nearby production of ethylene at the Shell cracker, stirred hopes for a homegrown expansion of the state's long-standing polymer industry.

It has taken that long to build the midstream infrastructure of gathering lines, separators, fractionators, and pipeline and rail connections required to deliver ethane and other gas liquids to markets, but now the first of those projects is coming online, and production of both pipeline gas for utilities and gas liquids is expected to leap (EnergyWire, July 16).

For example, Antero Resources, a major investor in the Utica wet gas play, said current estimated gross gas production is 660 million cubic feet a day, and it has an additional estimated 160 million cubic feet of daily production in the Marcellus and Utica shales that now is shut in, waiting for completion of infrastructure that it says should begin operating over the next year.

Wells Fargo analysts this spring estimated that Northeastern natural gas liquids would jump from 281,000 barrels a day average in 2013 to 484,000 next year and 903,000 in 2017. The first new pipeline networks to take away that production are beginning operation, led by the Mariner West project, which will deliver Marcellus and Utica gas liquids to the Sarnia, Ontario, refining center and the ATEX (Appalachia to Texas Express) connection to the Mont Belvieu, Texas, petrochemical and refining complex. The Mariner East pipeline to the Delaware River is to begin serving ethane export markets in 2015.

By 2017, the oversupply of gas liquids in the Northeast could rise to 251,000 barrels a day average, Wells Fargo estimated, and if all of the ethane component were processed, there would be enough supply to justify another major pipeline or a world-class cracker in the region, it said.

Clouding the outlook is an expectation of continued depressed pricing for natural gas liquids at least until a Gulf Coast olefin cracking plant expansion is ready for operation around 2017. A half-dozen major new cracker projects are planned for the U.S. Gulf Coast. Ethylene produced from ethane enjoys a decisive cost advantage over competing products from far more expensive oil-based feedstocks.

The list of pipeline projects continues to grow, however, expanding outlets for Northeastern gas to the Gulf Coast, where a highly interconnected petrochemical industry with processing, downstream production, storage and export facilities is long-established. The proposed new Bluegrass pipeline by Boardwalk Pipeline Partners and Tulsa, Okla.-based Williams Cos. would take mixed gas liquids to Texas and Louisiana, and Kinder Morgan and MarkWest Energy Partners have announced plans for a mixed NGL pipeline going from the Utica-Marcellus area to Mont Belvieu.

The pipelines can be built in half the time required for a major cracker installation, raising the question of whether the Shell or other possible olefin cracker projects could get to the starting line in time, analysts say.

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