It’s not clear whether Royal Dutch Shell would have taken this long to make a final decision to proceed on its ethane cracker had the oil price stayed at $100/barrel. Certainly, Shell and its competitors have been forced to downsize and reel in capital spending to remain profitable to the degree that shareholders demand. Lower profits were part of the reason that Chevron put its regional HQ project on hold and the price environment seems likely to have extended the decision-making process for the Monaca project; but has the decline in oil and natural gas hurt the Pittsburgh region in the way that Texas or North Dakota has been hurt?
Real estate service company CBRE Inc. published an energy market report Tuesday morning that covers this issue very well. Its conclusion is that Pittsburgh hasn’t been negatively impacted much at all, except to the degree that the exploration and expansion of the Marcellus and Utica formations has slowed.
You can read the full report here: CBRE Energy Report 2015_Pittsburgh
OK, now that we’ve had the time to take a deep breath we can look at last Wednesday’s announcement of Shell’s preferred site with a bit more perspective.
First things first. There is no downside to Shell picking the old Horseheads zinc site for their ethane cracker. Regardless of how events unfold from here the Western PA region is better off today than last Tuesday if only for the potential. That said however, it’s important to temper our regional enthusiasm with the knowledge that the decision to proceed with plant construction is still a year or more away and construction itself is at least two years out. The real beneficial impact of the plant – the development of the many downstream industries here – will be years further away.
The acute problem facing the natural gas industry hasn’t changed. Prices are still so low that extraction and processing is a losing proposition right now. It is fortunate for stakeholders in Western PA that the Marcellus Shale formation contains more profitable wet gases like ethane, propane and butane so the drillers will continue in the southwest corner of the state. We’re also lucky to have the oil-laden Utica formation easily accessible in Butler, Beaver and Lawrence counties so that upstream and midstream activities – like fractionation and distribution – will continue to expand.
For the gas industry to fully mature in our region the price will have to increase to its more normal levels, meaning that gas will be at $5-8/MmBtu. The most productive way for that to happen will be for gas to replace fossil fuels, increasing demand while decreasing the dependence on oil as a fuel or coal as an electricity generation source. That will take more investment or energy policy action than is going on right now.
Until something happens to push demand and natural gas prices higher the opening of the Shell cracker facility will remain on the horizon. Of course, it’s better that it’s on the horizon in Beaver Co. than elsewhere.
Since the first of the year have come the first indications that the exploration of the Marcellus Shale will not be transforming the region at breakneck speed. For more than a year the depressed price of gas has been troubling for the industry but the dip down to $2.50 MMbtu has prompted a change in strategy.
First is the shifting of resources from the northeastern corner of the state to the southwest to take advantage of the additional gases that can be gathered and sold from the wet gas that is found in the Marcellus Shale. That’s a plus for our region.
Second is that the high price of oil is an incentive for the gas companies to look at exploring the Utica formation because it contains oil as well as natural gas. That’s not as good for western PA since the Utica formation is more accessible in OH. The heightened interest in Utica will help with the activity in Butler, Beaver and Lawrence Counties as the Utica shale is closer to the surface too.
Drillers are also beginning to look at other formations that have natural gas deposits to see what the related oil/gas properties are. The Marcellus is going to be a big play for a long time but the speed of its development will be throttled back while gas remains cheap.
The slowdown in exploration may or may not be related to the dragging on of the announcement of the Shell and Aither cracker plant locations. What was to be an ‘end of the month’ announcement in January seems no closer to being made in mid-March and a statement made last week by Sheel CEO Peter Voser at an energy conference in Houston hints that Shell is in no hurry. Voser commented that the Dutch company’s final decision on the investment was “quite a few years away.” A shell spokesperson clarified later that Voser meant that the planning would take a few years but that a decision was imminent. No definition was made of ‘imminent.’