On Monday, Oct. 12, and Tuesday, Oct. 13, I attended the Tri-State Shale Summit in Morgantown, W. Va., at which representatives for Ohio, Pennsylvania and West Virginia agreed to collaborate on the development of a petrochemical cluster in and around the Ohio River Valley. This was an important step for the region to avoid becoming an “extractive” economy, whereby minerals are extracted from the region only to be transported elsewhere to create wealth.
The Appalachian basin has undergone extraordinary change since the Marcellus and Utica have begun to be drilled. According to MarkWest, a major gas processor and pipeline operator in the region, the basin is producing around 26 billion cubic feet of gas per day (BCFD). Just a few years ago, it was producing only 2 BCFD. The Appalachian Basin is now producing about 25% of the nation’s natural gas, and it soon will supply about one-third of the nation’s natural gas liquids — things like ethane that are the feedstocks of petrochemical plants.
It is small wonder, then, that researchers from the National Energy Technology Laboratory called the Appalachian Basin the U.S. “natural gas epicenter,” and described the play as a “generational opportunity.”
So the Tri-State region is sitting upon a massive natural gas deposit. As a result, the region is enjoying the lowest natural gas prices in the world. Of course, the low costs are significant challenge to producers. But it has been great news for Ohio manufacturing, residents, power producers and other end users of natural gas.
So why do the three states need to collaborate to ensure that Ohio does not become an extractive economy? Shouldn’t the low cost of natural gas grow existing manufacturing operations, or bring new ones to the region?
The short answer is yes, Ohio should see some growth just based upon the competitive advantage regional industries are currently enjoying for natural gas costs. Low natural gas prices are driving down manufacturing costs, especially for energy intensive businesses such as the chemical, glass and steel industries.
But the highest value use for a source of hydrocarbons is not to burn it, but rather to use it as a feedstock for the petrochemical industry. According to Paul Boullier, a chemical engineer with Team NEO, there are about 17,000 businesses within 400 miles of the Appalachian Basin that could benefit from a cheaper local feedstock.
Unfortunately, they can’t access that local feedstock unless an ethane cracker is built in the region. These companies need a refined version of the ethane, usually in the form of polyethylene.
It turns out that the Marcellus and the Utica both produce prodigious amounts of ethane. But without local crackers, that ethane is either being shipped to petrochemical markets in the Gulf Coast, or worse, it is being left in the natural gas stream (“rejected”) where it is burned. According to MarkWest, the region soon will be burning enough ethane to supply nine crackers every day.
The various regional economic development agencies fully understand the stakes: We must develop not just one, but several crackers in the region if we are to realize the full value of the ethane. Moreover, the choice of state does not really matter, so long as the crackers are regional. Local sources of polyethylene promise to inure to the benefit of manufacturers in all three states.
The stakes are high for the region. Sovereigns lucky enough to be rich in mineral resources must look for opportunities to move beyond being mere extractive economies. The best opportunity for Ohio to exploit the value of its hydrocarbons is for multiple crackers to get built in the region, leading to a growing petrochemical cluster.
This is why the governors of the three states have agreed to collaborate on an economic development strategy for the Appalachian Basin. To be sure, Ohio already has a diverse economy, and low hydrocarbon prices are not the disaster it is for states like Oklahoma or North Dakota. On the contrary, Ohio’s residents and businesses are, for the most part, enjoying the low prices.
But if Ohio is to fully realize the value of its hydrocarbons, ethane crackers will need to be built in the region. Let’s hope that the economic development agencies are successful in their efforts to develop a regional petrochemical cluster.
This was originally published in Crain’s Cleveland in October 2015