The Appalachian region is teetering on the edge of decisions that could lead to a new regional petrochemical industry based on natural gas liquids from the Marcellus and Utica shales.

Gas processing capacities in the region keep growing, and a $6 billion petrochemical project by Royal Dutch Shell Plc may have gone beyond the point where turning back would make any economic sense. Other plans for chemical manufacturing, pipelines, and storage are tentative but close to final investment decisions.

“I think it’s fair to say there are investments being made today that will transform the region,” said David Spigelmyer, president of the Marcellus Shale Coalition, a Pittsburgh-based energy industry association.

He’s understandably hopeful, given his supporting role, but the governments of Pennsylvania, West Virginia, and Ohio also are very supportive. They are dreaming of an industry that would step in where steelmaking and other heavy industries have faded. The region could soon learn how substantial those dreams are.

The next big step, according to Spigelmyer and others who spoke to Bloomberg Environment, could be a final investment decision by PTT Global Chemical and Marubeni Corp., which have been considering building a large petrochemical plant in eastern Ohio. A significant and positive project update will be announced early in 2018, PTT said in December.

Fast-Growing Capacities

Natural gas production in the Appalachian region has soared from about 2 billion cubic feet a day in 2010 to an estimated 26 billion cubic feet a day in January, according to the Energy Information Administration.

Gas processing plants have been multiplying in western Pennsylvania, northern West Virginia, and eastern Ohio. The plants separate methane—the dominant component of natural gas—from natural gas liquids (NGLs). Gas processing plant capacity grew from 1.1 billion cubic feet a day in 2010 to 10 billion cubic feet a day in 2016, according to the EIA.

The capacity of fractionation to separate the various natural gas liquids—especially ethane, propane, and butane—also grew in the region. The regional fractionation capacity jumped from 41,000 barrels a day in 2010 to nearly 850,000 barrels daily in 2016 and should reach 1.1 million barrels a day in 2019, according to the EIA.

That 1.1 million barrels a day is expected to include 350,000 barrels a day of ethane. Ethane crackers are large processing units that use heat to convert ethane molecules into ethylene molecules, which then can be fed into another unit for conversion into polyethylene, one of the most common petrochemical building blocks for plastics, resins, and other synthetic materials.

About 70 percent of the primary plastics manufacturing plants in the U.S. are within a seven-hour drive of Pittsburgh, according to Spigelmyer. Savings on transportation time and costs provide an added incentive for regional production of polyethylene, which can be shipped in pellet form by truck or rail.

Shell Cracker in the Works

The most significant development so far has been the multibillion-dollar ethane cracker project being developed by Shell in Monaca, Pa. It has reached a crucial stage, with extensive site preparation completed and the company set to start building the two main units—an ethane cracker to produce ethylene and unit to turn the ethylene into polyethylene.

Shell did not respond to requests about the status of its project, but many people are tracking the work. The company has realigned a highway and a rail line, put in docks, and built foundations, according to Warren Wilczewski, an EIA industry economist.

“It’s very difficult to dial that project back to nothing,” Wilczewski said in early January. “They’re now on the hook for more than half of the outlay on that project.”

Most of Shell’s equipment requiring extensive delivery times may already have been delivered, said Steve Lewandowski, vice president of olefins at consulting company IHS Markit Ltd. And Shell may have taken steps to allow for the option of going beyond what it has announced so far, he said Jan. 22.

“What we understand is they’ve sort of prepped that site for a second train,” Lewandowski said, referring to a second set of ethylene-polyethylene production units.

Shell has lined up long-term ethane supply contracts with regional producers, and the company’s marketers are presumed to be negotiating offtake agreements for companies to buy its polyethylene pellets. It also has plans for building pipelines to ship ethane from regional fractionation plants to its complex in Monaca. And it has paid for the licensing of polyethylene manufacturing technology, Lewandowski said.

Next Big Cracker, Maybe

PTT Global Chemical has spent several years studying the idea of building an ethane cracker complex in Belmont County, Ohio, 50 or 60 miles down the Ohio River from the Shell project. It’s said to be a $5 billion project. About $100 million was committed in 2015 to contracts with Fluor Corp. and Bechtel Corp. for the engineering design work that would determine costs more accurately.

PTT is Thailand’s largest integrated petrochemical and oil refining company. Japanese conglomerate and trading house Marubeni is the minority partner for the project.

“PTT is getting close to making a final investment decision,” Lewandowski said. “They’re still doing due diligence.”

The company said last December that it will have a significant update early in 2018 that “will demonstrate positive momentum” for this project.

The project has the support of Ohio Gov. John Kasich (R), just as the Shell project is supported by Pennsylvania Gov. Tom Wolf (D). Kasich joined the PTT president and CEO for a 2015 announcement of the site selection, and he stressed the elaborate efforts to bring together state, local, and federal officials to back the project for the sake of jobs and economic development.

“We can get the air permits,” Kasich said at the time, mentioning contacts with the Environmental Protection Agency. “We’ve already checked it.”

The location selected in Ohio is a former coal-fired power plant, while the Shell site in Monaca used to be a metal-processing facility. Former industrial sites needing revitalization abound in eastern Ohio and western Pennsylvania, and there is a reserve of skilled industrial workers.

Ethane Leaving by Pipeline

Ethane also is being shipped out of the region by pipelines to Ontario petrochemical makers, the Gulf Coast, and the port of Marcus Hook, Pa., where the product can be taken to Europe by tanker ship. More pipelines can be built, but the economics favor local use.

The Gulf Coast is the heart of U.S. petrochemical manufacturing, but the pipeline now taking ethane from the Marcellus and Utica shales may be the only one, because it’s not a profitable way for the ethane producers. It was merely a disposal strategy for surplus ethane, EIA’s Wilczewski said.

Enterprise Products Partners L.P. reversed one of its Teppco pipelines to carry Appalachian ethane to Mont Belvieu, Texas, the main hub for natural gas liquids. The shipping cost on that line, the Appalachia-to-Texas Express (ATEX), is more than $3 per million British thermal units of ethane, and that’s close to the selling price of ethane at Mont Belvieu, leaving no profit for the producers.

Producing companies were willing to pay for the ATEX project because they could not simply mix all their ethane into their methane streams as natural gas. The high ethane content would have raised the heat content of the gas beyond pipeline specifications.

Propane Options Discounted

Propane also is common in Appalachian gas and can be used to make propylene and then polypropylene. That, however, would be a much more difficult business proposition than turning ethane into polyethylene, Wilczewski said.

The propane market is so strong and so well-served by railroads to the Midwest and farther—as far as Mexico—that there is less financial motivation for trying to develop Appalachian polypropylene, he said.

Lewandowski at IHS Markit agreed, saying ethane is more of a “stranded product” than propane, a contrast that favors using ethane rather than propane for local chemical manufacturing. The U.S. polypropylene market is not growing much, he added.

More Infrastructure Wanted

The Appalachian region also could benefit from natural gas liquids storage, which would allow for a place to put surplus gas liquids produced but awaiting use. One project has been planned and a broader idea for projects is being explored.

The Mountaineer NGL Storage project, proposed by Energy Storage Ventures LLC with financial backing from Goldman Sachs, would store natural gas liquids underground in Monroe County, Ohio. Energy Storage Ventures has been trying to line up customers.

The governments of Pennsylvania, West Virginia, and Ohio also are trying to financially support natural gas liquids infrastructure development through what they have named the Tri-State Shale Coalition.

The best idea would be to develop more NGL pipelines and more than one storage site to allow for a trading hub, according to Brian Anderson, a chemical engineering professor at West Virginia University. That would be more efficient and flexible than relying on long-term contracts between natural gas liquids producers and petrochemical makers, he said.

A gas liquids trading hub like Mont Belvieu in Texas, with storage amid a network of pipelines, can allow buyers and sellers to participate in the market when they choose, as volumes become available and prices fluctuate, favorably or unfavorably.

The Trump administration also wants to foster energy infrastructure and economic development. The Energy Department has invited the Appalachia Development Group LLC to apply for a $1.9 billion loan guarantee for infrastructure development. Anderson has been working with Appalachia Development Group, which is made up especially of people who have experience in the chemical industry.

The loan guarantee would ease debt financing for projects.

Seeking Commitments

Part of the holdup for financial decision-making is the chicken-and-egg question of what comes first—infrastructure or petrochemical manufacturing projects to use the infrastructure. Anderson suggested the primary task is to get commitments for manufacturing.

A big ethane cracker facility can take five or six years to build. Pipelines and storage can be built in much less time, so if a commitment is made to build a cracker, the pipelines and storage can then draw commitments and get built in much less time, Anderson said.

Storage would involve creating caverns in salt beds. Water pumped underground can dissolve salt to create the caverns.

Spigelmyer at the Marcellus Shale Coalition offered an additional cautionary note. Political risk remains an issue despite state government support, he said.

He did not single out particular sources of risk, but there’s a continuing push in Pennsylvania to create severance taxes for gas production. At the same time, the interstate Delaware River Basin Commissionhas been considering a proposed ban on hydraulic fracturing, a practice that has helped enable the shale gas boom.