Strength in numbers: Diversifying America’s petrochemical industry bolsters security

Major weather events in recent years have demonstrated a growing need for diversifying America’s petrochemical industry.

A year ago this week, Hurricane Harvey hit Texas — and within six days, 27 trillion gallons of rain had fallen on the region. Winds reaching up to 135 mph tore through the nation’s fourth-largest city, devastating Houston and the Gulf Coast.

The hurricane “paralyzed” America’s largest petrochemical center, creating a profound ripple effect across the country.

{mosads}The Gulf Coast is home to about 90 percent of the nation’s plastic-producing capacity. These plastics are the building blocks for a wide range of industrial and consumer goods, including the products we use on a daily basis — everything from pacemakers to pill coatings.

Following Harvey, roughly 60 percent of U.S. ethylene and propylene capacity — the most common components of plastic — went offline, impacting businesses across the country. As PetroChem Wire’s Kathy Hall explained to CNBC, “[Manufacturers] can’t make very much without them.”

Even here in Ohio, the lack of access to polypropylene (a product produced from propylene and another component of plastic) caused Little Tikes — a children’s toy maker — to change vendors when it encountered a 25 percent cost increase for resin because of the cut off supply. And Little Tikes is just one of the region’s manufacturers that relies heavily on petrochemical feedstock.

Lack of geographical diversity in our petrochemical industry is a valid concern that is not to be dismissed lightly, as the effects of storms such as Harvey demonstrated. Our ability to produce and manufacture the materials that are the backbone of our economy is a matter of security — a fact that U.S. Department of Energy (DOE) Secretary Rick Perry shared in his recent testimony to Congress:

“As the governor of Texas, in August and September, I worried greatly about a Category 5 hurricane coming up the Houston ship line and devastating the petrochemical footprint that is a substantial amount of that industry for the United States,” he noted. “That is a national security issue.”

Fortunately, it’s a concern that’s being met with a cost-effective solution.

Efforts are under way to build additional petrochemical capacity outside of the Gulf Coast in the less hurricane-prone Appalachian Basin, or as it is starting to be renamed, the Shale Crescent USA.

Sitting atop the liquids-rich Utica and Marcellus shale reserves, the Pennsylvania, Ohio and West Virginia tri-state area has an abundance of natural resources recoverable at costs below Gulf Coast equivalents. Ethane and other natural gas liquids (NGLs), including propane and butane, are ubiquitous in the basin — and production levels are climbing at an incredible pace.

According to the latest DOE report, the Shale Crescent region — which by itself would make the third-largest producing country behind the United States and Russia — will increase its NGL production by more than 700 percent in the decade from 2013 to 2023.

Beyond access to resources, petrochemical investment in the Appalachian Basin also is incredibly cost-effective. A new IHS Markit study found the Shale Crescent region will “provide a significant financial advantage” over the Gulf for companies investing in new petrochemical projects. For example, according to IHS, ethane costs are 32 percent lower in the region, with ethylene, the petrochemical derived from ethane, costing 23 percent less to produce.

Further, and perhaps even more importantly, 70 percent of the nation’s polyethylene market is within a day’s driving distance of the resources. This means that for the first time, the market and supply are within close proximity.

With the reduced delivery costs and low-cost NGL supply, a petrochemical plant located in the Shale Crescent USA would generate a four-times-higher net present value cash flow than a comparable investment in the Gulf Coast.

Both the DOE and IHS studies demonstrate the viability of Appalachia as a second petrochemical hub. This opportunity provides us the ability to responsibly, geographically diversify the industry.

Shell’s $6 billion cracker plant in Beaver, Pennsylvania, is the first step in this movement to expand the industry, and additional projects are under way. Our natural resources are providing the ability to complement our assets in the Gulf Coast with another energy hub in the East. In doing so, we can ensure a stronger national economy by securing the industry that drives it forward.

Jerry James is president of Artex Oil Company in Marietta, Ohio. He is a co-founder of the Shale Crescent USA economic development initiative, which encourages business growth in the Ohio, West Virginia and Pennsylvania region.