Business, Government Legal News from throughout WVW.Va.’s Odds of Winning Cracker Plant Not Clear

W.Va.’s Odds of Winning Cracker Plant Not Clear

With jobs and potential economic revitalization on the line, West Virginia officials are hoping to beat out two other states for a major development opportunity.

Shell Chemicals officials recently stated they would be announcing where they would be considering placement of an ethane cracker facility. The plant, which extracts the multipurpose chemical precursor ethane from "wet" natural gas, offers hope to revitalize West Virginia's chemical industry.

"As we move forward with our development of this project, we are concentrating our search for an appropriate site in three states: Pennsylvania, West Virginia and Ohio," said Dan Carlson, general manager of new business development for Shell Chemicals in an e-mail response to questions regarding the announcement. "We hope to reach a decision on the location of the cracker by the end of this year and plan on announcing it in January."

In the e-mail, Carlson outlined numerous factors in which West Virginia will need to outshine Pennsylvania and Ohio in order to have a cracker facility located in the state. Some of the factors being considered include the regulatory environment, access to ethane-rich gas fields, transportation infrastructure, power grid infrastructure, underground storage facilities, availability, skills and cost of local workforce, proximity to Northeast markets, and the cost and ease of doing business in the respective states.

"There would be employment opportunities in the construction phase and afterwards when the plant is operational, ultimately providing hundreds of full- time, well-paying jobs at the site. And, it's important not to forget about indirect and induced jobs," Carlson said.

Regulatory environment

In West Virginia, little regulation had been drafted specifically for the methods used in Marcellus shale gas drilling. The drilling utilizes two techniques – horizontal drilling and hydraulic fracturing – concepts with which many West Virginians and lawmakers were not largely familiar.

The Joint Select Committee on Marcellus Shale, a collaborative effort of the state's Senate and House of Delegates, recently pushed out a comprehensive bill addressing numerous concerns, including special rights for both drillers and surface owners. It also adds several environmental protections.

Uncertainty about the bill, however, is prevalent as both industry representatives, environmental groups and surface owners, who while in opposition to one another, agree that the bill is not satisfactory. Lawmakers from the committee on both sides of the Legislature have largely expressed they believe leadership and the general body will support the bill when it comes time to vote.

Pennsylvania's House of Representatives passed a bill earlier this month that would enact a voluntary 1 percent impact fee on Marcellus shale drilling and add additional regulatory measures to the state's books. Critics of the legislation say it is too easy on the state's gas drillers.

Meanwhile, Ohio lawmakers are also battling over proposed regulations. Proponents of the state's latest package of regulations say they are some of the strongest in the nation. However, detractors are calling for more stringent rules on shale gas developers.

Pressure has also been mounting on states to pass their own regulations or face federal regulation.

Shell's decision will be further complicated as it examines potential sites, as numerous attempts to regulate the industry have occurred at county and municipal levels. The "patchwork" of regulations that can be found across various borders was recently criticized by members of the Department of Energy's Shale Gas Committee of the Secretary of Energy Advisory Board.

In addition to examining the current regulatory status of natural gas drilling and ethane development, Shell will also likely be trying to predict just what may change in those states' regulatory frameworks in the near future.

Last year, West Virginia introduced a bill that would provide incentives to companies that would locate an ethane cracker in the state. Ohio has also offered more than a billion dollars in incentives for a cracker facility.

Access to ethane-rich gas fields

Another prime factor in locating the facility, Shell said, will be proximity to the regions of the Marcellus shale that produce "wet" gas. Dry gas is primarily methane, while wet gas is methane laden with other heavy gases such as ethane or propane.

An ethane cracker facility would benefit from being located near sources of wet gas.

Natural gas from the Marcellus shale, formed in chemical reactions deep beneath the ground, tends to become less "wet" as it matures. Geographically, the less mature, and therefore more "wet," sources of Marcellus shale gas tend to fall to the western portion of the Marcellus field.

In the three states being considered for the cracker, West Virginia's Northern Panhandle would be centrally located. However, the two West Virginia facilities that have been considered are not exactly centered in the state's wet gas field.

The Kanawha Valley location is on the opposite end of the state, but another location Bayer has offered in New Martinsville would lie just within what is considered to the be the "wet zone."

While larger swaths of the wet zone lie in Pennsylvania, West Virginia's northernmost counties and Ohio's Eastern counties do have extensive access to wet gas fields.

Of course, locating in one state would not exclude a cracker facility from accepting shale gas from other states that are nearby.

Storage of natural gas

West Virginia economic development officials have called for further study of the state's storage potential. When not immediately being used or processed, natural gas must be stored, primarily in underground facilities.

According to the U.S. Energy Information Administration, in 2009 West Virginia had about 531 billion cubic feet of natural gas storage capacity. Ohio has about 580 billion, and Pennsylvania has about 777 billion cubic feet of storage capacity.

Precise location and capacity was not clear in the EIA data, but maps of natural gas storage facilities indicate that much of the storage capacity in all three states is near the wet regions of the Marcellus shale.

Abandoned mines, salt caverns and other artificial and natural underground storage facilities are primarily used for natural gas storage.

Several major pipelines for the transfer of raw natural gas and ethane are either in place or under way in all three states as well.

Transportation of natural gas and its byproducts

Shell has clearly stated it's interest in locating within close proximity of Northeastern markets. If the intention is to shop to markets in New England, then Pennsylvania, of course, is the closest, with West Virginia and Ohio falling fairly close behind.

Distance, however, is not the only factor in transporting the natural gas and the ethane that comes from it.

Pittsburgh is a central location for rail traffic and provides a good starting point for major shipments of natural gas byproducts. Some major railway connections in the very northern part of the state where the wet gas is located are also near major rail transport. The regions of Ohio of interest to wet gas producers have some connection to lighter traffic routes as well.

Both Ohio and Pennsylvania have prime port locations on Lake Erie with access to Northeastern markets.

West Virginia's primary freight-capable waterway is the Ohio River.

Locating near key railways and waterways is likely to be a key factor in locating the cracker. Carlson said "being closer to our customers in the Northeast would mean shorter supply chains and quicker response times plus greater flexibility."

Smith's outline of what the company would be looking for also lists "power grids" as one of the many factors being considered by Shell.

While it is not clear precisely what the company may be looking for in regard to the power grid, major high-voltage transmission lines do run through northern West Virginia and the Kanawha Valley. Mid-voltage lines are located throughout both Pennsylvania and Ohio.

Cost of doing business and the local workforce

When it comes down to West Virginia's ability to attract business and workforce, there is mixed news.

According to a 2011 "special report" from CNBC, West Virginia is ranked number 15 in states with lowest cost to do business. Pennsylvania is ranked 27^th and Ohio is ranked 5^th.

In overall rankings of top states to do business, which was based on cost of doing business, workforce, quality of life, economy, transportation and infrastructure technology and innovation, education, business friendliness, access to capital and cost of living, West Virginia was ranked 46^th.

Pennsylvania was ranked 12^th overall and Ohio was ranked 23^rd.

Despite a low cost of doing business, which included everything from tax burden to utility costs, West Virginia still scored in the bottom half of states in regard to available workforce, quality of life, infrastructure and transportation, education, technology and innovation, business friendliness and access to capital.

It scored in the upper half of states only in cost to do business, economy and cost of living.

Ohio, on the other hand scored well in most categories with the exception of workforce, quality of life and business friendliness. Pennsylvania also scored poorly on workforce and had lower than average rankings for cost of living, business friendliness, quality of life and cost of doing business.

Direct efforts to encourage cracker development in West Virginia may have netted the industry some advantage, but pending legislation also seeks to increase permit fees for shale gas drillers in the state.

While West Virginia workers tend to work for less and can do so largely because of a lower cost of living, the skills of its workforce aren't necessarily geared toward natural gas drilling. Several community colleges in the northern part of the state have been working with Pennsylvania and Ohio in developing educational programs that could lead to jobs in the Marcellus shale gas play.

Waiting game

While Shell has announced its plans to make an announcement in January 2012, even its specific outline of what it is looking for does not appear to make the location any more clear. While some regions of West Virginia look ideal in some respects, they pale to Ohio and Pennsylvania in other respects.

Meanwhile, ethane-heavy natural gas is being pulled out of the ground, and plans to use the gas are already under way. Chesapeake recently announced plans to ship at least 75,000 barrels of ethane daily from the Appalachian region to Texas for use by the petrochemical industry on the Gulf Coast. The timing of the announcement has worried some West Virginia officials, but industry representatives say the gas has to be used somewhere while West Virginia awaits its own cracker facility.

Some are estimating ethane production from the West Virginia Marcellus shale to be as high as 270,000 barrels per day. A cracker facility would utilize between 65,000 and 85,000 barrels per day.