Profit plunge unlikely to stop Shell plant for cracker plant in W.Pa.

By Timothy Puko

 

Updated: Sunday, August 4, 2013

 

Shell's plan to sell some North American oil and gas land likely would not affect the company's proposal to build a petrochemical plant in Beaver County, analysts said Friday.

 

The chemical arm of Royal Dutch Shell plc may build the multibillion-dollar plant even if its parent company tries to sell out of Pennsylvania, analysts said. The complex, still under consideration, would turn ethane from Marcellus shale into plastics.

 

Ethane's cheap price means Shell likely would build the so-called “cracker plant” even if it had to buy ethane from other drillers, analysts told the Tribune-Review.

 

Shell announced a 60 percent drop in second-quarter profits on Thursday, including a $2 billion writeoff in the value of its North American shale properties. It plans to reevaluate its holdings, which include land in Pennsylvania. It will sell some, though company officials have not said which properties.

 

“I wouldn't assume it means bad news for the cracker,” said Andy Walberer, a chemical industry consultant at A.T. Kearney. “It certainly doesn't help, but it doesn't for sure mean they're pulling back.”

 

Shell officials are working in Beaver County without any sign of hesitation, said several state and local officials and business partners. All reported having contact with Shell officials within the past week or two.

 

Shell showed its 350-acre footprint for the plant to local officials on June 25, County Commissioner Joe Spanik said. Local governments would need to approve a tax-free zone the state promised Shell.

 

“I have no concern about Shell right now,” said R.T. Walker, a real estate agent who specializes in oil and gas properties and recently became a vice president at CBRE Inc. He noted that parts of the Marcellus in Western Pennsylvania remain among the most profitable for producing gas and other fuels. “It makes sense that they would keep going on there.”

 

A Shell spokeswoman in Houston declined to comment. Company officials have not announced specifics of their plan. Shell's quarterly earnings report simply called it a “strategic review” for North America and warned investors it would enter a period of selling more properties than usual.

 

The company entered the shale-gas market in 2010 when it paid $4.7 billion for Marshall-based East Resources Inc. The purchase gave it 700,000 acres of mineral rights and an active drilling operation in northeast Pennsylvania.

 

It since became the second-largest gas rights holder in the state, with 850,000 acres as of May 1, according to research and consulting firm Wood Mackenzie.

 

Shell has drilled slowly in the Pittsburgh area, primarily to test how much gas it has. State production reports showed it had 39 wells in Butler and Lawrence counties, which it refers to as its Slippery Rock holdings. only seven of the wells actively produced in the last six months of 2012, according to the Department of Environmental Protection.

 

Ideally the company would own the wells and the cracker, analysts said. But so much drilling in shale plays around the country led to a glut of ethane and prices plummeted. Building a plant to turn ethane into plastics would enable Shell to get money from the premium product, experts said.

 

The $200 billion company has many arms, however, and could opt to let another driller spend money up front while its chemical arm builds the cracker, experts said.

 

Stephen Lewandowski, research director at IHS Chemical, said it might not matter which company owns the gas.

 

“I think there's a lot of hurdles still for the cracker, in general, but I'm not sure this integration play is that important,” he said. “It just boils down to their view on ethane prices and the added-value of the big investment.”