MATRIC, South Charleston, WV

Large petrochemical projects stymied by falling crude oil prices

From an Article by Anya Litvak, Pittsburgh Post Gazette (PowerSource), 9/8/15

For Aither Chemical, the company that strived to blanket Appalachia with small-scale ethane crackers, the past was prologue.

Technology that promised to drastically reduce the amount of energy required to turn natural gas liquids into a building block for chemical production was conceived in the 1980s at Union Carbide. The innovation was supposed to displace expensive crude oil with cheaper natural gas, but it was shelved after an oil glut sent the commodity’s price plunging.

Cut to 2010. Oil was around $80 a barrel and climbing. Development of the Marcellus Shale, with its pockets of natural gas liquids like ethane, was ramping up.

The rights to Union Carbide’s invention were transferred to a West Virginia technology nonprofit called Matric. There, scientists dusted it off, hired an executive team and began to gather attention and funding for their first cracker. They named the effort Aither.

But once again, an oil glut has dissolved both the promise and the company, a story that is repeating itself across the industry.

Crude oil dipped below $40 per barrel last month and while it has since recovered by a few dollars, the long-term outlook doesn’t forecast anything close to 2010 prices for another six years, according to the Energy Information Administration’s Annual Energy Outlook released in April before the most recent oil price collapse.

That makes the proposition of building new ethane crackers less compelling than feeding naphtha, a crude oil product, into existing crackers to make ethylene.

And Aither has joined the graveyard of other once-hyped projects vying to capitalize on the price spread between expensive oil and cheap gas before that spread narrowed to a sliver. All that’s left is some intellectual property that its overseer and largest investor, the West Virginia Jobs Investment Trust, is trying to either license or sell off.

The oil glut has also tempered the drive to build gas-to-liquids plants whose end products are meant to compete with traditional gasoline and diesel or oil-based lubricants.

Three such plants planned for Pennsylvania have been canceled.

In 2012, Calumet Specialty Products Partners, an Indianapolis chemical producer, said it would build a small gas-to-liquids plant at its Karns City refinery in Butler County to convert the region’s plentiful Marcellus bounty into lubricants and specialty liquids.

Calumet spokesman Noel Ryan said the company tabled the project two years ago, opting instead to buy into a gas-to-liquids joint venture in Louisiana where “the economics were more attractive.”

Marcellus GTL, a spinoff from an unrealized coal-to-liquids effort by Gilberton Coal Co. in Schuylkill County, made a splash by announcing a $200 million facility in Altoona that would manufacture gasoline and propane from natural gas. That, too, did not materialize.

Neither did an effort by Canadian company EmberClear to build a $1 billion gas-to-liquids near Reading, PA. That was scrapped earlier this year, according to the Reading Eagle.

Deeper pockets needed

As with all large projects, it isn’t just one turn of the market that scatters opportunity. Efforts that aim to bank on the volatility between oil and natural aren’t naïve to the general volatility of commodity arbitrage.

But while large multinationals such as Royal Dutch Shell, which has pumped millions of dollars into preparing a Beaver County site for a potential cracker that has yet to be greenlighted, can afford to ride out this wave, startups may not.

Aither was looking for somewhere between $200 million and $800 million for a small-scale plant, but it couldn’t secure even $12 million for a pilot facility, said Andy Zulauf, executive director of the West Virginia Jobs Investment Trust, the state’s Charleston-based venture capital arm. “We had a national energy company express an interest in acquiring the technology to the degree that a term sheet was issued,” he said.

But in the end, financing proved elusive.

“Economies of scale are really important in the ethylene production space,” said Steve Lewandowski, senior director at IHS Chemical. “Small crackers cost a lot more per ton of ethylene than large ones. “So whoever is financing the small crackers will need even more margins to cover higher capital cost and, in a lower margin market, this is much more risky.”

Large companies call the shots using their own pocketbooks, he said, while smaller projects depend on the confidence of investors. In today’s commodity environment, that confidence is wobbly at best.

See also: www.FrackCheckWV.net