Shell announcement increases Pa.'s chance at cracker
The chances that Royal Dutch Shell might build a multibillion-dollar petrochemical plant in Pennsylvania appeared to improve last week, after the company ditched plans to build another large plant along the U.S. Gulf Coast.
In late October, executives at the Netherlands-based energy giant said earnings declines were causing the company to face some "hard choices" about its future investment plans.
The company's global profits had dropped 32 percent over the last year due to weaker fuel demand, refinery profit margin declines and reduced output in Nigeria due to attacks on the company's pipelines.
The revenue squeeze didn't mix well with the company's ambitious plans to invest in new facilities and production capacity at sites around the world.
Chief Financial Officer Simon Henry said 2013 would be a "peak investment year," and said the company would carefully manage its finances by selling off some assets and being more cautious in its investments over the next few years.
Shell CEO Peter Voser said the company was going to have to review its current list of potential projects and decide which ones will go forward and which ones will not.
Three of those projects were in North America: A liquefied natural gas plant in Canada, a large gas-to-liquids plant in Louisiana and the ethylene cracker plant in Beaver County, Pa.
Voser singled out those three in October and signaled that at least one of them would have to be cut.
"We cannot afford to take all three together at once and if we could, I am not sure we have the engineers and the project managers to do so," he said.
Last week, the company went ahead and pulled the plug on one of the three.
In a statement last Thursday, Shell officials announced they were abandoning plans for the gas-to-liquids plant south of Baton Rouge, La., mainly due to increasing costs.
The Wall Street Journal reported Shell estimated in September it would spend $12.5 billion to build the plant, which would convert natural gas to diesel and other fuels.
However, in just three months, the project's cost skyrocketed more than 60 percent, from $12.5 billion in September, to $20 billion this month.
The Journal said the large number of energy infrastructure projects -- including new plants, port expansions and pipelines -- are driving up the cost of labor and raw materials in the Gulf Coast region.
Also, some moderate increases in the price of natural gas combined with increasing supplies of crude oil (which are expected to drive down prices in the future) are not good for a project that relies on a wide spread between natural gas and crude prices in order to turn a profit.
While Shell is still officially evaluating whether it will continue to move forward with the Pennsylvania cracker plant, scratching another more capital-intensive project off of its to-do list does up the chances for the Appalachian facility.
However, Voser on Thursday cautioned officials are still closely examining all future plans in order to preserve profits at the company.
"We are making tough choices here, focusing our efforts and capital on the most attractive opportunities in our worldwide portfolio to add value for shareholders," he said.