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Shell may pull plug on Pa. cracker

Facing eroding profits and future headwinds, executives at Royal Dutch Shell said Thursday they face "hard choices" about future investment plans, including the company's potential $2 billion petrochemical plant along the Marcellus shale.

Shell, Europe's largest oil company, announced Thursday that third quarter profits fell short of analysts' expectations. The $4.5 billion the company earned during the quarter fell 32 percent from the same quarter one year ago.

The drop in earnings was driven by weaker fuel demand, refinery profit margin declines and reduced output in Nigeria due to attacks on the company's pipelines.

In addition to the $2 billion ethylene cracker plant the company is looking to build in Beaver County, Pa., Shell had also planned a slew of new construction and infrastructure development projects for the latter part of this decade.

However, the recent drop in profits is now forcing company leaders to rethink those plans. Executives said the company would have to strike a careful balance between incoming cash flow and outgoing capital spending in order to maintain future profits.

"We are facing headwinds from weak industry refining margins, and the security situation in Nigeria, which continue to erode the near term outlook," Peter Voser, chief executive officer at Shell, said in Thursday's earnings announcement.

"The company is rich with new investment opportunities," Vosar said. "In the next few quarters, Shell's capital discipline means we will need to make hard choices between the best new investment opportunities from this industry-leading portfolio."

Chief Financial Officer Simon Henry said the $10 billion in new project investments would likely make 2013 a "peak investment year" for the company.

The company plans to sell off some assets in 2014 and 2015 to boost cash flow. However, Henry said officials would need to make decisions within the next year about whether the company will move forward with some new projects later this decade.

"We have reached critical mass with our 2015-plus investment option set," Henry said, "and there will be decisions to make in the next few quarters on which options to take to final investment decision, especially in our global integrated gas business."

In June 2011, Shell announced it was looking into building a large petrochemical complex in the Appalachian region to capitalize on the Marcellus shale gas boom.

This so-called cracker, which would break natural gas down into chemicals that can be used to make plastics and other materials, would create hundreds of new jobs at the plant and potentially attract other plastics and chemical plants, creating thousands more jobs.

Leaders in Pennsylvania, Ohio and West Virginia all aggressively courted Shell with promises of tax breaks and other incentives in an attempt to lure the plant to their state. Pennsylvania eventually won out with its offer of a nearly $2 billion multi-year tax incentive package.

On March 15, 2012, Shell signed a land option agreement to begin evaluating a site near Monaca, Pa. The company expected it would take one to two years to complete all the evaluations and engineering work, before making a final investment decision to officially green-light the project.

Meanwhile, many analysts began to sour on new natural gas refinery investment in the Marcellus region.

Some have said the shale gas refining industry has expanded too much in recent years and argue company dollars would be better spent by making use of unused capacity at existing plants along the Gulf Coast.

Three major pipeline projects also have been announced since the Shell decision. Once complete, the pipelines will be able carry up to 600,000 barrels per day of ethane and other liquids from Appalachia to the Gulf Coast.

Voser, who is stepping down at the end of the year, has acknowledged the company over-invested in the U.S. oil and gas shale market. He told the Financial Times in early October his "biggest regret" as Shell CEO was the company's $24 billion bet on North American shale.

In addition to the Pennsylvania cracker, the company is also evaluating potential construction of a liquefied natural gas plant in Canada and a large gas-to-liquids plant in Louisiana.

On a conference call with analysts and the media Thursday, Voser said the company's cash restraints will prevent it from building all three plants. 

"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," Voser said. "So we will need to make choices (about) which (projects) go forward."

Company officials said they might have a better idea about the status of the projects when the company reports fourth quarter earnings in late January.

Contact writer Jared Hunt at or 304-348-4836.


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