Developing new shale gas fields in Appalachia “may not end up being profitable” in the years ahead according to a new report. In addition, the associated petrochemical buildout that the region has pinned its hopes on as the future of natural gas is “unlikely,” the report states.
Natural gas drillers need prices to rise in order to turn a profit and continue expanding, a scenario that appears doubtful, according to the report published by the Stockholm Environment Institute’s US Center (SEI) and the Ohio River Valley Institute (ORVI), a Pennsylvania-based economic and sustainability think tank. Volatile market conditions for plastics are also putting the region’s plans for new petrochemical plants in question.
Given the poor financial results from the industry over the past decade, “gas prices would need to rebound and increase” if the fortunes of Appalachia’s shale industry are to improve, study co-authors, Peter Erickson, climate policy program director at SEI, and Ploy Achakulwisut, a scientist at SEI, wrote in the report.
Appalachia — already suffering from a long drawn out bust in the coal industry — has for much of the past decade seen natural gas prices languish as drillers pumped too much gas out of the ground, which has resulted in persistently low prices. And a renewed price surge appears unlikely as gas faces growing competition from solar and wind.
“Now there are signs that gas itself could get passed up for lower-cost renewables, introducing new risks for communities that rely on gas extraction for employment and tax revenue,” the authors wrote.
Due to liquefied natural gas (LNG) being a powerful and growing source of climate pollution, LNG’s expansion “would need to be — at best — short-lived,” the SEI/ORVI report’s authors state, noting that global decarbonization efforts could displace much of the gas demand that the industry is anticipating.
At the same time, a souring market for petrochemicals — a result of the industry overbuilding capacity and an uncertain plastic consumption outlook in the future — also undercuts the need for developing a major new petrochemical hub in the region. This is much to the disappointment of various business groups, regional politicians, and even the U.S. government who had planned on this being one of the last bastions of hope for the shale gas industry.
Appalachia’s Shale Gas Problem
The financial performance of Appalachian shale gas drillers has been consistently poor, with the industry broadly cash flow negative since its inception in the late 2000s. After a decade-long drilling boom, production ran into a wall in late 2019 and has stagnated since. Production remains high, but the frenetic pace of drilling is long gone.
“All the big players walked away and took multi-billion-dollar write-offs,” selling off their remaining assets in the region, Kathy Hipple, a finance professor at Bard College, told DeSmog. “The sales have either been pennies on the dollar or fire sales. Chevron left. Shell left.”
Natural gas prices have halved over the last 10 years. Prices averaged over $4 per million British thermal unit (MMBtu) a decade ago when more than 100 rigs actively drilled thousands of wells per year in Appalachia. By 2019, prices averaged just $2.50 MMBtu, before falling to around $2 MMBtu in 2020.
Regional leaders continue to hope for the best. “It’s not really a boom or bust situation. It’s an ebb and flow,” Ohio’s Belmont County Commissioner Jerry Echemann said at a county commissioners meeting on March 24, 2021, referring to the latest lull in drilling. As of mid-March, there were only 30 rigs active in Appalachia. “Right now, we’re at a downpoint, but we’re hoping for a pickup.”
“New gas development in Appalachia is unlikely to be broadly profitable in a sub-$2.75/MMBtu environment, and therefore growth is challenging at recent prices, ” SEI’s Erickson told DeSmog in an email.
The outlook appears unlikely to improve going forward. Futures prices are trading well below $3/MMBtu for the better part of the next decade.
Marcellus rig count has plummeted since 2011. Credit: Graph generated via Baker Hughes.
The industry, however, continues to promise to lower costs. “A lot of this development doesn’t work as well at $2.50 gas,” Toby Rice, CEO of EQT, the largest shale gas driller in the United States and a giant in Appalachia, said in late 2019 at a time when prices were careening down towards $2/MMBtu and below. At the time, the company’s breakeven cost was around $2.80.
In an earnings call with investors in February 2021, Rice noted that EQT has made strides in cutting costs, lowering its breakeven price to $2.40/MMBtu this year. With natural gas prices trading just a bit higher than that currently, the company expects to produce positive cash flow in 2021.
But EQT is the largest gas producer in the country. Other Appalachian drillers have consistently burned through cash.
“The smaller players that are there, institutional investors have abandoned them, even though their stock prices went up a lot last year. Except for EQT, institutional investors have largely walked away from that sector,” Hipple said.
Prices Set to Remain Stuck At Low Levels
For the industry to continue to grow over the next several years, drillers would need much higher prices. But for a variety of reasons, a sustained price increase does not appear likely, according to the SEI/ORVI report.
The substantial surge in U.S. natural gas demand over the past decade largely occurred as a result of the wave of new gas-fired power plants constructed around the country. That building boom, however, is likely over. The U.S. Energy Information Administration (EIA) forecasts flat gas demand in the U.S. for the foreseeable future, and new electricity capacity is now overwhelmingly captured by solar and wind.
In 2021, an estimated 39.7 gigawatts of new electricity capacity planned to come online in the U.S., with solar accounting for 39 percent of that total capacity, wind accounting for 31 percent, and batteries making up an additional 11 percent, according to the EIA. Natural gas, meanwhile, captures 16 percent of the total.
Moreover, these projects are the result of investment decisions made in the past, often several years ago. Going forward, utilities are likely to pivot even more aggressively towards renewables, as solar and wind are the cheapest option in most places.
Facing little prospect for growth in the U.S., new demand for Appalachia’s gas could come from overseas. But the global LNG market has also seen incredible volatility in recent years, forcing a wave of delayed and canceled LNG projects. The industry relies heavily on optimistic demand assumptions from Asia, which may or may not pan out. The U.S. is also not the lowest cost LNG supplier on the market. Qatar, the world’s largest LNG exporter, just announced a massive $29 billion expansion of its industry, which will grow its export capacity by a third. That creates a big barrier to new entrants.
LNG proponents make the case that gas offers a lower greenhouse gas profile than coal, a misleading industry talking point which could be used to justify an expansion around the world. Planet-warming methane leaks in the Permian basin, for example, wipe out any potential benefit of gas over coal. And while global LNG demand may not take a hit in the short run from decarbonization efforts, “in the longer term, LNG has a limited role to play,” the SEI/ORVI report concluded.
Can petrochemicals save Appalachian gas?
Without increased use of gas in electric power domestically, or increased gas exports, Appalachian drillers are down to petrochemicals as their main hope to clear the regional glut of gas. The processing of natural gas liquids (NGLs) – principally ethane – into little plastic pellets for industrial use would spur a “petrochemical renaissance,” according to the Department of Energy (DOE).
But this sector, too, is suffering from incredible volatility, with plastics prices falling over the past few years as supply growth worldwide outpaced demand.
In Beaver County, Pennsylvania, on the western edge of the state, huge cranes and hulking steel beams loom over the Ohio River. After a half-decade of construction, Shell’s ethane cracker, which will turn fracked shale gas into the building blocks of plastic, is nearing completion. In March, Shell announced that the massive facility – costing between $6 to $10 billion – will come online next year.
Shell’s ethane cracker was supposed to be the flagship plant in Appalachia’s petrochemical boom. “By our calculations, you could easily have another two or three world-scale crackers,” Warren Wilczewski, an economist at the EIA, said at an industry conference in Pittsburgh in June 2017.
However, Shell’s cracker could be the first – and last – for the region. Roughly 75 miles down the Ohio River at Dilles Bottom in eastern Ohio’s Belmont County, a dirt foundation where an old razed coal plant once stood, sits empty. PTT Global Chemical (PTTGC), Thailand’s largest petrochemical manufacturer, has been mulling a multibillion-dollar ethane cracker for that site, one with a similar size and price tag as Shell’s Pennsylvania cracker. But PTTGC has delayed the project multiple times amid volatile market conditions for natural gas and plastic.
In early 2020, PTTGC delayed an investment decision, and by mid-year one of its partners – Korea’s Daelim Industrial – pulled out of the project. In February 2021, the Thai petrochemical giant delayed the project yet again as it searched around for new investing partners.
“The risks are becoming insurmountable. The price of plastics is sinking and the market is already oversupplied due to industry overbuilding and increased competition,” Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis (IEEFA), said in March 2020 after one of PTTGC’s delays.
“The regional market is way oversupplied. So, you either find some regional use to consume it, or you’re kind of stopped, you hit a brick wall there,” Anne Keller, an independent consultant and former research director for NGLs at consulting firm Wood Mackenzie, told DeSmog.
Keller doesn’t see global decarbonization efforts cutting into gas demand to such an extent that it would hit Appalachian prices for the foreseeable future. “I’m kind of skeptical about that,” she said. Nevertheless, she did agree that the region is suffering from tremendous oversupply of gas, and that petrochemicals do not offer a way out.
The business case for Appalachian petrochemicals was that it had access to a large U.S. market for plastics, there was an abundant and cheap ethane supply, and low logistics costs. “The dynamics of ethylene have changed,” Keller said, referring to the product produced after ethane is “cracked.”
A much larger petrochemical buildout on the Gulf Coast got a head start in the early 2010s, greenlighting a long list of new petrochemical facilities several years before the industry set its sights on Appalachia, and has now saturated the U.S. market. But global market conditions have deteriorated to such a degree that even the Gulf Coast is tapping on the brakes, Keller said, citing an October 2020 decision joint venture between Chevron, Phillips 66 and Qatar to delay an ethane cracker on the Gulf Coast.
It is against this negative backdrop that new petrochemical facilities in Appalachia are trying to compete.
That said, Keller noted that decarbonization could cut demand growth for crude oil. If oil prices remain weak because of tightening climate policy, that makes oil-based feedstocks for plastic, such as naphtha, more competitive than gas-based feedstocks like ethane. As a result, Appalachian ethane crackers could be left in a lurch.
On top of all this, there’s one other threat that could stand in the way of Appalachian petrochemicals: a rising concern around plastics use and waste. Global plastic manufacturers and corporate users of plastics have promised to cut the use of single-use plastics. Bans on single-use plastics are also starting to proliferate. These new pledges complicate the growth market for ethylene.
For these reasons, it is no surprise that PTTGC continues to postpone a decision on its Ohio cracker. “The uncertainty is extremely high there versus what it was five years ago when they [PTTGC] first started this,” Keller said. “The market picture here is so uncertain now.”
That leaves no obvious solutions for the glut of gas in Appalachia. But Keller said that the industry faces a more immediate problem, leaving questions about demand almost a moot point: the lack of pipelines to move the gas.
The Atlantic Coast pipeline was cancelled last year due to delays and ballooning costs. Keller said that all eyes are now on the Mountain Valley Pipeline, a pipeline that would carry Appalachian shale gas to the southeast. “That is the big one. It’s critical,” Keller told DeSmog. It is over 90 percent complete but has been hit with legal and regulatory delays and still faces questions about whether it will be finished.
“The view is if that goes through, [the industry will] breathe a sigh of relief for two or three years..but then you’re back to what’s the next tranche of market access,” Keller said. “If it doesn’t go through, you’re going to see a scramble to rethink strategy.”