Gross domestic product grew at a seasonally adjusted annual rate of 3.2% in the fourth quarter, the Commerce Department reported on January 30. The latest figures show the economy expanded at a 3.7% pace in the second half of 2013 compared to the 1.8% pace in the first half of the year. The last year in which there was stronger growth in the last six months was 2003. The growth during that period marked the beginning of a four-year expansion. For the full year, the economy grew by 2.7% compared to 2012.
GDP growth in the fourth quarter is even more impressive when you factor in the government shutdown that lasted for the first three weeks of the quarter. Growth was also offset by an even lower rate of inflation, which fell to 0.7% during the last three months of 2013.
In local construction news, Brandenburg has been selected for the demolition of the Horseheads plant in Monaca. The former zinc facility, which is in the process of decommissioning and shutdown, is on the site that Shell has identified as its preference for a world-class ethane cracker. Reports from Beaver County real estate sources indicate that Shell has acquired or is in negotiations to acquire at least two additional parcels adjacent to the Horseheads property. No decision to proceed with the project has been announced yet.
Fairchance Construction was selected to build the $14 million Yester Square Apartments in McKeesport. BRIDGES & Co. is the successful contractor for the new 37,000 square foot Salvation Army store in Uniontown.
Today’s Pittsburgh Business Times had the front page dedicated to a story suggesting that the pipeline infrastructure investment underway was making the cracker plant in western PA unnecessary. Last weekend the Wall Street Journal published a small story suggesting the same thing (coincidence PBT?). Expect a bunch of piling on from other local and business media.
The essence of both stories is that so much pipeline capacity is being built that it makes more sense to just pipe the ethane to the Gulf to the existing cracker infrastructure. It’s important to remember that no sources with direct knowledge are quoted or anonymously cited and the use of the word “may” (as in may happen) is rampant in the writing.
I can’t argue the logic of the articles nor do I possess the experience in the petrochemical industry to comment on the feasibility. I do, however, talk to people involved with the project behind the scenes and a few things are worth noting:
1) The infrastructure being referenced was needed for the output that is coming, regardless of where the ethane goes. Moreover, the infrastructure isn’t going to the Gulf; it’s connecting to the existing infrastructure outside the region that goes to the Gulf, meaning it can easily serve the petrochemical industry in PA.
2) Engineering for the project is going on as we speak. While no contracts for EPC for the plant or the decommissioning of the Horseheads plant have been announced, preliminary pricing and sourcing is going on. Those involved say that the activity has accelerated in recent months rather than slowed.
3) The secondary pipeline infrastructure that is being built at the same time seems to be telling a different story. It’s pointing to Monaca. Tony Rosenberger from Chapman Properties was flying over a Washington Co. site recently and was stunned to see the amount of green pipe being laid out (a similar story is taking place in Beaver Co.), all going to the same spot on the Ohio River.
Shell may indeed be delaying the decision because they see less justification for the $2 billion investment. Remember that the reason that the cracker was proposed here in the first place was not just because the gas was here but more importantly because the consumers of the products made downstream were within 500 miles of here. There’s a cost associated with sending ethane 1,500 miles southwest and then shipping 60% of what is made with the ethylene that is cracked back to this region.
My bet is still for a thumbs up from Shell and sooner rather than later.
OK, now that we’ve had the time to take a deep breath we can look at last Wednesday’s announcement of Shell’s preferred site with a bit more perspective.
First things first. There is no downside to Shell picking the old Horseheads zinc site for their ethane cracker. Regardless of how events unfold from here the Western PA region is better off today than last Tuesday if only for the potential. That said however, it’s important to temper our regional enthusiasm with the knowledge that the decision to proceed with plant construction is still a year or more away and construction itself is at least two years out. The real beneficial impact of the plant – the development of the many downstream industries here – will be years further away.
The acute problem facing the natural gas industry hasn’t changed. Prices are still so low that extraction and processing is a losing proposition right now. It is fortunate for stakeholders in Western PA that the Marcellus Shale formation contains more profitable wet gases like ethane, propane and butane so the drillers will continue in the southwest corner of the state. We’re also lucky to have the oil-laden Utica formation easily accessible in Butler, Beaver and Lawrence counties so that upstream and midstream activities – like fractionation and distribution – will continue to expand.
For the gas industry to fully mature in our region the price will have to increase to its more normal levels, meaning that gas will be at $5-8/MmBtu. The most productive way for that to happen will be for gas to replace fossil fuels, increasing demand while decreasing the dependence on oil as a fuel or coal as an electricity generation source. That will take more investment or energy policy action than is going on right now.
Until something happens to push demand and natural gas prices higher the opening of the Shell cracker facility will remain on the horizon. Of course, it’s better that it’s on the horizon in Beaver Co. than elsewhere.
Since the first of the year have come the first indications that the exploration of the Marcellus Shale will not be transforming the region at breakneck speed. For more than a year the depressed price of gas has been troubling for the industry but the dip down to $2.50 MMbtu has prompted a change in strategy.
First is the shifting of resources from the northeastern corner of the state to the southwest to take advantage of the additional gases that can be gathered and sold from the wet gas that is found in the Marcellus Shale. That’s a plus for our region.
Second is that the high price of oil is an incentive for the gas companies to look at exploring the Utica formation because it contains oil as well as natural gas. That’s not as good for western PA since the Utica formation is more accessible in OH. The heightened interest in Utica will help with the activity in Butler, Beaver and Lawrence Counties as the Utica shale is closer to the surface too.
Drillers are also beginning to look at other formations that have natural gas deposits to see what the related oil/gas properties are. The Marcellus is going to be a big play for a long time but the speed of its development will be throttled back while gas remains cheap.
The slowdown in exploration may or may not be related to the dragging on of the announcement of the Shell and Aither cracker plant locations. What was to be an ‘end of the month’ announcement in January seems no closer to being made in mid-March and a statement made last week by Sheel CEO Peter Voser at an energy conference in Houston hints that Shell is in no hurry. Voser commented that the Dutch company’s final decision on the investment was “quite a few years away.” A shell spokesperson clarified later that Voser meant that the planning would take a few years but that a decision was imminent. No definition was made of ‘imminent.’