Planned cracker in Ohio likely doomed; Shell’s Pennsylvania plant may be in jeopardy March 31, 2020 A planned buildout of ethane crackers in the Ohio Valley was founded on weak financials even before the recent plunge in oil prices and the economic shock of a coronavirus pandemic. Under the conditions emerging now, they are likely to fail economics—offering little benefit to investors or communities. The credit rating agency Moody’s is raising doubts about the viability of plans for the planned ethane cracker in Belmont County, Ohio. Moody’s predicts that the firm behind the project, PTT Global, will “not embark on any new capacity expansion plan until margin improve on a sustained basis.”1 On March 31, Fitch concurred, downgrading PPT Global’s outlook to negative, stating that the rating agency “does not expect any large new investment in light of the currently weak market conditions.”2 Conditions for the industry have continued to deteriorate. Following the oil price collapse in early March 2020, share prices of PTT Global plummeted by more than 24%.3 Making matters worse for the industry, low oil prices mean that gas-based petrochemical projects like the one in Ohio will face more intense competition from oil-based projects elsewhere that can now supply cheaper feedstocks. Industry analysts at IHS Markit are bearish on the project too. According to media reports, “they have concluded that a proposed $5.7 billion ethane plant in Belmont County, Ohio, may never be constructed because of circumstances that were present even before the coronavirus began to dramatically shrink the economy.”4 More troubles are revealed in a March 2020 report by the Institute for Energy Economic Financial Analysis (IEEFA) finding that the Belmont cracker plant faces significant economic risks, which will make it difficult or impossible to operate profitably.5 Major findings of the IEEFA analysis include: • Prices are weak for ethylene, the principal product made by ethane crackers. Prices are 40% below where they were in the early 2010s, which means Ohio Valley crackers will struggle to make money on sales, much less recoup the billions in investment required to build the plants. • Ethylene continues to be oversupplied, due to an industry buildout of crackers on the Gulf Coast and elsewhere, which has expanded capacity by nearly 50% in just the last few years. • Growth in demand for plastics is slowing down. The economic downturn triggered by the coronavirus is expected to reduce economic growth globally for many years, while the same time a worldwide movement to reduce plastics pollution is slowing market growth. The risks identified by IEEFA are fundamental to the industry and shared by any proposed cracker in the Ohio Valley. Yet the situation is even worse for the proposed Belmont cracker because its chief sponsor, PTT Global, faces specific financial risks, including threats to its bond rating, competition from major oil companies such as ExxonMobil and Shell, and special vulnerabilities that arise for foreign companies trying to undertake major energy projects in the United States. Also At Risk: other ethane crackers, plastics manufacturing, and Appalachian Storage Hub • The most serious financial risks enumerated in the IEEFA report would be shared by any cracker plant in the Ohio Valley, making further expansion unlikely. These risks cast serious doubt on the notion that the region will ever benefit economically from a petrochemical buildout. • Without more crackers to produce ethylene, the raw material for plastics manufacturing, there is little business rationale for new manufacturing operations to locate in the Ohio Valley. The Shell cracker being constructed in Beaver County, Pennsylvania is not likely to attract new plastics manufacturing jobs because it is specifically designed to produce commodity plastic beads that are easy to ship to other locations. • The absence of additional crackers means an absence of customers for the Appalachian Storage Hub that has been proposed for West Virginia, throwing that project into doubt. FURTHER READING • Tom Sanzillo, Kathy Hipple, Suzanne Mattei, “IEEFA U.S.: Ohio petrochemical project faces high risks and shaky outlook,” Institute for Energy Economics and Financial Analysis, March 21, 2020 • Al Greenwood, “ICIS Webinar: Falling oil prices squeeze polymer margins,” ICIS, March 25, 2020 • “Factbox: Coronavirus affects Americas petrochemicals markets,” S&P Global, March 25, 2020 • James Bruggers, “Market Headwinds Buffet Appalachia’s Future as a Center for Petrochemicals,” Inside Climate News, March 21, 2020 • Kristina Marusic, “Financial fallout from coronavirus could devastate the fracking and plastics industries,” Environmental Health News, March 18, 2020 • Julie Grant, “Why Some Financial Analysts are Questioning the Viability of Appalachian Plastics Hub,” Allegheny Front, March 27, 2020 SOURCES 1 Moody’s, “PTT Global Chemical Public Company Limited,” https://www.moodys.com/credit-ratings/PTT-Global-ChemicalPublic-Company-Limited-credit-rating-822770555.
2 Fitch Ratings, “Fitch Revises PTT Global Chemical to Negative; Affirms at 'AA+(tha)',” March 31, 2020, https://www.fitchratings.com/research/corporate-finance/fitch-revises-ptt-global-chemical-to-negative-affirms-ataa-tha-31-03-2020.
3 Polkuamdee and Pathom Sangwongwancih, “Local energy shares free fall,” Bangkok Post, March 9, 2020, https://www.bangkokpost.com/business/1874929/local-energy-shares-free-fall.
4 James Bruggers, “Market Headwinds Buffet Appalachia’s Future as a Center for Petrochemicals,” Inside Climate News, March 21, 2020, https://insideclimatenews.org/news/20032020/appalachia-future-center-petrochemicals-coronavirus-plasticethane.
5 Tom Sanzillo, Kathy Hipple, Suzanne Mattei, “IEEFA U.S.: Ohio petrochemical project faces high risks and shaky outlook,” Institute for Energy Economics and Financial Analysis, March 21, 2020 https://ieefa.org/wp-content/uploads/2020/03/Proposed-PTTGC-Complex-in-OH-Faces-Risks_March-2020.pdf.