Appalachia banks on natural gas, chemical plants

WHEELING, West Virginia Mon Mar 12, 2012 6:16am EDT

1 of 13. A woman pushes a baby carriage past a bar and one of many empty storefronts in Wheeling, West Virginia March 6, 2012. The economically depressed city is emblematic of the regional conditions and could get a big boost from a new chemical plant planned for the area.

Credit: Reuters/Jason Cohn

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WHEELING, West Virginia (Reuters) - In George Vacheresse's lifetime, Appalachia has fallen from its prime when steel mills and coal mines anchored middle-class communities and offered hope there always would be enough work to go around.

In this historically poor region nestled in the misty mountains of the eastern United States, most steel mills shut down long ago and the coal workforce has shrunk by 90 percent in the past 40 years.

During the last recession, Appalachia lost all the jobs it gained from 2000 through 2008. Personal and small business income is roughly 25 percent lower than the rest of the United States and poverty is rife.

Now Vacheresse and other residents are counting on cheap natural gas from the massive reserves in the Marcellus and Utica shale rock formations, which lie under a swathe of the north-eastern United States, to reinvigorate the region's economy.

In the Northern Appalachia area alone, where West Virginia, Ohio and Pennsylvania converge, billions of dollars of investment is planned by major companies, including most recently Royal Dutch Shell, to recover the gas and build new chemical plants.

"I hope it gives us jobs for everybody," said Vacheresse, 39, who last fall joined an apprentice scheme at a Wheeling, iron workers' labor union to learn how to work in steel construction. He made the move after watching layoffs erode the workforce at his machinist shop over 17 years. He expects his new skills will lead to a much higher-paying job building Shell's planned new $2 billion cracker, industry slang for a chemical plant.

"Something like this could carry our region for years and years," he said.

Improvements in drilling techniques have transformed the U.S. energy landscape in recent years by unlocking the country's immense shale oil and gas reserves.

But this has raised concern about the safety of natural gas extraction techniques like hydraulic fracturing, or fracking, in which chemical-laced water and sand are blasted deep below ground.

Environmentalists fear fracking could pollute water supplies, and an Ohio state agency earlier this month said there was evidence that it had led to a series of earthquakes in the state. New York state currently has a ban on the process.

NEW MANUFACTURING HUB

With the new natural gas supplies, Appalachia, known for decades for getting government hand-outs, is beginning to emerge as an international manufacturing hub.

Caiman Energy LLC, Chesapeake Energy Corp and other natural gas drillers and pipeline operators have already hired hundreds of workers in the region. Dominion Resources Inc is building a plant to separate ethane from natural gas for use in chemical manufacturing.

Shell's chemical complex, which was announced last summer and will take four years to build on 200 acres, will turn ethane from natural gas into ethylene. Shell will then turn the ethylene into the lucrative chemical polyethylene, used to make packaging, cushions and clothing.

Supporters say Shell's chemical plant and others expected to be built in the region will help make permanent a financial bubble brought by drillers, guaranteeing a solid tax base for at least the next half century with hundreds of high-paying jobs.

"The cracker is kind of like an anchor store at a mall," said Keith Burdette, West Virginia's secretary of commerce. "You need one to attract maybe twice as much in development from smaller companies."

The American Chemistry Council, an industry trade group, expects each chemical facility to boost the region's economy with at least 12,000 jobs and $729 million in salaries as money flows out to bars, hotels and other local businesses.

"We have steel workers that have been out of work for a year and a half, or longer. We have coal miners who would love to go back to work," said Jason Wilson, director of the Ohio governor's Office of the Appalachia. "They have the skill set to build such a chemical plant."

THE SHALE BOOM

There are many signs of a new economic hope. In Lisbon, Ohio, the Saratoga Restaurant is reopening after sitting in the dark for five years.

Owner Mike Naffah hired 45 workers, and in a nod to his new customer base he changed the restaurant's name to the Shale Tavern & Grill. "This industry has really helped us get off the ground and reopen," Naffah said. "We all hope the shale boom continues for decades."

Shell has said it will announce the location of its plant in the area around West Virginia's northern panhandle by March 31, and West Virginia, Pennsylvania and Ohio are trying to outdo each other with tax incentives to attract the factory. Many people expect the plant to boost the economy of all three states.

West Virginia's northern panhandle is only seven miles wide, sandwiched between Pennsylvania and Ohio. Shell is already eyeing the local talent pool.

"They asked me if I could get 1,000 pipe fitters quickly, and I said 'Yes,'" said Jeff Beresford, the business manager at the Plumbers and Steamfitters Union Local 83 branch in Wheeling. Pipe fitters will end up doing half the work to build a new chemical plant because of the intricate pipe work needed to connect tanks and furnaces.

"I told Shell I could get 2,000 pipe fitters if they need them," Beresford said. "But it'll take me 48 hours."

CLOSE TO CUSTOMERS

Appalachia is geographically well placed as a chemical manufacturing site because 45 percent of U.S. demand for polyethylene is concentrated in north and northeastern states from Maine to Minnesota.

Polyethylene plants in the U.S. Gulf Coast, currently the country's largest chemical manufacturing site, have to pay at least three cents per pound to ship the product north by railcar, said Bob Neuman, a chemical industry consultant with Polymer Consulting International. The type of chemical plant Shell wants to build makes about 2 billion pounds of ethylene each year, so transportation costs add up.

"The potential for capturing market share is much greater when you're located near the Northeast," Neuman said. "Even if the demand were stagnant, Shell is going to have an advantage and probably displace products coming in from the Gulf Coast."

Appalachia also has an extensive network of pipelines and railway tracks, and sits on the Ohio River, a tributary of the Mississippi River and a major transportation route. Not everyone is a fan of the gas drilling and the proposed chemical plant.

The mining and manufacturing industries have a checkered environmental record in the Appalachians, with watershed contamination, chemical spills and river dumping.

Rivers and forests have been degraded by mountaintop removal mining in which the tops of mountains are shaved off to get to the coal below, sending debris into to the valley.

"Don't get me wrong, I want jobs, but I don't want an environmental wasteland when the chemical plants leave," said Steve Terry, a laborer in Moundsville, West Virginia. "I want this area to prosper, not go to hell."

Despite the plans, some are not convinced ground will be broken for the Shell chemical plant, citing decades of broken economic promises to Appalachia by politicians and corporations.

"I'm skeptical it'll ever get built," said David Hounshell, a professor at Carnegie-Mellon University in Pittsburgh. "I've watched how the petrochemical industry has historically made big announcements, then backed away, because if everyone built there would be overcapacity."

Natural gas prices have dropped nearly 30 percent this year and are at 10-year lows, which could unnerve investors. Chemical companies expect prices to remain low for years due in part to ramped up production from the shale reserves.

Hounshell, the Carnegie-Mellon professor, does not believe the shale formations are as large as drillers and geologists have estimated, something at least one chemical executive disagrees with. "There'll be more than enough natural gas for everyone," said Len Dolhert, CEO of Aither Chemical, which is building a $750 million chemical plant in Appalachia to also produce ethylene.

"I'm not concerned about supply."

THE FIRST WAVE

In Wheeling an economic uptick is already underway as workers flood the area to extract natural gas.

Real estate agents, restaurants, banks and others report a business jump that they expect to be made permanent by the arrival of chemical plants. Regional bank Wesbanco Inc has seen deposits and loan activity increase in the past year, Chief Executive Paul Limbert said.

"One of the things that we're very interested in seeing is what are all the spin-off businesses that can be created from the byproducts of natural gas," he said.

Collections from a 12 percent tax on hotel rooms in West Virginia's Ohio County jumped more than 10 percent in 2011, netting more than $1.5 million. Discretionary purchases are rising, too, as those affiliated with the natural gas industry are finding they have extra bucks to spare.

At Stages, a costume shop in downtown Wheeling, a contractor for natural gas drillers who was already looking forward to the Christmas season recently splurged on a $500 Santa Claus suit. "He came in and bought the most expensive Santa costume we have," said Dan Fincham, the shop's owner. "He said he was just happy to have some money again."

(Editing by David Storey and Vicki Allen)

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