Cheap feedstocks resulting from dramatic increases in US shale production of natural gas and natural gas liquids (NGLs) have led petrochemical companies to plan at least 7 new processing plants - known as olefin crackers - all but one on the Gulf Coast. These plants are expensive (think $billions) and take years to permit and build. They also produce significant quantities of emissions that are restricted by the Clean Air Act (CAA) – some of which trade in a market that has been skyrocketing for the past few months – threatening to delay or constrain the Gulf Coast cracker building spree before it gets started. Today we describe the regulations.
We have talked previously about the surge of NGL’s headed to Mont Belvieu on the Gulf Coast and the new fractionation capacity being built to extract the 5 purity NGL products (ethane, propane, butane, isobutane and natural gasoline - see Ready Set Go…New Fractionation). The market for all of the ethane and some of the propane being produced by those fractionators is feedstock for olefin crackers on the Gulf Coast that produce petrochemicals such as ethylene and propylene. Right now those crackers are running full out and making huge margins for their operators. That is because ethane and propane prices are low in the US (see Hacking a Model of Ethane Rejection) and the natural gas fuel that the crackers use is also inexpensive. International competitors mostly use heavier and more expensive feedstocks such as naphtha for their crackers so they can’t compete. Operators expect the US cost advantage to continue and have therefore made plans to build at least 7 new olefin crackers – 6 of them on the Gulf Coast.
These new crackers cost $ Billions and take at least three years to permit and build. The current project timetables suggest that the 6 new plants on the Gulf Coast will come online between 2016 and 2017. A seventh new plant in Pennsylvania planned by Shell will not be completed until 2019 at the earliest. As you can imagine building new olefin plants is a serious undertaking and there are many hurdles to be negotiated on the way. One hurdle that comes up early in a project timeline is acquiring necessary permits for plant emissions. The Clean Air Act (CAA) - a federal law that requires the Environmental Protection Agency (EPA) to protect the public from exposure to air pollutants - regulates plant emissions.
The CAA regulates a variety of “criteria pollutant” emissions that are summarized in the table below. The basic purpose of the regulations is to reduce the overall level of emissions. The EPA regulates all emissions by monitoring their levels in the atmosphere in different regions of the country to determine which counties should be considered non-attainment areas. The emissions rules for non-attainment areas get progressively tougher depending on the extent of non-attainment. In the case of industrial plants that means requiring that the latest emissions control technology is used. As we learned in our discussion of coal fired power generation, some older plants also have to be retrofitted with expensive emission controls or retired (see Smokestack Lightning). There are specific rules covering new construction.
Source: Element Markets
The trouble with new plant construction is that emissions from operating a new plant did not previously exist and so unless they are offset in some way – they add to overall levels. A special component of the CAA called the New Source Review (NSR) was set up in 1977 specifically to regulate such new sources of emissions. NSR is triggered any time a company seeks to permit a new facility or facility modification that would create a “significant increase” in criteria pollutant emissions and exceed threshold emissions levels defined for the region. Affected facilities must report their expected emissions to the local air quality regulatory authority and take certain measures to reduce their pollution. Emissions reduction requirements vary across the country and depend on the local air quality. To reduce pollution in a more economically efficient manner, some regions have adopted a tradable emission reduction credit (ERC) program; NSR regulations provide guidelines for these programs based on the air quality status of the region. The basic approach of all these programs is to offset new sources of emissions with reduced emissions somewhere else in the same attainment area.
NSR regulations determine whether a new plant is considered a major source of one or more of the criteria pollutants. If the plant is a major source then its emissions are regulated. The definition of “major source” depends on the non-attainment level of the area in which the plant is located. If the plant is in a marginal or moderate non-attainment area it is only considered a major source when more than 100 tons per year (tpy) are emitted. If the plant is located in a severe non-attainment area then 25 tpy is considered a major source of emissions.
In Texas - where most of the proposed new olefin crackers will be built - most of the State’s counties are clean ozone attainment areas. The map below shows these clean areas (where you should plan your vacation) as well as the nonattainment and near nonattainment areas. The only severe ozone nonattainment area in the State is the Houston-Galveston-Brazoria region that includes Mont Belvieu and the Houston Ship Channel. The Texas Commission on Environmental Quality (TCEQ) administers the NSR regulations in the State. A new plant in a nonattainment area in Texas requires a permit to ensure that the best technology is used to reduce emissions and that any new emissions the plant will make are offset by emission reduction credits (ERCs) acquired through the emissions credit program.
Source: Texas Commission on Environmental Equality
The TCEQ emissions credit program allows participants to generate credits by creating permanent emissions reductions. For example, if a company owns a plant or process equipment that is on record with the TCEQ for criteria pollutant emissions, then retires or shuts down that plant or equipment, credits are granted to the company equivalent to the reduced emissions. These ERCs can then be registered with TCEQ and used by the same company or sold to any other company to be used as an offset for new emissions during a five-year period after they are registered. When the five-year period is over the ERCs “retire”. In effect the only way for a company to permit a new plant in a nonattainment area is to acquire sufficient ERCs to offset their new emissions.
The TCEQ ERC offset scheme is further complicated by two factors. The first is that the severity of the nonattainment in a particular area determines the level of emissions that has to be offset – including an offset ratio. For example, the offset ratio is increased in severe nonattainment areas such that applicants for new plant permits have to offset 1.3 X new emissions. The second complication is that offsets have to be for the same criteria pollutant as the new plant will emit and they must come from the same nonattainment area.
These regulations vary across the country and use different credit or allowance schemes to offset new emissions. In most cases there are enough credits generated to offset new emissions and there is an orderly market for credits between buyers and sellers. But in the next episode in this series we will explain how a limited inventory of ERCs in the Houston-Galveston-Brazoria nonattainment area has caused their price to skyrocket. Let’s put that word skyrocket in perspective.
Credits for VOCs (volatile organic compounds), one of the key emissions have increased in price from $4,500/ton in January 2011 to $300,000 per ton in the last few weeks. Now that’s an increase.
The $64 billion dollar question is whether that lack of inventory and high price for credits could seriously delay new construction of some of the new olefin crackers. We’ll look at that question and the markets for those credits in the next episode of this blog series.