Will emissions costs choke petchem expansions?

Mike Taylor for RBN Energy

Emission regulations require that companies planning new olefin crackers in EPA designated nonattainment areas like Houston must buy emission credits prior to construction. The market for credits in Houston for one criteria pollutant – volatile organic compounds (VOCs) skyrocketed from $4.5K/ton in 2011 to $300K/ton this month. The scarcity of emission credits and their rising price threaten to constrain or delay new petrochemical plant builds and will continue to hamper plant development and expansions in the Gulf Coast region. Today we describe the challenge new projects face.

Yesterday we explained the complex emissions rules governing new plant construction in regions designated as nonattainment areas by the Environmental Protection Agency. If you are not familiar with these regulations, you might want to read that posting before you jump into this one. To recap we described Clean Air Act (CAA) rules relating to new sources of emissions such as those created when building new chemical processing plants (olefin crackers). We explained the mechanism that allows a plant operator in one of the ozone nonattainment areas to permit a new plant by acquiring emission reduction credits (ERCs) from retired facilities or processes to offset new emissions from their project. The Texas Commission for Environmental Quality (TCEQ) administers the ERC scheme in the Lone Star State. Companies register plant retirements or process abandonments with TCEQ to receive ERC credits that can be used by them or sold to others in a bilateral market. The number of offsetting ERCs required for building new plants in nonattainment areas increases with the severity of that area’s nonattainment. ERCs must also come from the same area and be for the same criteria pollutant as the new plant emissions.

The worst nonattainment area in Texas is the Houston/Galveston/Brazoria region – known as HGB. Despite its poor air quality the HGB area is experiencing significant growth in the number and size of announced projects in the petrochemical sector. The table below lists 9 currently announced projects to expand ethylene crackers or build new plants in the US. The five projects highlighted in blue are located in the HGB nonattainment area. The other 4 are in attainment areas and do not need to be concerned with emission offsets. [Note that to keep things simple we didn’t include two plants in nonattainment areas that are not in HGB – a Dow plant in Plaquemine Parish, La and the proposed Shell plant in Pennsylvania]. Each of the five highlighted projects will likely have the potential to emit over 25-100 tons per year of Volatile Organic Compounds (VOC) and nitrogen oxide (NOx). That means they will have to secure ERCs in HGB – at a time when these credits have become scarce – especially those for VOCs.

 

 [Note: Two ethylene plants not included in this list are also in nonattainment areas outside the Houston/Galveston/Brazoria region – the Dow expansion at Plaquemine Parish, La and the new Shell plant in Pennsylvania.]   

Source: Element Markets LLC (Click to Enlarge)    

This scarcity in the HGB region came about in 2011 after a period when ERCs for VOC’s were relatively easy to come by in 2009. That was after the financial meltdown had depressed heavy industry leading to many plant retirements and no new construction to use the credits. Once the economy started to recover in 2011 and energy costs began to fall as shale production of natural gas boomed, companies began to start planning ethylene plant expansions on the Gulf Coast as well as other industrial process facilities such as fractionators and liquefied natural gas (LNG) plants. Companies like CP Chemical and others found that there were no credits on the TCEQ books to buy. So they started doing deals with companies operating marginally economic facilities to shut down those plants  to ‘make’ credits. The way that works is that company “A” needs to offset a new plant emission so they identify company “B” that has an old plant or process with emissions that match those company “A” needs to offset. Company A then pays company B to shut down their plant or process and transfer the resulting ERC credits to use for their offset.

This process can be tricky because when a plant closes down or cuts back its emission reduction must be registered with the TCEQ in order to receive the credits. Once registered, the credits can be applied as an offset at any time during the subsequent 5 years before they expire. So if you pay a company for presold credits in this way then you need to monitor when their plant closes and when the credits are registered with TCEQ to avoid the credits expiring before you need to use them. But if the “presold” credits you buy in this fashion have not been registered there is no guarantee of their volume – so there are risks attached to the strategy. Nevertheless the scramble for credits in HGB (actual and presold) increased the price per ton of ERCs for VOCs from $4,500 to $125,000 between January and December of 2011. 

And as new projects were announced the price of VOC ERCs in HGB continued to skyrocket. The chart below shows data from Element Markets tracking the price of VOC credits (red line, right axis) since 2009 as well as the volume of VOC ERCs that have been traded (blue bars, left axis). As you can see the volume of trades has been very small in the past two years and the price has increased exponentially. Element Markets auctioned off the last available registered VOC ERCs on May 23rd of this year (2013) for $270,000/ton as part of a package with NOx ERCs at $151,000/ton. Those ERCs belonged to the City of Houston that pocketed over $5MM from the deal.

 

Source: Element Markets LLC

We don’t know if all the projects in our table that need them have acquired enough credits for their ethylene cracker projects yet. CP Chemical has purchased 125.9 tons of VOC ERCs as well as banked 106.1 tons of VOC ERCs that will likely be used on their new ethylene facility. Based on TCEQ records, Lyondell, CP Chemical and Dow have also acquired or internally created significant credits.  We don’t know if they have enough for their announced facilities, but it would seem to be a reasonable assumption.  Exxon has not purchased ERCs but they may be able to create their own through a process called ‘netting’ where they reduce their own emissions at Baytown to create credits for their own use. So it looks like most of the big petrochemical crackers should be able to be built on schedule. Companies have had to be very proactive to obtain VOC ERCs because most have been presold before they were issued by the TCEQ.  Element Markets has worked with numerous companies in various industries to plan and manage this huge risk in their projects. 

But the catch is that these facilities have bought up so many credits that now there are none left again.  That is a problem for any other chemical plant project that has not been announced yet, let alone any other facility that generates emissions, such as LNG plants, fractionators, condensate splitters or anyone else who wants to build something on the Gulf Coast.

And the current ERC famine will continue to constrain future developments in the HGB region. Most of the petrochemical companies building ethylene crackers also plan to run that ethylene in new downstream facilities. They will use those downstream facilities to make polyethylene and all sorts of other petrochemicals rather than just exporting the ethylene. Whether these facilities will be able to buy enough emission credits to get built remains a wide open question.

About the author
Taylor is a senior vice president at Element Markets LLC. He manages carbon and emissions trading in regional and federal programs across the United States. Taylor has over a decade of energy trading experience, specializing in environmental trading. He has entered over a thousand environmental market transactions with a notional value of over a half billion dollars. He also served three years on the Board of Directors of the Environmental Markets Association. Prior to joining Element Markets, Taylor served as Senior Emissions Trader at Louis Dreyfus Energy Services, where he managed and assisted in establishing the emissions trading and origination desk. Prior, Taylor was Senior Trader in Coal and Emissions at NRG Energy. Taylor has also worked in emissions and energy trading at CRAI, Multifuels and Enron. He received a Bachelor of Science in Finance, summa cum laude, from Louisiana State University.

 

 

 

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