Powhatan Salt company and the sponsors of the Mountaineer Storage Project, a natural gas liquids (NGL) storage facility in Salem Township, Monroe County, Ohio, allowed a state environmental permit to expire last week. Why give up a permit they worked hard to secure from the Ohio Department of Natural Resources (ODNR)? The answer is that construction of the project’s most promising potential customer, the PTT Global Chemical (PTTGC) Petrochemical Complex, has been delayed due to the weakened state of cracker plant and plastic markets.
PTTGC now says it will make a final decision on the cracker by the summer of 2020
It is a chicken and egg problem. The storage facility can secure the required permits and even line up financing, as it has with Goldman Sachs’ merchant banking arm. But in order to start construction, the storage facility needs an anchor that will actually commit to using its capacity. PTTGC, a company based in Thailand, first announced its interest in building a multi-billion-dollar cracker plant on the Ohio River in 2015. Cracker plants take liquids generated by the natural gas drilling process and turn them into raw materials used in the plastics industry. PTTGC has continually delayed making a final decision on moving forward with the cracker, and now is saying it will decide by the summer of 2020.
THERE ARE BROADER IMPLICATIONS FOR THE DELAY OF THESE TWO PROJECTS, which were touted as major factors in a push to create a new hub for plastics production in the Ohio Valley.
PTTGC has solid reasons for not proceeding with its planned complex. The company’s profits were down by 58% in 2019. It is also fielding a number of substantial projects in other parts of the world. Although the company has a decent credit profile, current market pressures and PTTGC’s appetite for expansion led Moody’s recently to conclude last month: “[Our] estimates incorporate [our] expectation that PTTGC will significantly reduce its shareholder returns and not embark on any new capacity expansion plan until margins improve on a sustained basis.” (Emphasis added.)
It is unlikely that 2020 will be a year when the company’s margins improve, as plastic prices have started the year low and the Chinese market, a major buyer of PTTGC’s products, is showing signs of a slow year. Starting a new expansion now would be a risk to the company’s credit rating.
Clearly, the State of Ohio wants to provide support to both PTTGC and the storage facility. JobsOhio, the state’s privatized economic development arm, has provided $50 million in pre-development grants to PTTGC in the past two years as an incentive for the company to move forward with the full investment (and the agency previously granted $17 million to the former owners of the site for clean-up and preparation). ODNR granted a permit for the storage facility even though the company was not prepared to move forward with construction in a timely manner.
IT SEEMS THE STATE HAS TAKEN ON SIGNIFICANT RISKS UNDER DIFFICULT MARKET CONDITIONS. The market outlook is much weaker than when the projects were originally planned. The profit margins for cracker and plastics plants have declined over the past five years. It remains to be seen if PTTGC’s prior expressions of interest in using the storage facility still hold.
Expiration dates are used in permitting so that real-time problems can be addressed with dispatch
Whatever the next steps are with regard to the re-issuance of the permit, the State also runs the risk of its environmental regulatory processes being used to abet financial speculation. Expiration dates are used in permitting so that real-time problems can be addressed with dispatch during a well-managed construction process. The permits are not intended to be used to allow a marginal financial project time to kick the can down the road in the hopes that market conditions will change and become more in line with investor needs.
Obtaining the permit was essential for Mountaineer’s sponsors and important for reassuring an investor like Goldman Sachs that they could maintain confidence in the project. If the sponsors reapply, the reasons for the project’s delay should be examined thoroughly and publicly. Poor market conditions and more time needed to get the project moving forward means it has become more risky, and that means more expensive.
The situation at Mountaineer demonstrates that the granting of an environmental permit does not change the fundamental market dynamics of a project. So, if this permit comes before the state agency again, a closer look regarding the sponsors’ ability to carry out the project is in order.
Tom Sanzillo is IEEFA’s director of finance.
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