What's at stake if Philly becomes an energy hub?

The project's promoters plan to gather potential investors for a major sales pitch at Drexel University on Dec. 5.

Philadelphia Energy Solutions' refinery in South Philadelphia
Maria Pouchnikova

The view to the north from the Schuylkill River Bridge on I-95 isn't easy on the eyes. A vast tangle of smokestacks, oil-storage tanks and pipes operated by Philadelphia Energy Solutions' South Philadelphia refinery dominate the view, presenting an intensely industrial landscape to visitors heading toward Center City.

There may be a lot more of that to come if the Philadelphia region's energy industry succeeds in building out its proposed "energy hub," a complex of pipelines, refineries, petrochemical plants, factories and connecting infrastructure that would take natural gas and associated liquids from Pennsylvania's massive Marcellus Shale and turn them into fuels and feedstocks for industrial use throughout the country and the world.

Parts of the hub — such as the Philadelphia Energy Solutions (PES) refinery, the Marcus Hook Industrial Complex on the Delaware River and the Mariner East pipeline that will carry natural-gas liquids from western Pennsylvania to Philadelphia — already exist, but much more would be built if the vision is realized.

The biggest expansion would be a new pipeline to bring "dry" gas from western Pennsylvania, and possibly a second line to connect Philadelphia to gas-rich northeastern Pennsylvania. Other components could include petrochemical plants and a variety of manufacturing facilities that would benefit from cheap gas and a proximity to suppliers.

The project, its backers say, would generate thousands of jobs, especially in local manufactur­ing, and establish Greater Philadelphia as a leading U.S. energy complex, rivaling Houston. Boosters, led by the Greater Philadelphia Chamber of Commerce and PES CEO Phil Rinaldi, are urging city and business leaders to seize what they say is a golden opportunity to transform the city's economy.

But opponents, who are lining up to raise environmental and other alarms, paint a very different picture. They argue that an energy hub would maximize profits for investors while boosting regional carbon emissions, and ignore the health and welfare of city residents.

Offsetting the prospect of cheap, abundant natural gas to spur a revival of Philadelphia's traditional manufacturing base are important concerns about air and water pollution, an increase in greenhouse-gas emissions at a time of gathering warnings on climate change, a need for effective regulation of an expanded energy industry at city and state levels, and the argument that residents' concerns are not being adequately represented in public discussion over the hub.

"What they are talking about is really turning Philadelphia into a sacrifice zone," said Tracy Carluccio, deputy director of the environmental group Delaware Riverkeeper Network.

"They are not talking about anything other than maximizing business opportunities and making money for these companies that want to jump on the shale gas-and-oil train. They are not talking about the public and what the impacts are to the public and the people who live here."

Meanwhile, some in government and academia are heading more toward the middle of the road — calling for a careful analysis of the hub's potential benefits and drawbacks as well as a clear-eyed view of the political reality.

As the project's promoters gather potential investors for a major sales pitch at Drexel University on Dec. 5, Carluccio warned that the proposed expansion of Philadelphia's energy infrastructure flies in the face of global efforts to cut the use of fossil fuels.

"Natural gas is not a bridge fuel," she said, referring to the argument that the gas will allow energy us­ers to "bridge" a gap between more-polluting hydro­carbons like coal, and renewable fuels that can supply power without emitting greenhouse gases.

"Natural gas is a dead end because it is intrinsically polluting. It can't be used safely. It is a nonrenewable energy source. We have to move away from this," she said.

The hub's proposed use of gas from the Marcellus Shale in western and northern Pennsylvania has damaging environmental effects throughout its life cycle, ranging from potential aquifer contamination by fracking fluids to the leakage of methane — a much more potent greenhouse gas than carbon dioxide — at different stages of gas production, Carluccio said.

She dismissed an assumption by energy hub backers that the price of natural gas from the Marcellus will remain low. While energy hub proponents say the Marcellus contains a century's worth of gas at current consumption rates, Carluccio argued that prices will, in fact, rise in response to higher demand for exports of liquefied natural gas (LNG) to Europe and Asia where much higher prices will attract U.S. producers.

U.S. authorities already have approved some applications to build LNG export terminals, including one at Cove Point, Md. And even if Phil­adelphia's energy hub doesn't include a terminal for exporting LNG, U.S. energy companies will be lured to overseas markets because they are having trouble recouping billions of dollars in investment with gas prices currently so low because of an abundant domestic supply, Carluccio said.

"These companies are getting pretty desperate to see returns," she said. "The assumption that it will be cheap is not founded on anything more than a promise from companies that want to make a lot of money."

Rather than building up its fossil-fuel industry at a time of rising global carbon emissions, Philadelphia should be investing in renewable energy, and that funding could be coming from the same private industry that will be courted at Drexel on Dec. 5, Carluccio said.

But hub backers say renewables, which accounted for only 13 percent of U.S. electricity supply in 2013, according to the Energy Information Administration, are unlikely to match fossil fuels' contribution to total energy anytime soon. Phila­delphia's energy hub facilities can become an impor­tant bridge to a sustainable energy future, they say.

Mark Alan Hughes, director of the University of Pennsylvania's new Kleinman Center for Energy Policy, rejected the view that the hub represents a repu­diation of the renewable energy agenda, arguing that its expanded use of natural gas would allow residential, commercial and industrial users to use gas much more efficiently through loc­al­ized use of combined heat and power (CHP) technology.

Unlike conventional power generation, which converts only about a third of fuel into energy, CHP is around 80 percent efficient, and that's achievable in homes and businesses, he said.

If Marcellus gas was used along with CHP technology, the energy hub would allow time — perhaps 30 or 40 years — to develop a stronger base of renewables, while achieving much higher levels of energy efficiency, Hughes said.

"A 30-year commitment to natural gas helps create conditions under which Philadelphia becomes a location at which businesses, institutions and residents can get the same energy using less than half as much fuel, with all the economic and environmental benefits that follow," he said.

Although participants at the meeting at Drexel are more likely to focus on the hub's benefits than its costs, they should also pay attention to building political and community support, Hughes said.

"It would be a major mistake for the people who attend that December 5 meeting to think that all they need to do is make a bunch of deals around gas consumption and not pay serious attention to all of the politics and all of the discussion and negotiation that they are going to have to do to make that pipeline real," he said.

He called on the hub's backers to recognize the dangers of unfettered energy development such as has happened in some Chinese cities, where air quality has been badly damaged as a result of the country's rapid economic expansion.
Referring to this Chinese pollution, Hughes said, "There's room in the world for boosterism, but you couldn't ask for a clearer demonstration of what happens when boosterism runs amok."

If the energy industry does not bring environmental, community and neighborhood advocates to the table, it will risk slowing its own development, he warned.

"Here's the big risk to the boosters: If they do not attend to the concerns to all of those mobilizing constituents, through litigation and endless poli­tics, those groups can channel those concerns into actions that can slow or stop this agenda," he said.

The risks of even the appearance of cutting important parties out of the process has been seen lately in City Council's failure, so far, to approve the proposed sale of the city-owned Philadelphia Gas Works to UIL, or even to hold a hearing on the plan.

Some Council members, notably Marion Tasco, who also chairs the Philadelphia Gas Commission, have complained that Mayor Michael Nutter didn't do enough to involve Council in details of the deal.

And even if creation of the energy hub doesn't depend on the sale of PGW to the private sector, Council's abrupt rejection of the city-backed $1.86 billion deal, after millions of dollars were spent on due diligence by all sides, raises serious questions about whether the city really is open for more energy business, Hughes said.

"Why would anybody think that Philadelphia city government could take on the management or facilitation of this larger, more complex thing?" he asked.

Hughes contends that the city's proposed contract with UIL should be amended so that some of the $420 to $630 million in sale proceeds earmarked for shoring up the depleted public pension fund would instead pay for promotion of a regional energy hub, to build public support and improve environmental protections.

Approval of the PGW sale to UIL would put the Council in a better position to influence the bigger and more complex questions of how to manage an energy hub, he said.

"City Council has its best opportunity to play a leadership role on the larger energy-hub strategy by proceeding with an amended sale of PGW to UIL," he said.

Hughes predicted that regulation of an expanded energy complex will be tightened at the state level, where the administration of incoming Gov. Tom Wolf will likely take steps to avoid the accusations of lax oversight of the oil and gas industry made about the Corbett administration.

The hub's business backers, too, are concerned about the signals that Council's response on PGW have sent to potential energy investors, according to Michael Krancer, an attorney who leads the energy practice at Blank Rome, and is a leading advocate for the hub.

"We have a company that was willing to put $1.8 billion into this city and region and it was not met in a very professional way by City Council, and that certainly sends a negative signal to investors," he said.

Rinaldi of PES — which currently processes domestic crude oil arriving from North Dakota by rail — took Council to task at its own energy hearing on Nov. 13, saying its conduct around the PGW sale risked alienating investors beyond just those who might buy the utility. Investor confidence in Philadelphia's energy assets is based, in part, on political will, Rinaldi said at the hearing, and the events surrounding PGW cannot been seen as a showcase for that process.

"Prospective manufacturers are focused on the City Council through a lens that measures whether the Council's actions foster or impede the development of an energy-centric economy," said Rinaldi, also at the hearing. (He declined to be interviewed for this article.)

In another sign of the importance of an inclusive approach to the energy hub, Krancer argued that Mayor Nutter shares responsibility for the hiatus in the PGW sale process because he didn't make Council a full partner.

"He did not enfranchise City Council early and often enough to make it a partner in the process, and that engendered some of the negative reaction from Council, part of which was, 'You froze us out,'" Krancer said.

Nutter has denied this, arguing in a statement that members had many opportunities for input, including briefings for Council members and their staffs. His statement also asserted that Council President Darrell Clarke passed up the opportunity to put a member of his staff on the sale's steering committee, and that Clarke met privately with six short-listed bidders on Dec. 9 and 11, 2013, giving him the opportunity to pro­pose ways of making the deal acceptable to Council.

Despite the acrimony, recent events will prove to be just a "hiccup," Krancer said. He predicted a sale, to UIL or another buyer, will ultimately happen because the private sector is far better equipped to incorporate PGW into the energy hub — including replacing its aging pipelines — than a city-owned entity that does not have the same kind of access to capital markets.

Krancer, a member of the host committee for the Dec. 5 event, predicted it will kick-start a ser­ies of business deals that will allow the hub to take shape. He said the event will be short on "con­ference chitchat" and long on specific business deals.

Host companies include Dow Chemical, Exelon, PSEG Power, Sunoco Logistics and UGI, in addition to Philadelphia Energy Solutions.

Krancer cited a long list of advantages that gives Philadelphia an edge in the energy industry. They include proximity to the Marcellus Shale, among the biggest and most productive natural gas deposits in the world; good rail, road and port links; a location amid the populous market of the U.S. Northeast; and access to the expertise of the region's many universities.

The event is being organized by the Greater Philadelphia Energy Action Team, a group of business and government leaders whose goals include the removal of "policy barriers" that they say impede the growth of the energy and manufacturing industries.

For the Nutter administration, the energy hub is an enticing prospect that would burnish Philadelphia's credentials as an economically competitive city, but only if it is managed "responsibly," said Alan Greenberger, deputy mayor for economic development.

"What we want to see is the responsible expansion of the city as a place for energy usage, production and conservation," Greenberger said. "If the city wants to be a competitive city in the 21st century, it needs to figure out how to use energy more efficiently than others."

The city recognizes the environmental risks of fracking for natural gas, expects that construction of any new pipelines would be controversial, and shares a long-term goal of reducing fossil-fuel use, Greenberger said. But it also sees the need for more energy now.

"There clearly are environmental issues with the Marcellus Shale, but we're foolish to say the answer is, just don't do it," he said.

The Nutter administration, which wants Philadelphia to become "America's Greenest City," sees itself steering a middle course between those at either end of the energy-hub debate, Greenberger said.

"We need to be thinking about the well-being of the citizens of Philadelphia," he said. "We can't just sit idly back and say, 'Bring it on.'"

But the risks of an energy hub need to be understood accurately rather than through "speculation and ideology," he said.
"From the city's perspective, we want this. We want the expansion of manufacturing; we want cleaner burning fuel; we want the expansion of sustainability, and it all comes with having to be responsible about the environmental issues. It comes with being accurate about what the environmental issues are.

"If there's boosterism on one side and radical environmentalism on the other, then I guess that's the middle ground," he said.