As oil prices threaten to hit $100 a barrel and governments seek to
introduce ever-tighter controls on air pollution, a cheaper alternative
resource that can be turned into less-polluting road fuels should look
like a winner.
But just as the technology to convert natural gas into high
quality diesel seems most worthwhile as an alternative to conventional
petroleum, the sector has stumbled and lost momentum with some of its
biggest projects beset by technical problems or canceled outright
because of high construction costs. "By the end of last year it looked
as if we had five major projects coming to fruition," said Alex Forbes,
a consultant at industry advisory service Gas Strategies. "In 2007 we
had something of a reality check...the prospect for a major new
gas-to-liquids project being finalized in the next year or two looks
not too good," he said.
The technology isn't new. The process to convert natural gas
into liquid fuels was invented in the 1920s. But commercial-scale
application of the process only began in the 1990s as world energy
demand rose and the technology became cost effective as a way of
developing natural gas resources stranded a long way from major
markets.
Gas-to-liquids plants produce clean-burning diesel road
fuel, naphtha, that is used as a petrochemical feedstock, lubricants
and waxes. These products are of better quality than standard
petroleum-derived products and can be sold at a higher price. One
example is Royal Dutch Shell PLC's high-performance V-Power
diesel that fueled Audi's Le Mans rally victories in 2006 and 2007 and
typically sells at a premium of around 6% to regular diesel at the
pump.
Increasingly the technology has also been seen as an answer
to many of the world's most pressing energy concerns - the rising price
and depleting reserves of oil, air pollution and the lack of
alternative fuels for transport.
Gas prices are much lower than oil. Rajnish Goswami,
Vice-president of Gas and Power consulting at Wood Mackenzie estimates
that Oryx GTL, a joint venture between South Africa's Sasol Ltd (SSL)
and state-owned Qatar Petroleum, pays $3-8 per barrel of oil equivalent
for its natural gas, compared to the current price of around $97 a
barrel for international benchmark light crude West Texas Intermediate.
Even if the long-term price of oil were to fall to $50 a barrel, a big
GTL project like Shell and Qatar Petroleum's Pearl plant should make
$17 billion in profit before tax over its lifetime, Goswami said.
Environmental considerations are also a selling point.
Diesel produced from natural gas can reduce fuel consumption and
emissions of nitrous oxide and soot from a car's exhaust compared to
regular diesel, said Frank Seyfried, Technology Manager for Fuels at
Volkswagen AG. "We see a 10-20% (carbon dioxide) emissions
reduction potential for GTL fuels," he added.
GTL diesel can also be used in standard engines and
transported using existing infrastructure, unlike other petroleum
alternatives like biofuels or hydrogen. "We are not asking consumers to
take a leap of faith and we are not asking car manufacturers to invest
in new technology," said Malcolm Wells, Communications Manager at a GTL
joint venture between Sasol and Chevron Corp.
Gas reserves are also projected to last more than 100 years
at current production rates, compared to estimates of just over 40
years for oil.
These compelling arguments have spurred development of the
world's two biggest GTL plants, both in the gas-rich emirate of Qatar
in the Persian Gulf.
Oryx GTL, which started this year, should eventually produce
33,000 b/d of GTL fuels and 1,000 b/d of liquefied petroleum gas. Pearl
GTL, due to start in 2009, will produce up to 140,000 b/d of GTL fuels
and 120,000 b/d of LPG.
The ramp-up of production at Oryx has been delayed because
its product was contaminated by catalyst particles that were clogging
up filters. Sasol says it has solved the problem at a cost of $50
million, but will not say when the plant will reach nameplate capacity.
Qatar's Energy Minister Abdullah al-Attiyah said last week
that he expects Oryx production to reach 27,000 barrels a day by the
end of the year.
The completion of the two projects in Qatar alone will
increase by almost five times the world's GTL production, but they are
still just a drop in the ocean of road fuels consumed every day.
So far, the only other major GTL project under construction
today is Chevron-led Escravos GTL, a copy of the Oryx plant that will
begin construction in the Niger Delta next year.
"Three years ago we would have predicted having more projects and the industry would be further ahead," said Wells.
All kinds of energy projects are suffering runaway cost
inflation due to labor and materials shortages. Expensive and complex
projects like GTL have been hit hard.
ExxonMobil Corp. earlier this year canceled plans to
build a 154,000 b/d GTL plant in Qatar due to the high cost of
construction and questions over the availability of gas. Algeria
dropped plans to build a 36,000 b/d plant this year, also on the
grounds of cost.
There is widespread speculation that the cost of Shell's
Pearl project will be higher than the $12-$18 billion price tag the
company has put on it, which is already three times initial estimates.
Forbes said he expected the project ultimately to cost in excess of $20
billion.
High costs and technical problems don't help GTL to compete with other, more established gas development technologies.
"Unquestionably the technical risk in liquefied natural gas is
lower," said Goswami. "There is a far bigger subset of companies with
experience of LNG than GTL. LNG is a global industry with lots of
players and multiple supply sources."
LNG is gas cooled to -162 Celsius and shipped in ocean-going
tankers. It's sold primarily to large utilities and manufacturers at a
lower price than road fuels.
A person involved in the finance of large energy projects
said the high cost and additional complexity of GTL projects, which
involve numerous highly specialized partners and technologies, are of
growing relevance in the wake of the global credit crisis that has
highlighted the importance of pricing risk correctly.
A person at a state-owned gas producer in the Middle East
said his country had chosen LNG instead of GTL to develop its gas
resources because it was the lower risk option.
People in the industry acknowledge these problems, but say they are not insurmountable.
Initial technical problems can be overcome, said Guy de Kort,
General Manager of Global XTL Development at Shell. He added that the
company's Bintulu plant in Indonesia is now operating at 99%
reliability, despite early technical problems and a large explosion
that shut down the plant between 1997 and 2000.
Wells said Sasol Chevron's successful marketing of higher
quality GTL diesel and the premium at which it can be sold over regular
fuel is convincing gas resource holders that GTL is a worthwhile
diversification option.
Wells said Sasol Chevron remains bullish that GTL can
continue to grow and will not just be a niche technology. Plans to
scale up production at Oryx above 100,000 b/d remain on the agenda, he
said, although he would give no timetable. Sasol Chevron is also doing
a pre-feasibility study for a project in Western Australia, he said.
"Events in Qatar will influence what we see as the future
prospects of the GTL industry," said Goswami. A solution to Oryx's
problems in the next 12 months and the completion of Pearl on time and
on budget will be critical not just for Sasol and Shell, "but for
pretty much the whole GTL industry," he said.