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The No 1 Gold Stock for 2019

Jumpstarting The Flight From Oil: Gas To Liquids

Commodities / Natural Gas Dec 05, 2012 - 06:14 AM GMT

By: Andrew_McKillop


The world was supposed to be at the brink of the "Gas Cliff" as recently as 2006. Writers working that doomster theme, such as Julien Darley and Michael Ruppert, even Naom Chomsky roared that conventional natural gas resources were depleting fast, especially in the US, and gas prices could only explode. Aided by events such as hurricane Katrina and by excited Nymex traders, US gas futures were able to top $15 per million BTU several times in 2005 and 2006. Today in early December 2012 Nymex gas futures struggle to beat $3.75 per million BTU.

Only since 2007, world discoveries of land-based shale gas and deep offshore stranded gas are estimated by BP, the IEA and other energy agencies and companies as sufficient to cover about 150 - 200 years of world gas production and consumption at 2011 rates. These are estimated by Cedigaz at around 4.25 trillion cubic metres total production, of which 0.5 trillion cu metres was reinjected, flared and lost. Showing the wide variety of definitions ("dry" and "wet" gas, and loss estimates), the US EIA estimates 2011 world natural gas consumption was less than 3.25 trillion cubic metres per year.

Gas is low carbon relative to coal, has almost zero particulates, is low or zero sulphur and rarely contains anything but trace quantities of heavy metals such as mercury, toxic metals such as arsenic, and even the radioactive contaminants that are found, sometimes in large quantities in physical coal. To be sure there are disadvantages for gas, for global warming and zero carbon purists, notably due to greenhouse gas emissions and loss of gas from all sources including flaring, pipeline transport, LNG transport and gas reforming.

Unconventional gas, like unconventional oil - and in a short time forward, unconventional coal - all have at least 3 common denominators: production by fracking, large or massive abundance, and lower cost than previous energy supply from natural gas, oil and even coal.

Unconventional gas is the first at the starting gate. In the US case, where gas output has risen 25% since 2007 and in March 2012 the US supplanted Russia as the world's biggest producer, what to do with it is now the biggest question: continued production growth is "locked in" and certain for years ahead. The gas can be used as-is for power production, industrial heatraising, domestic and office heating and other conventional end uses. It could be used directly as-is for transport, as T. Boone Pickens (and large truckmaking companies like Volvo and Tata) argue. Royal Dutch Shell's action in this domain, focusing marine transport use of gas is advancing rapidly.

Gas can also be used to produce synthetic light crude, middle distillates and light distillates, by the Haber-Bosch process, as used by Nazi Germany and apartheid sanctions-limited South Africa. In an ambitious bet that natural gas will stay abundant and low price in the United States for years ahead, Sasol of South Africa announced on Monday 3 December that it would build America’s first commercial plant to convert natural gas to synthetic crude, diesel and other liquid fuels, based in Louisiana.

 Sasol, headquartered in Johannesburg, has more than 45 years industrial experience in gas-to-liquids (GTL) conversion, and with Royal Dutch Shell is the world leader in improved Haber-Bosch processing. To be sure the economic incentive is easy to understand: US natural gas at $3.75 a million BTU prices this energy at $21.75 per barrel equivalent. Even accepting an energy conversion loss rate as high as 45% in the GTL process, this can produce synthetic light low sulphur (in fact zero sulphur) oil at below $45 a barrel for the upstream gas input, and directly produce distillates, including jetfuel and diesel fuel, whose present US market values are around or above $115 per barrel.

Having already built many smaller plants in South Africa, and one larger plant in Qatar, Sasol has designed its new Louisiana-based plant to produce 96 000 barrels of fuel a day by 2018 using its GTL technology. It will be the second-largest plant of its kind in the world, after Royal Dutch Shell’s Pearl plant in Qatar, which has a target production rate of up to 140 000 barrels per day, when completed and fully operational by 2014. The Louisiana plant is costed at $11 to $14 billion to build.

An output of 96 000 bpd or 0.096 million bpd is of course only a drop in the USA's ocean of oil demand, but optimism on further and rapid improvement of the Haber-Bosch process is high. As David Constable, Sasol’s CEO said at the news conference unveiling the project: “By incorporating GTL technology in the US energy mix, states such as Louisiana will be able to advance the country’s energy independence through a diversification of supply”. For Sasol and its partners, however, the energy conversion losses of the Haber-Bosch process (which in Nazi times were above 75%) make it essential to aim for value-added.

 The Sasol facility will therefore include a gas processing plant, a separate chemical plant producing high value non-energy products, and a refinery. All are required to maximise value added and ensure that plant outputs include ready-to-use fuels such as diesel fuel and jet fuel, some gasoline, and high value chemical raw materials and finished products. Location factors for the plant not only included the Gulf Coast and its oil transport infrastructures, but proximity to bountiful shale gas fields in Texas. The boom in shale drilling, for gas and oil, has not only destroyed any perspective of the "Gas Cliff", but has also encouraged energy and chemical companies to build and expand manufacturing plants around the Gulf of Mexico to produce non-energy oil- and gas-based petrochemicals.

 Sasol estimated that the plant would create at least 1200 permanent jobs and 7000 jobs during the construction phase. For Louisiana, the plant is win-win and the state will support the project with more than $2 billion of tax credits and other incentives.

These will be needed, because the Shell plant in Qatar, and the smaller Shell forerunner in Malaysia were both subject to cost overruns and construction delays  This is due to the Haber-Bosch process itself, with multiple problems for scaling up output while finding ways to cut energy conversion losses, notably through heat saving. The track record for the technology, developed by two German scientists in the 1920s, feature cost overruns and high energy conversion losses - with inevitable high emissions of CO2 and other greenhouse gases.

 Shell’s Pearl plant in Qatar, a joint venture with Qatar Petroleum will likely end up costing $19 billion, compared with initial estimates in the early 2000's of below $8 billion, and stubborn maintenance concerns are slowing its output growth to design capacity. Over the years, many oil and gas companies have looked at the process and declined to make the huge investments necessary. Whereas the 1920s-era Haber-Bosch mainly thermal-based conversion process has been constantly improved, for many engineers to about the theoretical limit of GTL conversion capacity by this route, hopes are now set for technology breakthroughs. These include a range of options, such as nanotechnology based catalysis and lower temperature conversion.

Both Shell and Sasol are however confident in their Haber-Bosch technology, and Shell is considering building its own GTL plant on the US Gulf Coast. With Sasol, Malaysian oil company Petronas is building a plant in Uzbekistan, and Sasol with Chevron will build a GTL plant in Nigeria.

The link with oil and the big energy picture is simple: to make GTL work financially, natural gas prices must stay low and oil prices must stay high. The certainty of this is declining.

Since 2005, the story of natural gas, crude oil and distillate prices has been a massive switchback ride, especially in the US.  One industry fear is that a large expansion in global GTL capacity will drive natural gas demand growth even faster than at present - changing the supply boom into a black hole of rising demand, and putting unstoppable upward pressure on gas prices, but on a timeframe of decades rather than years. The outlook for gas-powered transport however and in particular, is on the brink of rapid change simply because of the vast price differential between gas and oil. Other factor also include much lower GHG emissions per vehicle than oil-fuelled vehicles, no carcinogen emissions as emitted by the world's growing "dirty diesel" car fleets, and cheap conversion to natural gas fuelled engines for conventional cars avoiding the huge infrastructure costs and long construction timelines for supporting mass all-electric car fleets.

Global oil companies face a daunting outlook:  natural gas prices outside the US are set to radically fall, even if they grow from current levels inside the US. Oil prices are set to erode, if not crash, at a time of continually rising E&P (exploration and production) costs for conventional oil. GTL is at present only another future threat, needing breakeven prices, on a US basis, of close to $4 per US gallon of gasoil and heating oils. This sets few or no threats to oil producers and refiners as long as crude stays above about $65 - $75 a barrel, but the picture changes when oil prices erode, and if GTL conversion costs decline.

GTL is also an effective substitute to oil for petrochemicals processing, and GTL expansion may also result in non-energy oil substitution, further eroding oil demand worldwide, and operating downward pressure on oil prices by this route. Louisiana's Sasol GTL plant, the largest manufacturing project in the history of Louisiana also includes a $5 billion petrochemicals-only facility, able to substitute oil as the raw material for producing plastics, solvents and other chemicals, where market values on a weight basis can attain more than $400 per barrel.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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