Despite cost, if technology works as expected, GTL looks highly profitable.

Shell is commissioning the worlds largest gas-to-liquids (GTL) plant in Qatar, which will produce 140,000 b/d of GTL products and 120,000 b/d of natural gas liquids (NGLs) when it ramps up to full output in 2012. Shell expects to see gas and NGLs in its Pearl plant in early 2011 and to ship its first GTL products from one of its two 70,000 b/d GTL trains later in the year Matthias Bichsel, Shells Director of Projects and Technology, told investors on 28 September.

In addition to producing higher quality fuels than refineries do, a GTL plant can change its output configuration in less than 72 hours much faster than a complex refinery, which can take up to a week. Its excellent for the just-in-time market, Al Troner, President of Asia Pacific Energy Consulting (APEC), tells MEES.

Interest in Pearls mechanical completion is intense after Qatars first GTL plant, jointly owned by state-owned Qatar Petroleum (QP) and South African petrochemical firm Sasol, faced a troubled start. The Oryx GTL partners say the plant has a 32,400 b/d capacity and is in stable operation. It says it is now debottlenecking the facility, which was originally slated as 34,000 b/d, to add 10%.

If Pearl, which uses different technology from Oryx, starts up successfully it will allow Shell to dominate the global GTL market and cement Qatar at the center of Shells production plans. Shell expects Pearl and its other Qatari project a 7.8mn tons/year LNG mega-train, also due to start ramping up production early next year (MEES, 27 September) to have a combined production capacity of 350,000 b/d of oil equivalent (boe/d) in 2012. In todays terms this would represent over 10% of Shells worldwide upstream output. Shells CEO Peter Voser calls Qatar a heartland, which Deputy Prime Minister and Minister of Energy and Industry ?Abd Allah al??Attiyah says is the GTL capital of the world. For Doha, however, GTL has been bitter-sweet. Qatars gas diversification plan aimed to reduce reliance on LNG by adding pipeline gas and GTL to its portfolio. Only one pipeline project succeeded Dolphin Energys hook-up to the UAE and ExxonMobil cancelled the countrys biggest planned GTL project, the 154,000 b/d Palm plant, in 2007 due to costs that more than doubled from the planned $7bn.

Healthy Profit

Many industry insiders have questioned Pearls $18-19bn price tag, yet at todays hydrocarbon prices it would still make a healthy profit. Independent gas consultant Alex Forbes tells MEES the 260,000 b/d combined output, taking into account shutdowns, at $50/B gives a capital expenditure repayment of four years. At $100/B oil, the payback period is just two years. Shell however, which paid for all of the investment, has to share production with its partner QP. Even the $1bn Oryx plant, which experienced initial setbacks due to equipment failure, is making buckets of money despite its output not yet continually matching design capacity, (in January 2009, Oryx achieved 100% throughput on both trains), Mr Forbes says. At full output its payback time would be two years at $50/B and one year at $100/B, he says. At 50% output a threshold the project crossed some while back the payback times are the same as for Pearl. One of the reasons for the short period is that Oryx GTL came in on-budget at around $1bn. That was a bargain no-ones ever going to build a plant of that capacity at that price again, Mr Forbes said.

In September Sasol published financial results that showed an unscheduled Oryx shutdown in the second quarter of the 2009-10 financial year due to an air compressor failure, which was followed by a planned statutory shutdown in the fourth quarter of the 2009-10 financial year. The report says the plant has still not continuously produced above 90% of capacity since it was first due to start up in 2006. Oryx, however, says it is overcoming the problems. Oryx GTL has recorded a significant improvement in the performance and sustained high production rates during the second half of the 2010 financial year. The debottlenecking of the operation is also well on track, said Sasol Qatar country president, George Couvaras.

Oryx setbacks have put off other firms from investing in GTL. In 2002-03 global planned projects were expected to build nearly 2mn b/d of GTL capacity. But only 10% of that capacity will be operating by 2013, when the 34,000 b/d capacity Escravos GTL plant in Nigeria, a joint venture of Chevron Nigeria (75%) and Nigeria National Petroleum Corporation (25%), which uses Sasols technology, is scheduled to start up. The project has been delayed by a further year, MEES understands. Moreover it will cost at least six times as much as Oryx for a very similar plant. A Sasol official tells MEES: The schedule and cost of the EGTL plant remains under pressure, yet Sasol is committed to providing experienced people for the successful commissioning and start-up of this facility. Encouraged by the success of the Oryx GTL facility in Qatar, Sasol is currently assessing other gas-based opportunities, and launched a GTL feasibility study in Uzbekistan.

Lessons learnt at Oryx are being applied at the Escravos plant, said Mr Forbes, so it should ramp up output much faster. Shell and Sasol both use the Fischer-Tropsch process, which combines methane and oxygen to make hydrogen and carbon monoxide (so-called synthesis gas), which passes over a catalyst to make waxy hydrocarbons. Oryx uses two very large slurry bed reactors. In their original configuration there was high attrition of the catalyst, triggering the plants problems; the reactors have since been modified. Shell expects its technology keeping the catalyst fixed in tubes within each reactor to work as intended.

Feedstock Costs

Another factor affecting the future of GTL is feedstock costs. Pearl incurs gas production and processing costs Shells operational expenditure for the whole process is $6/boe and also the capital expenditure of wells and gas processing units. But it does not have to buy feedstock at market prices, and it gets a share of the NGLs revenue. Oryx buys its gas feedstock from Al Khaleej Gas at $0.901.10/mn BTU, significantly below todays global market prices.

Nonetheless, at todays margin between gas and crude prices, even if a GTL plant had to buy methane at market rate, it would still be profitable. In the US whose government would like to reduce its dependence on energy imports, and where the gas market is softest a 140,000 b/d, $20bn plant would pay back within seven years, MEES calculates, based on the difference between the Henry Hub gas price and West Texas Intermediate crude price. Taking into account the refining crack spread, plus the GTL premium over refined products, the period would be even shorter and shorter still if the plant operator also operated its feedstock supplying gas field. A drawback is that due to government taxation policy the US transport fuel market is gasoline dominant, while GTL plants produce diesel, not gasoline. However, US trucks consumed some 2.6mn b/d of diesel in 2008 before the economic slump lowered demand.

Another potential drawback is that the long term margin between gas and crude may narrow, with many analysts thinking that the gas market will firm up by 2015. Fatih Birol, Chief Economist and Director of the International Energy Agency (IEA), however, said at the World Energy Congress in Montreal on 14 September that the gas glut will continue for longer than earlier anticipated. He also said that China would become a coal exporter, driving down global gas prices, if the country decided to develop large coal resources in the northwestern Xinjiang province. Crude prices in contrast will rise, he said, as unconventional oil production will push up costs. On the supply side the cheap oil era is over, he said.

Ever-tightening global clean fuel specifications will also help GTL. Instead of upgrading, refineries could blend their output with cleaner GTL products to meet regulatory requirements. GTL products are free from sulfur and aromatics, biodegradable, and burn with significantly lower smoking and lower emissions of pollutants including particulates, hydrocarbons, and carbon monoxide than typical refinery fuels. Some GTL products also have other value-added properties.

Quality Premium

For the quality Shell hopes to get a premium over refined products a third factor in the future of GTL. Shell says that in 2008 its Malaysia plant sold diesel at a $40/B premium to Brent crude. It is not clear if Sasol is selling its products at a premium, and if it is, what volumes are being sold at a premium or how much the premiums are. The premium, however, will not make or break GTLs future. A Qatar source tells MEES: The economics are gas feedstock cost, while producing an oil-product-priced product. The premium is merely the icing on the cake.

But not all GTL products will command a premium. With smaller molecule products such as normal paraffin no one could tell the difference between GTL and refined product, so I dont think Shell will get a fat premium on all products just for being GTL, the Qatar source says. Nor, at first, will it get a premium for all volumes of the added-valued products such as gas oil and naphtha. If youre the new kid on the block youll be tested first you cant just expect a premium from day one. We are at the mercy of the market, which determines the price, he says. APECs Mr Troner tells MEES: Quality premiums are very unstable.

The greatest interest comes from petrochemical firms that make ethylene they need feedstock that has high paraffinic content, which allows them to get more ethylene per unit of feedstock. GTL-based naphtha is 95-99% paraffinic content compared to refined naphtha (65-90%).

GTL gasoil, which includes diesel, has a high cetane number that improves ignition performance (60-70, compared to a typical refinerys high 40s). However, it needs blending to have the right specific gravity. Although it meets Japanese and European specifications, Shell will initially aim it at the modern diesel car market in Europe through blending and direct sales, the Qatar source tells MEES.

Asia-Pacific is Qatars most likely long term GTL destination. Shell estimates that by 2020 the global demand for naphtha, jet kerosene and especially gasoil will grow by some 30%, specifically in the Asia-Pacific region. Instead of a complex refinerys gasoline and LPG, a GTL plant produces more normal paraffin and naphtha, in addition to kerosene, gasoils and base oils. Its the worlds biggest gasoil market and will soon be the worlds biggest market for diesel too, Mr Troner says. In 2010 it consumed 7.2mn barrels of gasoil, of which 62% were diesel. European growth is slow, he says.

GTL As Aviation Fuel

GTL kerosene is relatively expensive for the general market, and is of far higher quality than standard kerosene, according to APEC. Its most valuable part is aviation fuel Shell says it has a higher energy density, meaning aircraft will need a lower fuel payload compared to standard jet fuel. APEC again identifies Asia-Pacific as the growth market demand for aviation fuel did not go negative in 2008-09. GTL aviation fuels one key weakness was that it could not meet freeze point requirements without blending. Regulator approval for use in commercial aviation specifies 50% non-GTL. If Shell is right and they overcame the freeze point problems through additives and blending, it can then make a pretty large volume of this premium transport fuel from GTL. It is one of the fastest growing products in Asia-Pacific, Mr Troner says.

GTL faces a competitor Sasols coal-to-liquids (CTL) aviation fuel. On 21 September Sasol flew the worlds first passenger aircraft exclusively using 100% CTL aviation fuel, which is internationally approved by aviation authorities. The emissions are lower than those from refinery jet fuel due to its limited sulfur content.

Maybe base oils, used in lubricants, will also get a premium, the Qatar source said. Lubes are a growing market and are always very high value per volume unit often a company will make more selling lubes than anything else. As Asia-Pacific motorizes and as industry needs ever more specialized lubricant, the sales volume of lubes will grow. GTL plants can produce a huge amount of base oil, Mr Troner said.

Copyright MEES 2010.