Posted on January 19, 2013

Last week Doha hosted the first World Gas-to-Liquids (GTL) Congress. The event comes at a time of heightened interest in the industry, according to QNB Group. Recent landmark developments include the commissioning of the second train of Pearl GTL in Qatar, moves by Qatar Airways to utilise GTL as jet fuel and plans for new GTL plants in the US and elsewhere.

The GTL process converts natural gas into refined liquid fuels, such as kerosene and diesel. These can be more easily transported to relevant markets than gas, and have a higher sales value than raw gas. The GTL process is a chemical transformation, in contrast to purely physical methods of reducing the volume of gas for transportation by increasing pressure, producing compressed natural gas (CNG), or reducing temperature, producing liquefied natural gas (LNG).

Unlike CNG and LNG methods, GTL products do not require any special equipment to transport or use, as they are similar to fuels derived from crude oil. Moreover, the purity and quality of the GTL-produced fuels also means that they are considered suitable for high-value applications, such as jet fuel.

The chemical process underlying GTL was developed nearly a century ago. However, high capital development costs limited its application except in situations where countries lacking oil reserves needed security of fuel supplies. This was the case for Germany during the Second World War and for South Africa under sanctions during the Apartheid era. Both countries used coal rather than natural gas as the feedstock for the process.

Sasol, a South African firm, brought the technology to Qatar to build the 34,000 barrels per day (b/d) Oryx GTL plant in partnership with Qatar Petroleum (QP). At its launch in 2006 it was the world’s largest GTL plant, but has since been surpassed by Pearl GTL, a joint-venture of Shell and QP. Its first train was commissioned in 2011 and the second last summer. The entire plant is currently operating at around 85% of its nameplate capacity of 140,000 b/d of GTL. This capacity is equivalent to more than half of global GTL production. The huge US$19bn project utilised twice the concrete of the Burj Khalifa, 40 times the steel of the Eiffel tower and involved 52,000 construction workers at its peak. The other commercial facilities are much smaller and in South Africa and Malaysia, operated by PetroSA and Shell respectively.

Interest in GTL has come in three waves, according to QNB Group. The first was in the early 1990s, when the South African and Malaysian plants were launched. The second wave was in the early 2000s, when the current plants in Qatar were envisaged, as well as a 33,000 b/d project by Chevron and Sasol in Nigeria, due to be commissioned this year.

However, some other GTL projects, envisaged during the second wave were subsequently cancelled. This happened largely because the LNG market looked like it offered a better rate of return on capital. Qatar backed Oryx and Pearl GTL, alongside its even larger LNG projects, in order to diversify its options for monetising gas.

It is too early to judge which technology—GTL or LNG—will offer better returns on investment in the long-term. This will depend on the average premium of liquid fuels over LNG prices over the lifetime of the projects, compared to the difference in capital and operational costs. Currently, GTL capital costs are about US$100k-200k per b/d, about 2-4 times those of LNG, affected by several factors such plant size and the potentially volatile prices of construction materials. The GTL conversion process also consumes some of the gas feedstock. Depending on the particular plant and local cost of gas, GTL is considered to break even at about US$40-US$80 per barrel. Refined oil prices are currently well above this level, providing strong profit margins.

One place where a significant premium has opened up between oil and gas prices is in the US. The US shale gas revolution there has driven down local gas prices at a time of high oil prices, thereby boosting the appeal of GTL. The US government’s Energy Information Agency (EIA) forecasts that the ratio of domestic oil to gas prices will be twice as high in the period until 2030 than it was in the previous two decades.

This is why Sasol announced plans last month for a 96,000 b/d GTL plant in Louisiana, to start operations in 2018. This is part of a third wave of interest in GTL. Sasol also has plans for a 38,000 b/d plant in Uzbekistan, with a final investment decision due this year, and is also investigating a 48,000 b/d plant in Canada. PetroSA is in discussions on a 40,000 b/d plant in Mozambique, which has recently discovered sizeable reserves of offshore gas. Finally, Shell is also considering a plant in the US.

Although Sasol and Shell hold most of the expertise and patents for large-scale GTL plants, new firms are entering the sector. Oxford Catalysts, a spinoff from the university science department, is developing smaller-scale modular GTL technology, suitable for production ranging from a few hundred to a few thousand b/d. This could help capture “stranded” associated gas from oilfields which would otherwise be flared because the volume and/or location means that it is not economical to market by pipeline or LNG. Petrobras, for example, is considering this technology to utilise the associated gas in Brazil’s offshore oilfields. Waste biomass can also be used as a feedstock for small-scale GTL.

GTL-derived fuel has less environmental impact than conventional jet fuel as it has a higher energy density and cleaner emissions. Coal-derived GTL jet fuel has been used in South Africa for over a decade, and British Airways is planning on using some biomass-derived GTL jet fuel. Qatar Airways is leading the way in usage of natural gas-derived GTL jet fuel, and began commercial flights this month utilising up to 50% GTL kerosene.

QNB Group concludes that the future of GTL will depend on whether capital costs can be kept under control and on long-term expectations for the price premium of oil over gas/LNG. If the major GTL plants under discussion go ahead, then global production capacity could more than double by the end of the decade to nearly 0.5m b/d.

The new capacity would not significantly compete with existing GTL because it would still be well under 1% of global oil consumption. Small scale GTL is a new development that has yet to be commercialised, but its prospects look promising. An optimistic case envisages that it has the potential to produce perhaps 3m b/d of GTL from currently flared gas, although the installation of this capacity could take decades. Coal and biomass based GTL capacity is also likely to grow, driven by energy security and sustainability considerations, respectively.