Outsiders Debunk Shell GTL Expansion Talk, Say Stick to LNG
944 words
21 December 2011
World Gas Intelligence
WGI
English
(c) 2011 Energy Intelligence Group. All rights reserved
Even before Royal Dutch Shell has ramped up the Pearl natural gas-to-liquids (GTL) plant in Qatar to full capacity, several leading company officials have talked about building more GTL plants -- notably in the US, now the source of some of the world's cheapest feedstock. Pearl GTL is Shell’s Qatari showpiece, with capacity to turn out 140,000 barrels per day of high purity gasoil, naphtha, kerosene, lubricants base oils and other specialty products. In addition, the project should yield 120,000 b/d of natural gas liquids (NGLs) such as butane, propane, natural gasoline and condensates that serve as refinery blending stocks and petrochemical feedstocks. Construction began in 2007 (WGI Feb.28'07).
Critically to project economics, NGLs and the GTL products both sell at oil-related prices. In today’s market that could easily push revenue over $1 million per day. Those funds won't go amiss, as Pearl GTL ended up costing considerably more than the $5 billion Shell initially estimated. The company admits to $19 billion. Qatari sources have told WGI that the actual price tag is $22 billion-$24 billion.
Shell Chief Executive Peter Voser first raised the idea of a US project at the company’s second-quarter earnings presentation. He told analysts that Shell is looking to maximize the value of its US gas portfolio, and turning the gas into liquid products with its proprietary GTL process is one way to do that. Andrew Brown, Pearl GTL managing director, again brought up the idea of building another GTL plant in the US to take advantage of the low gas prices at Pearl’s dedication ceremonies.
But industry analysts and former GTL executives from other oil companies are less enthusiastic about US GTL. On a purely economic basis, LNG clearly has the advantage, they say. Barclays Capital analyst Paul Cheng was blunt in a recent report comparing the economics of the two approaches. “Could GTL compete effectively with LNG and play a more prominent role in the future development of global remote gas resources?” Cheng asked. “Our short answer is that it’s not likely -- not in the current operating environment and using current technologies.”
Only if the long-term contract price of LNG declines to less than 40% of parity with crude oil would GTL be economically viable, the report continues. Barclays compares Pearl GTL to the QatarGas-4 project in which Shell has a 30% stake: “Based on our base-case operating environment assumptions, Pearl GTL development costs would need to improve by roughly 50% before competing effectively with the comparable QatarGas-4 project.”
Pearl GTL's economics were questionable from the beginning, industry sources both in Qatar and other oil companies have told WGI. When Shell’s board made its final investment decision in early 2007, both Brent and West Texas Intermediate crude oil prices were in the high $50-low $60/bbl range. Only days before Shell announced the go-ahead on Pearl, Exxon Mobil pulled out of its 154,000 b/d Palm GTL project in Qatar, as costs soared above $17 billion from the original $7 billion estimate (WGI Feb.21'07).
Exxon’s technology was considered more efficient, with somewhat lower operating costs, but the soaring capital cost estimates took the project out of the company’s required rate of return. Barclays Cheng estimates that at a $100/bbl Brent price, GTL would earn a 13.3% rate of return, compared to 28.6% for LNG. In all of his test cases, LNG’s rate of return is about 125% higher. But why might Shell have proceeded in the face of poor economics? Perhaps because the supermajor had already booked the reserves behind the project and committed to $10 billion in contracts for labor, products and engineering-construction services. Write-down of either could have heavily damaged its share price, coming only two years after massive reserves de-booking (WGI Jan.14'04).
But what about locating a plant in North America? South Africa’s Sasol has disclosed plans for two GTL ventures, one in Canada and one in the US. The Canadian project would be a joint venture with Talisman, using what is essentially stranded gas from British Columbia. They are looking at two 48,000 b/d trains that would produce diesel, naphtha and LPGs for the Canadian market. Talisman and Sasol officials are assuming that gas prices will remain very low relative to oil well into the future, possibly several decades, thus guaranteeing desired rates of return. The project’s $3.2 billion per train cost still would be double, on a per barrel basis, that of the 33,000 b/d Oryx GTL facility Sasol and state Qatar Petroleum have in the Mideast Gulf nation (WGI Apr.20'11).
Sasol is also considering a two train, 96,000 b/d GTL complex in Louisiana next to an existing Sasol chemical facility. The company hasn’t released a cost estimate, but industry sources put the price tag at $12 billion, upstream expenses not included (WGI Sep.21'11).
If Shell were to build a US facility, where would it be? Industry sources suggest it would follow Sasol’s lead to either the Gulf Coast for lower construction costs, or Alaska or Canada for “stranded” feedstock. The minimum size would be 50,000 b/d, but probably double for economies of scale. Sources also claim that Shell has “Bintulu vintage” technology, dating back about a decade to Shell's original pilot plant in Malaysia. Sasol’s technology has been upgraded multiple times.
Barbara Shook, Houston
Energy Intelligence Group Inc.