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QNB Economics
                                                                                            economics@qnb.com.qa

                                                                                                    18 January 2013



Global interest in GTL expected to grow

Last week Doha hosted the first World Gas-to-Liquids       much smaller and in South Africa and Malaysia,
(GTL) Congress. The event comes at a time of               operated by PetroSA and Shell respectively.
heightened interest in the industry, according to QNB
Group. Recent landmark developments include the            Interest in GTL has come in three waves, according to
commissioning of the second train of Pearl GTL in          QNB Group. The first was in the early 1990s, when
Qatar, moves by Qatar Airways to utilise GTL as jet        the South African and Malaysian plants were
fuel and plans for new GTL plants in the US and            launched. The second wave was in the early 2000s,
elsewhere.                                                 when the current plants in Qatar were envisaged, as
                                                           well as a 33,000 b/d project by Chevron and Sasol in
The GTL process converts natural gas into refined          Nigeria, due to be commissioned this year.
liquid fuels, such as kerosene and diesel. These can be
more easily transported to relevant markets than gas,      However, some other GTL projects, envisaged during
and have a higher sales value than raw gas. The GTL        the second wave were subsequently cancelled. This
process is a chemical transformation, in contrast to       happened largely because the LNG market looked like
purely physical methods of reducing the volume of gas      it offered a better rate of return on capital. Qatar
for transportation by increasing pressure, producing       backed Oryx and Pearl GTL, alongside its even larger
compressed natural gas (CNG), or reducing                  LNG projects, in order to diversify its options for
temperature, producing liquefied natural gas (LNG).        monetising gas.
Unlike CNG and LNG methods, GTL products do not
require any special equipment to transport or use, as      It is too early to judge which technology—GTL or
they are similar to fuels derived from crude oil.          LNG—will offer better returns on investment in the
Moreover, the purity and quality of the GTL-produced       long-term. This will depend on the average premium
fuels also means that they are considered suitable for     of liquid fuels over LNG prices over the lifetime of the
high-value applications, such as jet fuel.                 projects, compared to the difference in capital and
                                                           operational costs. Currently, GTL capital costs are
The chemical process underlying GTL was developed          about US$100k-200k per b/d, about 2-4 times those of
nearly a century ago. However, high capital                LNG, affected by several factors such plant size and
development costs limited its application except in        the potentially volatile prices of construction materials.
situations where countries lacking oil reserves needed     The GTL conversion process also consumes some of
security of fuel supplies. This was the case for           the gas feedstock. Depending on the particular plant
Germany during the Second World War and for South          and local cost of gas, GTL is considered to break even
Africa under sanctions during the Apartheid era. Both      at about US$40-US$80 per barrel. Refined oil prices
countries used coal rather than natural gas as the         are currently well above this level, providing strong
feedstock for the process.                                 profit margins.

Sasol, a South African firm, brought the technology to     One place where a significant premium has opened up
Qatar to build the 34,000 barrels per day (b/d) Oryx       between oil and gas prices is in the US. The US shale
GTL plant in partnership with Qatar Petroleum (QP).        gas revolution there has driven down local gas prices
At its launch in 2006 it was the world’s largest GTL       at a time of high oil prices, thereby boosting the appeal
plant, but has since been surpassed by Pearl GTL, a        of GTL. The US government’s Energy Information
joint-venture of Shell and QP. Its first train was         Agency (EIA) forecasts that the ratio of domestic oil to
commissioned in 2011 and the second last summer.           gas prices will be twice as high in the period until
The entire plant is currently operating at around 85%      2030 than it was in the previous two decades. This is
of its nameplate capacity of 140,000 b/d of GTL. This      why Sasol announced plans last month for a 96,000
capacity is equivalent to more than half of global GTL     b/d GTL plant in Louisiana, to start operations in
production. The huge US$19bn project utilised twice        2018. This is part of a third wave of interest in GTL.
the concrete of the Burj Khalifa, 40 times the steel of    Sasol also has plans for a 38,000 b/d plant in
the Eiffel tower and involved 52,000 construction          Uzbekistan, with a final investment decision due this
workers at its peak. The other commercial facilities are   year, and is also investigating a 48,000 b/d plant in
                                                           Canada. PetroSA is in discussions on a 40,000 b/d
                                                                                                                   1
QNB Economics
                                                                                                economics@qnb.com.qa


plant in Mozambique, which has recently discovered          The new capacity would not significantly compete
sizeable reserves of offshore gas. Finally, Shell is also   with existing GTL because it would still be well under
considering a plant in the US.                              1% of global oil consumption. Small scale GTL is a
                                                            new development that has yet to be commercialised,
Although Sasol and Shell hold most of the expertise         but its prospects look promising. An optimistic case
and patents for large-scale GTL plants, new firms are       envisages that it has the potential to produce perhaps
entering the sector. Oxford Catalysts, a spinoff from       3m b/d of GTL from currently flared gas, although the
the university science department, is developing            installation of this capacity could take decades. Coal
smaller-scale modular GTL technology, suitable for          and biomass based GTL capacity is also likely to
production ranging from a few hundred to a few              grow, driven by energy security and sustainability
thousand b/d. This could help capture “stranded”            considerations, respectively.
associated gas from oilfields which would otherwise
be flared because the volume and/or location means                     Global GTL Installed Capacity
that it is not economical to market by pipeline or LNG.                  (k barrels per day nameplate capacity)
Petrobras, for example, is considering this technology                                                      466
to utilise the associated gas in Brazil’s offshore
                                                                     Elsewhere
oilfields. Waste biomass can also be used as a
                                                                     Qatar
feedstock for small-scale GTL.
                                                                                                            63%
GTL-derived fuel has less environmental impact than
conventional jet fuel as it has a higher energy density                                  211
and cleaner emissions. Coal-derived GTL jet fuel has                                     17%
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                                       83%                37%
                                                                       37
way in usage of natural gas-derived GTL jet fuel, and                 100%
began commercial flights this month utilising up to
                                                                      2005              2013f              2020f
50% GTL kerosene.
                                                               Source: QNB Group forecasts; 2020 is an upper-range
QNB Group concludes that the future of GTL will                estimate, and assumes that currently announced projects go
depend on whether capital costs can be kept under              ahead on schedule, but excludes small-scale GTL
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.




                                                                                                                            2

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20130115 efar gtl_v06

  • 1. QNB Economics economics@qnb.com.qa 18 January 2013 Global interest in GTL expected to grow Last week Doha hosted the first World Gas-to-Liquids much smaller and in South Africa and Malaysia, (GTL) Congress. The event comes at a time of operated by PetroSA and Shell respectively. heightened interest in the industry, according to QNB Group. Recent landmark developments include the Interest in GTL has come in three waves, according to commissioning of the second train of Pearl GTL in QNB Group. The first was in the early 1990s, when Qatar, moves by Qatar Airways to utilise GTL as jet the South African and Malaysian plants were fuel and plans for new GTL plants in the US and launched. The second wave was in the early 2000s, elsewhere. when the current plants in Qatar were envisaged, as well as a 33,000 b/d project by Chevron and Sasol in The GTL process converts natural gas into refined Nigeria, due to be commissioned this year. liquid fuels, such as kerosene and diesel. These can be more easily transported to relevant markets than gas, However, some other GTL projects, envisaged during and have a higher sales value than raw gas. The GTL the second wave were subsequently cancelled. This process is a chemical transformation, in contrast to happened largely because the LNG market looked like purely physical methods of reducing the volume of gas it offered a better rate of return on capital. Qatar for transportation by increasing pressure, producing backed Oryx and Pearl GTL, alongside its even larger compressed natural gas (CNG), or reducing LNG projects, in order to diversify its options for temperature, producing liquefied natural gas (LNG). monetising gas. Unlike CNG and LNG methods, GTL products do not require any special equipment to transport or use, as It is too early to judge which technology—GTL or they are similar to fuels derived from crude oil. LNG—will offer better returns on investment in the Moreover, the purity and quality of the GTL-produced long-term. This will depend on the average premium fuels also means that they are considered suitable for of liquid fuels over LNG prices over the lifetime of the high-value applications, such as jet fuel. projects, compared to the difference in capital and operational costs. Currently, GTL capital costs are The chemical process underlying GTL was developed about US$100k-200k per b/d, about 2-4 times those of nearly a century ago. However, high capital LNG, affected by several factors such plant size and development costs limited its application except in the potentially volatile prices of construction materials. situations where countries lacking oil reserves needed The GTL conversion process also consumes some of security of fuel supplies. This was the case for the gas feedstock. Depending on the particular plant Germany during the Second World War and for South and local cost of gas, GTL is considered to break even Africa under sanctions during the Apartheid era. Both at about US$40-US$80 per barrel. Refined oil prices countries used coal rather than natural gas as the are currently well above this level, providing strong feedstock for the process. profit margins. Sasol, a South African firm, brought the technology to One place where a significant premium has opened up Qatar to build the 34,000 barrels per day (b/d) Oryx between oil and gas prices is in the US. The US shale GTL plant in partnership with Qatar Petroleum (QP). gas revolution there has driven down local gas prices At its launch in 2006 it was the world’s largest GTL at a time of high oil prices, thereby boosting the appeal plant, but has since been surpassed by Pearl GTL, a of GTL. The US government’s Energy Information joint-venture of Shell and QP. Its first train was Agency (EIA) forecasts that the ratio of domestic oil to commissioned in 2011 and the second last summer. gas prices will be twice as high in the period until The entire plant is currently operating at around 85% 2030 than it was in the previous two decades. This is of its nameplate capacity of 140,000 b/d of GTL. This why Sasol announced plans last month for a 96,000 capacity is equivalent to more than half of global GTL b/d GTL plant in Louisiana, to start operations in production. The huge US$19bn project utilised twice 2018. This is part of a third wave of interest in GTL. the concrete of the Burj Khalifa, 40 times the steel of Sasol also has plans for a 38,000 b/d plant in the Eiffel tower and involved 52,000 construction Uzbekistan, with a final investment decision due this workers at its peak. The other commercial facilities are year, and is also investigating a 48,000 b/d plant in Canada. PetroSA is in discussions on a 40,000 b/d 1
  • 2. QNB Economics economics@qnb.com.qa plant in Mozambique, which has recently discovered The new capacity would not significantly compete sizeable reserves of offshore gas. Finally, Shell is also with existing GTL because it would still be well under considering a plant in the US. 1% of global oil consumption. Small scale GTL is a new development that has yet to be commercialised, Although Sasol and Shell hold most of the expertise but its prospects look promising. An optimistic case and patents for large-scale GTL plants, new firms are envisages that it has the potential to produce perhaps entering the sector. Oxford Catalysts, a spinoff from 3m b/d of GTL from currently flared gas, although the the university science department, is developing installation of this capacity could take decades. Coal smaller-scale modular GTL technology, suitable for and biomass based GTL capacity is also likely to production ranging from a few hundred to a few grow, driven by energy security and sustainability thousand b/d. This could help capture “stranded” considerations, respectively. associated gas from oilfields which would otherwise be flared because the volume and/or location means Global GTL Installed Capacity that it is not economical to market by pipeline or LNG. (k barrels per day nameplate capacity) Petrobras, for example, is considering this technology 466 to utilise the associated gas in Brazil’s offshore Elsewhere oilfields. Waste biomass can also be used as a Qatar feedstock for small-scale GTL. 63% GTL-derived fuel has less environmental impact than conventional jet fuel as it has a higher energy density 211 and cleaner emissions. Coal-derived GTL jet fuel has 17% 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 83% 37% 37 way in usage of natural gas-derived GTL jet fuel, and 100% began commercial flights this month utilising up to 2005 2013f 2020f 50% GTL kerosene. Source: QNB Group forecasts; 2020 is an upper-range QNB Group concludes that the future of GTL will estimate, and assumes that currently announced projects go depend on whether capital costs can be kept under ahead on schedule, but excludes small-scale GTL 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. 2