Abundant Natural Gas Supply Has Industry Evaluating GTL Technology

The abundance of U.S. natural gas reserves unlocked by new production technologies like hydraulic fracturing has been well documented.  One result of this activity has been a natural gas supply glut that has far outstripped demand, resulting in extremely low prices.  Predictably, industry is searching for ways to take advantage of these conditions.  One potential avenue is so-called "gas-to-liquids" ("GTL") technology, which converts natural gas feedstock into liquid fuels such as diesel.

A BRIEF HISTORY OF GTL

The technique underlying GTL is almost a century old.  GTL is based on a process invented by German scientists Franz Fischer and Hans Tropsch in the 1920s.  The process is less efficient and more expensive than traditional petroleum refining.  As a result, it has historically been used only out of necessity by pariah nations that had difficulty obtaining oil to manufacture needed transportation fuels.[1]  Nazi Germany used the process during World War II to convert coal to synthetic oil.  Apartheid-era South Africa did the same in response to international oil embargoes.

Now, industry is turning back to the process due to opportunity, not necessity.  The natural gas production boom has resulted in a large spread between natural gas and oil prices in countries with extensive gas deposits, like the United States.  That spread makes GTL more economical as an alternative to petroleum refining. 

WHY GTL?

Companies investing in GTL are essentially betting that the spread between natural gas and oil prices will remain large well into the future.  They believe that the abundant supply of natural gas will keep prices low and stable for years to come, ensuring that GTL will remain economically viable.

The fuels produced through GTL are also cleaner burning than conventional fuels.  In addition, GTL-created fuel has an advantage over other natural gas-based products like compressed natural gas in that it could be used without retrofitting vehicles or replacing existing fueling stations.[2]

Proponents in the U.S. also tout GTL's potential for contributing to U.S. energy independence.  Some sources estimate that U.S. shale formations contain enough natural gas to sustain domestic energy needs for a century.[3]  GTL would take advantage of this abundant, domestically-available resource rather than oil, which often must be obtained from countries that are unstable, hostile, or both.

GTL also provides an outlet for domestic natural gas.  The gas drilling boom has generated business activity and created well-paying jobs during difficult economic times.  That activity will almost certainly slow unless additional uses are found for the supply that is being built.[4]

REASONS FOR SKEPTICISM?

Skeptics point to the massive, often unpredictable capital investments required to build and maintain GTL facilities.  For example, Shell's "Pearl" plant in Qatar cost more than three times the amount originally projected and has experienced unexpected maintenance problems.  Existing GTL facilities have also encountered operational difficulties.  The Sasol "Oryx" facility in Qatar reportedly encountered serious operational problems and operated far below capacity, at least early in its service life.[5]  GTL proponents counter, however, that they can apply lessons learned from prior ventures to avoid similar cost overruns and operational difficulties in the future.

Skeptics also note the historic volatility of both oil and natural gas prices and argue that industry cannot count on the imbalance between gas and oil prices to persist.  While there currently appears to be sufficient domestic gas reserves to keep prices low and stable for many years to come, skeptics argue that GTL plants require decades of low natural gas prices or imbalances between gas and oil prices in order to be economical due to the large up-front capital investments that are required.  Moreover, while hydraulic fracturing has rendered huge volumes of natural gas accessible, it has also generated a great deal of controversy.  Legal or regulatory developments might increase barriers to the use of such techniques and thus decrease accessible reserves.  While operators may be able to protect against price risks to some extent through mechanisms like long-term supply contracts, such protections are far from perfect and may themselves result in unexpected complications years hence.

Another risk is that competing uses will drive up demand for natural gas, resulting in higher prices.  The same conditions that have led some companies to consider investments in GTL are spurring other companies to find other uses for natural gas.  Steelmakers, for example, are increasingly using natural gas as feedstock for their processes.  Liquified natural gas export facilities are another potential outlet.  While such uses of natural gas generally are not expected to be sufficiently prevalent to make a major impact on price in the near future, that may change as industry finds new and improved ways to take advantage of gas supplies.

Finally, environmentalists argue that the purported environmental benefits of GTL-produced fuels are largely illusory.  They claim that GTL-fuels actually generate more carbon emissions than conventional fuels because the process used to create them is so inefficient and energy intensive.

Consideration of GTL is just one of many developments arising out of the natural gas boom.  The legal, economic, political, and social implications of this activity are enough to provide fodder for numerous entries on this and similar sites.

 


[1]           John M. Broder and Clifford Krauss, "A Big, and Risky, Energy Bet," New York Times, Dec. 17, 2012, available at http://www.nytimes.com/2012/12/18/business/energy-environment/sasol-betting-big-on-gas-to-liquid-plant-in-us.html?pagewanted=all&_r=0.

[2]           Ben Lefebvre, "Gas-to-Liquid Site May Hit $10 Billion," Wall Street Journal, Sept. 14, 2011, available at http://online.wsj.com/article/SB10001424053111904353504576568872584676488.html.

[3]           Louisiana Economic Development, "New World for Natural Gas," LED News, Q2 2012, available at http://www.louisianaeconomicdevelopment.com/led-news/articles/new-world-for-natural-gas.aspx.

[4]           Steve Hargreaves, "Turning Natural Gas Into Diesel Fuel," CNNMoney (May 9, 2012), http://money.cnn.com/2012/05/09/news/economy/natural-gas-diesel/index.htm.

[5]           "Gas to Liquids - GTL," available at http://www.natgas.info/html/gastoliquids.html.

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