Shell, Shale, and GTL

Cheap shale gas in the lower 48 is attracting the attention of LNG exporters (LINK) and now Shell is looking at building a large Gas-to-Liquids (GTL) plant in the United States. (LINK). Quote (link and highlights added):

By JAMES HERRON  Royal Dutch Shell is in the early stages of planning projects to turn natural gas into fuels like diesel in the US, of similar scale to its huge project in Qatar, Andy Brown, executive vice president of Shell, said in Qatar Monday.  "We are looking for places where gas is cheap and [oil] products are expensive," he said at a press briefing at the World Petroleum Congress in Doha, Qatar. "Clearly the US is something we're looking at."  Shell is only interested in large-scale projects similar to the $18 billion Pearl gas-to-liquids plant it has developed in Qatar, Brown said. The first phase of Pearl GTL is now producing at close to full capacity and the second phase started over the weekend, he said.

 What can an $18 billion investment yield?  According to the Shell website Pearl converts 320,000 BOE of gas into:

• - 140 kboe/d of gas-to-liquids products (2 trains)
• - 120 kboe/d of natural gas liquids and ethane

At today's prices I estimate that's equal to about $8.5 billion in gross annual product revenue.  The 1.8 BCFD of gas feed stock  would cost about $2.5 Billion leaving a gross margin of  $6 Billion.  Assume operation, maintenance and utility cost of $1 Billion and a Pearl type GTL plant will yield $5 billion annually EBIT.  After taxes the rate of return is in the attractive range.  I assume the capital cost in the lower 48 will be higher than Qatar, so the rate of return is probably in the 12% to 15% range.

How does this relate to an Alaskan Gas Pipeline?  First don't get your hopes up for Shell to build a world scale GTL plant in Alaska - construction cost are much higher than the lower 48 and the pipeline infrastructure is already in place on the Gulf Coast.  A lower 48 GTL plant of this scale does help Alaska - it soaks up 1.8 BCFD of gas, roughly 40% of the 4.5 BCFD capacity of the Alaskan Gas Pipeline.  Keep in mind GTL is expensive, but outfits like Shell can buy gas at $3.5/MMBTU and sell liquid products at $16/MMBTU.  There's also the possibility that more lower 48 GTL plants will be built and the gas demand could easily exceed the volume of the Alaska Gas Pipeline.

Ultimately sponging up cheap lower 48 shale gas with GTL plants and LNG export plants will help create demand for Alaska's gas.

 

Qatar GTL Online

Shell reports the first cargo of GTL (gas to liquids) product sold from the Pearl project in Qatar (LINK).

Here's the math - at full production Pearl will produce 1.6 BCFD and produce 120,000 BPD condensate and 140,000 BPD GTL products. The cost was about $19 billion.

The Pearl gas volume is roughly one third of the proposed Alaska Natural Gas Pipeline. Direct comparisons for application to the Alaska gas volumes are difficult. It's fair to say that about 1.3 BCFD went to produce the 140,000 BPD of GTL liquids. If those liquids bring $100 per barrel the simple payout is 3 - 4 years.

Could a GTL plant in Alaska compete with exporting Alaska gas via pipeline? No. At a capital cost of $14/cu ft an Alaska GTL plant would cost $63 billion before adding a 30% "Alaska factor" for Arctic construction. $82 billion is my low side estimate for an Alaska GTL plant capable of processing the full 4.5 BCFD of North Slope gas. That's double or triple the cost of the pipeline.

So can GTL help Alaska? YES. Given Pearl's success, a Pearl sized Lower 48 GTL plant is now bankable. A Lower 48 GTL plant could cost less if less refined products were sold into existing refining infrastructure. If built, GTL plants would sponge up cheap shale gas, making room for Alaska gas.

Overall a large GTL success like Pearl is good news that should be replicated in North America, GTL products directly replace imported crude oil eliminating the need to convert vehicles over to compressed natural gas (CNG). Huge projects like a GTL plant will help put Americans back to work too.