New GTL Developments

Spending $40 billion for an Alaskan gas pipeline to the lower 48 seems less and less feasible every day.  $20 billion for a short pipeline to Valdez plus another $20 billion for a LNG plant seems to offer only slight advantages over the big line. Other small pipeline options fail to monetize the the full volume of available North Slope gas.

It's always tempting to talk about Gas-To-Liquids (GTL) to convert Alaskan gas to petroleum products but the cost never seem to add up.  I think this is because many GTL projects like Shell's Pearl convert gas to refined petroleum products (low sulfur diesel, kerosene etc). An Alaskan GTL plant only needs to convert gas into petroleum liquid in the C6 to C16 range, i.e. something liquid at atmospheric pressure and pumpable.  Such a material could be blended with crude oil, moved down TAPS, and sold as crude oil.

Another factor working against GTL plants is size. Plant size drives up cost.  The heart of a GTL plant is the Fischer-Tropsch reactor.  The F-T reaction is exothermic (gives off heat) so reactor size becomes is dependent on effective heat transfer.  An  F-T reactor is fed by syngas produced by reforming natural gas.  Some syngas plants require pure oxygen to form syngas.  An expensive air separation plant must be built to supply the pure oxygen.  An air separation plant adds both capital cost and operating cost.

What if the size and cost of a GTL plant could be reduced and a GTL plant could be customized to the needs of Alaskan gas?  A new outfit is commercializing a technology that might just fit the bill. CompactGTL is scaling up a modular GTL technology that can convert Alaskan gas to synthetic crude oil at lower cost than other GTL processes.  (LINK to CompactGTL presentation) Here are the advantages I see for the CompactGTL process:

1) Reduced reactor size. CompactGTL claims to have reduced reactor size by a factor of 10 through the use of  mini-channel reactors.  I believe in that claim.  The mini-channel reactors integrate a reactor within a plate type heat exchanger. This type of heat exchanger provides very high heat transfer rate.  CompactGTL has implemented this type of reactor for both the steam methane reformer (SMR) and the Fischer-Tropsch (FT) reactor. Size reduction will yield cost reductions.

2) No oxygen required. The CompactGTL process does not use an autothermal reformer therefore no costly air separation plant.  That's a cost reduction.

3) No carbon dioxide separation required.Alaskan natural gas contains about 12% carbon dioxide (CO2). The CompactGTL process does not require CO2 removal.  This reduces cost compared to pipeline alternatives.

4) Modular Design. Modular design suits Alaskan construction needs.  Any gas line project envisions modularized gas treatment plants.  Incremental deployment of CompactGTL using modules would take years and extend the oil production benefits of gas reinjection thus optimizing the total field production.

5) Synthetic Crude Oil. The CompactGTL process is geared to produce an unrefined product.  That keeps cost low and options open.  A synthetic crude could be blended with ANS crude or batched to Valdez. The product would be valued near the price of crude depending on the capabilities of the buyer's refinery.  Note - a FT synthetic crude is not an exact replacement for crude oil, it lacks aromatics, the key ingredient of gasoline. On the plus side a FT synthetic crude lacks low value heavy cuts and troublesome sulfur.   FT synthetic crude is ideal for clean diesel, kerosene and naphtha production.  Converting Alaskan gas into a crude oil equivalent would forever break the market link to cheap shale gas.

6) Economics.  CompactGTL shows one cost comparison in their presentation. Since they are currently focused on floating production, storage and offloading (FPSO) units I'll use that cost unescalated. i.e. "Alaska Factor" equals 1.00,  I figure the cost of building a module on a ship will cost the same as deploying a module to the North Slope.  Crunching those numbers I find that a full deployment of CompactGTL for Alaskan gas would cost upwards of $68 billon and it would produce about $15 billion annually in gross revenue if the product is priced at $100/bbl.  The capital figure is 1.7 times higher than a gas pipeline but the synthetic crude product sells for 5 to 6 times the price of natural gas so that a BTU of North Slope gas could sell for 3.5 more if converted to liquids. These are of course very rough calculations, but the conclusion points in the right direction.

Other considerations

1) Timing.  CompactGTL is currently in the commercialization phase with a demonstration plant funded by Petrobras. It will be some years before we're ready to talk deployment to a cold region.  In those years I doubt the gas to liquids value ratio will change all that much.  I also doubt that Alaska will ink a deal to sell gas as LNG into a market flooded with cheap shale gas and cheap shale gas derived LNG.

2) GTL Trend.  The world is full of cheap gas and stranded gas. CompactGTL is only one of many outfits focused on converting stranded or wasted gas into useful liquids. Technological leaps in catalyst and reactor design may push GTL into full commercial in North America in the near future.

3) NGLs.  Most urban Alaskan would like a big pipeline to deliver gas to their homes at an affordable price.  That may never happen and Alaskans need to make other plans for in-State energy needs.  A GTL plant does not exclude the possibility of propane and butane (NGLs) recovery from North Slope gas upstream of a GTL plant.  The economics of a GTL plant is not dependent of the BTU content of the feed gas, so a GTL plant would not compete with the interest of supplying Alaskans with affordable home-grown energy from NGLs.

2011 - Year of the Yawn

I had greater expectations for the Alaska Gas Pipeline in 2011. To recap -

1. The open season process was expected to yield announcements of precedent agreements for long term commitments to ship gas.  The agreements may or may not have been reached, but no public announcement was forthcoming.  Chances are any agreements reached are so heavily conditioned that they represent no commitment to do anything in the here and now. 
2. In 2011 I expected a viable shipper for a 7 MMTPA Valdez LNG plant to step forward.  What actually happened was that Governor Parnell voiced support for a tidewater LNG project. The Governor's comments had the unintended consequences of delaying submission of resource reports by the Alaska Pipeline Project (TransCanada and ExxonMobil).
3. 2011 Started with two Alaska Gas Pipeline projects - The APP (TransCanada & Exxon Mobil) working to the scope as defined by the Alaska Gas Inducement Act (AGIA) and The Denali Project (ConocoPhillips & BP).  I had an expectation that the projects would merge in 2011.  Instead Denali folded in May citing "open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project".  

What's next? - for starters spot Henry Hub gas closed the year at $2.97/MMBTU (see chart for 2011 natural gas prices).   That's astonishing and sobering to any proponent of an Alaskan Gas Pipeline.  Gas that cheap in December is partially due to a mild lower 48 winter but mainly a function of  the glut of shale gas. The 200 day average price is right at $4/MMBTU - essentially the low profit range to drill and produce a shale gas well.

In 2012 the North American gas markets will have little appetite for Alaskan Gas.  Billions will be spent to build Gulf of Mexico LNG export capacity and preliminary studies will be launched to look into the viability of at least one lower 48 Gas to Liquids (GTL) plant.  Anti-fracking stories will continue with little effect on the continued development of lower 48 shale gas resources. The annual average price of 2012 gas may fall within the $3.50 - $5.00/MMBTU range. No new nuclear power will come on line in 2012, but a few gas fired plants will come on line to replace aging coal plants.

Throughout 2012 Alaskans will come to grips with the increasing unattractiveness of Alaskan Gas.  The best comment this year came from Steve Kirchhoff, Vice President – Americas, ExxonMobil Gas and Power Marketing Company in a presentation to the Resource Development Council of Alaska in this video. In this presentation Kirchoff states that "You can't dabble at LNG"

Shale Gas Apocalypse* - Ending?

What would it take to end the shale gas apocalypse* ?  Maybe a ton of new laws constraining shale gas development and destroying thousands of good paying jobs, or maybe.....Monetize and export shale gas as LNG, and convert shale gas to liquid fuels.

I favor LNG exports and gas-to-liquids (GTL) for three reasons - Jobs building LNG export plants, Jobs building GTL plants and Jobs building the Alaska Gas Pipeline.

It's one thing for this lonely blog to promote the idea but the industry is beginning to take advantage of abundant, cheap shale gas.

Today we have news that LNG company Cheniere is planning a second LNG export plant  near Corpus Christi Texas (Rigzone Link) (Marketwatch Link) RigZone quote:

Cheniere Energy announced Friday that its wholly owned subsidiary, Corpus Christi Liquefaction is developing a liquefied natural gas (LNG) export terminal at one of Cheniere's existing sites that was previously permitted for a regasification terminal. The LNG export terminal site is located in San Patricio County, Texas , and it is anticipated that the terminal would be primarily supplied by reserves from the Eagle Ford Shale, located approximately sixty miles northwest of Corpus Christi . The proposed liquefaction project ("Corpus Christi Project") is being designed for up to three trains capable of producing in aggregate up to 13.5 million tonnes per annum (mtpa).

The combined export volume of the Cheniere export  projects will equal about 4 BCFD which is about 88% of the capacity of the Alaska Gas Pipeline.  What's great about the LNG export terminals and GTL plants is that they represent new demand.  The scale of these projects is large enough to move markets and increase the gas price, hopefully into a long term stable range that will promote the Alaska Gas Pipeline.

*(my term for super low natural gas prices caused by lower 48 shale gas production)

Sasol GTL

Sasol has plans to pursue a Gas to Liquids (GTL) project on the Gulf Coast. (LINK).  Chesapeake has been saying GTL will sponge up the shale gas glut (LINK- see page 10).  Looks like they may be right.

Quote from the DownStream Today article:

Sasol Ltd. (SOL.JO, SSL), a chemical company long known for squeezing motor fuel out of coal, is now turning its sights on the glut of natural gas in the U.S.South Africa-based Sasol on Tuesday announced plans to build a plant, at a cost of as much as $10 billion, that would convert natural gas into diesel.

Sasol's board last week approved an 18-month feasibility study for the project, which would be constructed on land adjacent to Sasol's existing chemical facility in Louisiana.If given the final go-ahead, the plant would be the first in the U.S. to use so-called gas-to-liquids technology. Once seen as far-fetched and futuristic, the technology has gained traction in recent years as the discovery of gas supplies has outpaced that of oil.

 Anything that increases demand for lower 48 gas helps Alaska in the long run.  18 months seems like a long time for a study, but I still look forward to approval for projects like this.

GTL - News worth noting

Foster Wheeler has been awarded work on a Canadian Gas To Liquids (GTL) plant (LINK). From DownstreamToday.com:

Foster Wheeler AG announced Wednesday that a subsidiary of its Global Engineering and Construction Group has been awarded a contract by Sasol to perform the technical portion of a feasibility study for a planned gas-to-liquids facility in Canada, on behalf of the Sasol/Talisman Energy partnership. The technical portion of the feasibility study is expected to be completed during the fourth quarter of 2011.

Recent investor updates from Chesapeake have alluded to GTL plants that will sponge up cheap North American gas for conversion to liquids. This sounds like the first credible North American GLT plant.

Before reading this announcement I would have predicted that the first GTL plants would be sited on the Gulf Coast. Citing a GTL plant in Canada makes a lot of sense too. GTL plants convert gas into hydrocarbon liquids that require further processing into fuel. That processing requires capital investment. In Canada GTL liquids could be added to thick oil sand products as a diluent, thinning the oil sand product. This product would be easy to pump. The GTL cut of the blended product would be co-processed into fuels at the refineries that receive the oil sand oil. It's a great strategy the maximizes return on capital employed.

The press release says shale gas will be used for the GTL project however gas from the Alaska Gas Pipeline and / or the Mackenzie pipeline could contribute to other GTL projects or satisfy other market demand as GTL sponges up shale gas.

Press release did not mention volumes, however I assume the plant will be sized along the lines of the other Sasol GTL plants.

GTL in Canada is good news and it's worth keeping an eye on.

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.

Natural Gas Prices - Up?

Lou Kilzer of the Pittsburgh Tribune-Review wrote this story "Natural gas prices set to jump with exports" taking issue with plans to export LNG from the lower 48. In the story he quotes Boone Pickens as saying "we're truly going to go down as the dumbest generation." referring to plans to export LNG.

He also details more LNG export plans, specifically:

Freeport LNG Expansion LP, together with Liquefaction LLC, applied on Dec. 17 to export 1.4 billion cubic feet of natural gas per day from a terminal port near Freeport, Texas. Lake Charles Exports LLC, a subsidiary of British-based BG Group and Houston-based Southern Union Company, applied to DOE on May 6 to export 2.0 billion cubic feet a day from its Lake Charles, La., facility.

If the DOE approves those requests, combined with the Sabine permit, the total 5.2 billion cubic feet a day proposed for export would represent 8.4 percent of U.S. production, a Tribune-Review analysis determined.

The story also bemoans the fact that the US imports 10% of our gas needs. According to the Energy Information Agency (EAI) gas imports in 2010 averaged 10.4 BCFD. For comparison the proposed Alaska Gas Pipeline will export 4.5 BCFD of gas to Canada, offsetting about half of our natural gas imports.

In summary, according to the article, exporting LNG is a bad idea according to the author because:

1. LNG exports will drive up gas prices
2. We would export clean energy and import dirty oil
3. We are dumb

Let's examine these outcomes and fill in the blanks;

1. Exporting LNG will drive up natural gas prices - GOOD. Current pricing in the $4/MMBTU range will not support job growth in America. $6/MMBTU gas puts Americans to work - building LNG plants, building pipelines, and building petrochem plants. Maybe even building the Alaska Gas Pipeline. I don't see a problem with that. For once we can export a product to Asia and keep the jobs at home.
2. Importing "dirty" oil sounds just awful doesn't it? The fact is that high sulfur, thick crudes are less expensive and our technological leadership in refining allow us to use the materials. American know how, cheaper products - can't beat that.
3. Are we dumb? I don't think in those terms. Markets are pretty smart at figuring out how to maximize returns. The Pickens Plan seeks to convert our trucking fleets over to compressed natural gas. I'd call that a pretty good idea, it would be even better if Boone was spending his money instead of reaching out for my tax dollars to fund the plan. Of course increased domestic use of gas for transportation will drive up price which is OK with me since that will spur development and build domestic employment.
   

I can offer a few ideas, and I think these will build a better America:

1. Support the conversion of LNG import terminals into export terminals. Conversion of these facilities is the most cost effective way to get into the LNG export market.
2. Let's get serious about Gas To Liquids. Our cheap natural gas and coal can be used to make clean liquid hydrocarbon fuels. Fuels that will burn in our existing cars trucks and trains without all the taxpayer funded investment required by the Picken's Plan. Domestic GTL will help protect us from overseas supply disruptions.
   
3. Let's build facilities in this country instead of building overseas. Let's build LNG export terminals, new petrochem plants, and new pipelines including the Alaska Gas Pipeline. Building here equals jobs here.
   

Shale Gas Liquids & Shell Gas Liquids

Larry Persily, the head of the office of the Federal Coordinator for Alaska Natural Gas Transportation Projects has an article in the Alaska Dispatch about shale gas economics (article link). The article focuses on the value stream from shale gas ethane and touches on the possibility of Gas-to-Liquids (GTL) projects in North America.

He quotes Harold York of Wood Mackenzie:

To illustrate just how important the revenue from gas liquids can be for a shale gas producer, York ran through some numbers:

A typical shale well needs $5 to $6 per thousand cubic feet (mcf) of output to make money.

Methane has been priced at about $4 most of the past year.

But the added value of the liquids makes the entire flow from the well worth about $7 to $8 per mcf.

"The natural gas liquids contribution is carrying the well," York said.

The same theme runs through the Chesapeake investor presentation. Page 16 of this presentation (LINK) Quoting:

Many reasons to be bullish on intermediate and long-term natural gas prices:

• U.S. natural gas producers are rapidly moving to an oilier production base. Once producers convert to drilling wells that produce $10-17/mcfe units and finish natural gas drilling to HBP land, why would they go back to drilling natural gas wells if prices increase from $4/mcf to $5/mcf to $6/mcf to $7/mcf? CHK believes this is the single biggest misunderstood aspect of the future bull case for U.S. natural gas...
  

• Conversion of U.S. liquefaction import facilities to LNG export facilities U.S. will be exporting gas via LNG by 2015, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. to receive world natural gas prices
  

• Growing industrial demand U.S. natural gas prices are lowest in the industrialized world and well below oil-based naphtha prices
  

• Quickening momentum for CNG vehicles $4+ gasoline and diesel prices will cause the market to force policy changes
  

• Continuing and accelerating shift from coal to natural gas for U.S. electrical generationElectrical generation natural gas demand could increase 10-15 bcf/d over the next decade
  

• Construction of U.S. GTL plants. Several will be built in U.S. by 2015-16, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. natural gas to receive world oil prices

Both Persily, and Chesapeake discuss future GTL plants. I'm interested to see if a North American GTL plant materializes. If it does I'll bet on a lower 48 plant location. Either way all the factors listed support higher gas prices and improved economics for an Alaska Gas Pipeline.

So what about ethane? This week I learned that Shell is looking at a lower 48 ethane cracker to take advantage of shale ethane (LINK), quote:"

Building an ethane-fed cracker in Appalachia would unlock significant gas production in the Marcellus region by providing a local outlet for the ethane," said Ben van Beurden, Shell Executive Vice President Chemicals. "This fits well with our strategy to strengthen our chemicals feedstock advantage and would be another step in growing our chemicals business to meet the increasing demand for petrochemicals."

I expect this plant to be sited somewhere in West Virgina or Ohio. In the odd math of the natural gas world the shale gas glut causes a ethane glut, ethane prices plummet hurting the economics of shale gas wells, less shale gas is produced and the price of natural gas rebounds.

Long story short - markets are re-normalizing to the available volumes of shale gas and shale gas liquids. New opportunities abound including the Alaska Gas Pipeline.

Weekly Blurbs

West Alpine on Hold. It's not a gas pipeline story, but it's a bad sign when permits hold up work, especially when the permitting agency won't give an explanation.

TransCanada monthly report to FERC...Yawn, seriously here's a preview of next months report "Engaged stakeholders, worked on the gas treatment plant cost estimate, attended a meeting...."

Denali's monthly report to FERC...Hmm ever so slightly more interesting, comments on polar bears.

Tweeking oil taxes - Maybe Parnell gets it? Maybe not. High oil taxes and no firm gas tax plan are killing projects. Let's hope he didn't O.D. on Palin's koolaid.

Ramras get's it.

One man's assessment of the Republican candidates for governor.

Goofy Blurb of the Week/Year/Decade : New pipeline supplies gas to BioFuel plant. Think about it. Let's grind up food crops, cook it with a petroleum product, fill up the land barge SUV with biofuel and good kharma then commute alone to a desk job.

Norman Wells needs gas. (MAP LINK) Preview of Fairbanks future without gas?

How about a GTL Plant? Love the technology, but who's lining up to fund and GTL plant? It takes MONEY, Lots and lots of MONEY. In Alaska maybe natural gas is the wrong feedstock - Syngas from insitu coal gasification sounds like a better Alaska GTL feedstock to me.