The Answer to Cheap Natural Gas and Declining Coal

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Fischer-Tropsch (FT) gas to liquids (GTL) technologies were largely abandoned when cheap petroleum became the primary feedstock for hydrocarbons. The advent of hydraulic fracturing in the past decade has lead to a new age of cheap and abundant natural gas – turning the tables in dramatic fashion while creating an interesting dynamic in petrol chemical supply chains. The coal industry has also suffered from gushing natural gas and new emission standards. Fortunately, FT processes can also turn coal into high-value products.

The smartest thing coal and natural gas companies could do to ensure profits in a low-price environment is to create high-value products. The use of a product dictates its price. This may seem obvious, but most people – and often times “experts” and analysts – gravitate to fuel/energy producing companies. It should be no surprise then that burning natural gas to produce electricity results in the least value-added product possible. FT facilities can turn natural gas that would otherwise be burned into higher-value products.

The FT process yields low-weight, medium-weight, and high-weight products that include naphtha, gasoline, kerosene, diesel, waxes, and lubricants. Producers aim to produce as many medium-weight products as possible, but unfortunately the distribution is not very easy to control. Low-weight products are looped back into the process while high-weight products are cracked into higher-value products.

Recent FT catalyst breakthroughs in the last decade have allowed researchers to control the distribution of products to those of higher value and reduce medium-weight products on coal and natural gas feedstocks. Just as cellulase enzymes will drive the future of the sustainable chemicals industry, new FT catalysts will drive the future of GTL technology.

So, which companies are doing something about the low-price of natural gas instead of sitting around and complaining about it? We will discuss the leading public companies as well as a few industry-leading private companies to demonstrate what is possible.

Coal as a feedstock

South Africa has extensive coal reserves but few oil deposits. As a result, nearly all of the country’s diesel fuel comes from FT processes and the country is a leader in coal-fed FT technology. Sasol (NYSE: SSL) operates some of the largest FT facilities in the world in South Africa, where it has been turning coal and natural gas into useful hydrocarbons since 1927.

Natural gas as a feedstock

Sasol also operates the 34,000 bbl/day (12.4 million bbl/yr) Oryx GTL facility in Ras Laffan, Qatar. That figure is barely topped by PetroSA, which operates a 36,000 bbl/day (13 million bbl/yr) GTL facility in Mossel Bay, South Africa. The plant utilizes natural gas extracted offshore and is expected to be fully operational in 2012. While 13 million barrels per year is impressive, keep in mind that it is a heterogeneous mix of products – not just fuel or high-value waxes.

Royal Dutch Shell (NYSE: RDS-A) is another big player in FT technology and operates a 12,000 bbl/day facility in Malaysia that utilizes natural gas. The company takes the crown with the 120,000 bbl/day (43.8 million bbl/yr) Pearl GTL facility also located is Ras Laffan, Qatar. The massive facility will eventually target 140,000-150,000 bbl/day.

All of the above (and biomass too!)

Rentech Inc.’s (AMEX: RTK)newfound financial flexibility spawned from the recent IPO of their fertilizer unit Rentech Nitrogren Partners LP (NYSE: RNF) may offer them the fresh-start they need. This underdog has demonstrated some interesting IP in GTL technology and has proven its platform to work with biomass, although it has had trouble getting beyond pilot and demonstration scale in the past. Their co-fired biorefinery technology may be an interesting future revenue stream. Just keep in mind that their largest scale is 400 gallons/day.

As mentioned in a prior article, privately held Synfuels International of Dallas, TX has an impressive patent portfolio for non-FT GTL technology that is profitable on a much smaller scale. If Shell or Sasol build a large 250 million cubic feet/day natural gas-fed FT facility they would not recover their investment for 8-10 years. Synfuels on the other hand could build a 100 million cubic feet/day facility (non-FT) and recoup their investment in 3-4 years. The company has carved out an interesting industry niche by targeting natural gas fields too small for large FT facilities to compete with. 

<img src="/media/images/user_6293/synfuelsgtlprocess_large.PNG" />

Synfuels has the industry’s only liquid-phase acetylene hydrogenation. In English: methane (natural gas) is first turned into acetylene via cracking. The company’s technology, as generalized above, allows for acetylene to be turned into higher-value gasoline, diesel, jet fuel, and ethylene, which sells for 2.5x that of gasoline.  Synfuels International is a shining example of what is really possible when turning low-value raw materials such as natural gas into high-value products at an economical price.

Foolish bottom-line

The companies and technologies discussed above should serve as a wake-up call to United States energy suppliers. Our out-dated oil refinery only mindset needs to shift to consider all possibilities. Consider this: if the United States built ten 36,000 bbl/day (130 million bbl/yr) CTL/GTL facilities we would replace 2% of our annual petroleum product consumption. Given our vast domestic reserves this is not out of the question. I hope after reading this you are scratching your head and wondering, “Why aren’t we doing more?”

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and biopharmaceuticals @BlacknGoldFool.

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