Are Gas-to-Liquids a Key to Boosting Natural Gas Prices?

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

Investors in the domestic energy industry know quite well that the current low natural gas prices are not good for profits. It’s simple economics really; we have more supply than we have demand. Because of this several companies are now considering new projects that’ll sop up some of our oversupply.

One such project that has the potential to use our abundant natural gas resources are gas-to-liquids plants. These facilities work to convert natural gas into liquid transportation fuel or feedstock for the chemical industry. A majority of the operational plants are overseas but their feasibility stateside is now being studied.

One recent project that was just recently making headlines was from Calumet Specialty Products (NASDAQ: CLMT) who announced that they are looking to build a 1,000-barrel-per-day gas-to-liquids plant at one of their Pennsylvania manufacturing facilities. This facility will be used to convert natural gas into liquid hydrocarbons that they can use as a feedstock to manufacture some of their products. Their CEO Bill Grube saw three important benefits of the project saying it would reduce their costs, increase the security of their supply, and improve their product quality. Calumet’s project is microscopic in comparison to some of the projects being built around the world.

To catch a glimpse of this on a much larger scale we need to span the oceans and look at a project that recently began production in Qatar. Shell (NYSE: RDS-A) just completed an $18 billion project creating the world’s largest GTL facility called Pearl GTL. Shell projects to process about 3 billion barrels of oil equivalent over the facility’s lifetime. That’s about the equivalent of the amount of oil the US imports each year from foreign sources.

The project will add 8% to Shell’s worldwide production making it their top growth engine this year. The facility has a capacity for 260,000 barrels of GTL and NGL’s per day which towers over Calumet’s prospective project. It’ll produce enough diesel to fill over 160,000 cars per day. That is more cars than cross the Golden Gate Bridge each day. The plant is fed gas from the world’s largest single natural gas field, North Field, in the Arabian Gulf. The field which contains more than 900 trillion cubic feet of gas making it six times larger than our own Marcellus Shale at 141 tcf where Calumet is building their plant.

Shell’s plant while the world’s largest isn’t the only one. Over in Nigeria, Chevron (NYSE: CVX) along with their partner Sasol (NYSE: SSL) are in the midst of building an $8.4 billion 33,000 barrel-per-day facility that will turn natural gas into diesel fuel. They see the world’s energy challenge being that of transportation fuels accounting for 20% of global oil consumption. This demand will grow to over 21 million BOE/D by 2030 and to meet this demand they’re working to promote the use of GTL as a viable alternative.

Sasol’s not only working with Chevron overseas but they’re also now looking into building their own GTL facility in Louisiana which will be first of its kind in the US. The cost of the project will be between $8 and $10 billion and will create 850 permanent jobs as well as 5,500 construction jobs. It will use abundant domestic natural gas and convert it into diesel fuel in addition to some other products. They are still determining the location of the facility and whether it is feasible to build a facility that’ll produce two million tons of GTL or one that’s twice that size. What’s truly amazing about the fuel is that it looks just like water and it can be used in existing vehicles and through existing fuel delivery systems.

A final and much more speculative technology being explored is through Chesapeake Energy’s (NYSE: CHK) 50% owned Sundrop Fuels.  In 2011, Chesapeake invested $155 million to acquire this stake in a company building the largest waste biomass based “green gasoline” plant in the world.  The plant combines natural gas with waste biomass at high temperatures to produce a tank ready gasoline equivalent.  The first plant which will be located in Louisiana will be small with production of about 3,500 barrels of renewable gasoline per day.  They plan to follow this plant with much larger scale plants which could produce up to 300 million gallons per year.  For Chesapeake, they see this as an outlet for their Louisiana Haynesville Shale where they’re the largest producer. 

Still, we’re many years until any of these gas-to-liquids plants will be built in the US. Once built and operational these plants will certainly consume some of the excess supply. At this point they are projects to watch as they’re a step in the right direction but not yet the key to unlocking natural gas prices.

 

 


latimerburned has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron and Sasol. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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