GTL: A worthy competitor

IFandP attended SMI’s Gas to Liquids 2008 conference and returned with a wealth of information. Here we cover the most salient points.

Gas-to-liquids (GTL) is a technology which offers a means of commercialising “stranded” natural gas reserves, which, as their name suggests, are far away from demand centres. This puts it into competition with LNG, but the two cater to very different markets. While LNG requires very specialised ships and provides energy for power and heating, the products from a GTL plant cater to the transport sector and can easily make use of existing oil transport infrastructure. Another important string to its bow is that diesel can be easily produced via GTL technology and that demand for this product is expected to grow significantly in the future, at the expense of gasoline, due its better mileage per gallon. In addition, the current refining sector has recently been struggling to produce enough diesel and this was thought by the IEA to be a factor in the run up in crude prices seen earlier in the year. There is also the expectation, as articulated by the IEA and given extra weight by the current investment climate, that while the demand-supply balance in the oil sector may become looser in the next few years, a very tight situation may be seen around 2013, as demand recovers.

Although GTL is obviously impacted by the recent dramatic economic downturn and the resulting fall in the price of oil products, it is important to understand that the big players are thinking in the long term and with the IEA forecasting a 45 per cent increase in energy demand between now and 2030, there is clearly a great need for energy projects of all descriptions. The growing scarcity of conventional oil also means that GTL projects will become increasingly important in the years ahead. It is also worth bearing in mind that even at the depressed prices for crude and oil products seen presently, GTL projects are still immensely profitable. Of the two, the price of crude is by far the most important, eclipsing the premium on diesel.

To put some numbers on the profitability of GTL projects, Oryx GTL, the world’s currently largest operational GTL plant, which was developed at a cost of US$1bn and has a nominal plant capacity of around 32,400bpd, is expected to pay back its investment in two years at an average crude price of US$50/bbl. However, Oryx was built largely before the extraordinary run in construction costs and with a specific capacity of US$30,000bpd could be considered a bargain. As a result, it is not representative of the present economics experienced by the industry.

A better example is Royal Dutch Shell’s fully-integrated Pearl project at the Ras Laffan industrial city in Qatar, which is expected to see its first train come online around the end of 2010. At full capacity, the plant will produce 140,000bpd boe of GTL products and 120,000bpd boe of natural gas liquids and ethane. Its operating costs are expected to be around US$8/bbl and the project is expected to pay back in four years or two if the price of crude averages US$100/bbl, according to Malcolm Wells of Sasol Chevron. Alex Forbes of Forbes Communications suggested that Shell had turned down the option of project financing for Pearl, instead choosing to fully fund the project itself, as the presence of other investors could have resulted in intellectual property issues arising from the completion of due diligence.

Pearl also highlights the benefits GTL projects can bring to the local community. At its peak, it will employ 35,000 workers and has created a village with its own recreation centre, park and outdoor cinema.

Due to their sheer scale and the size of some components, such as the reactors, GTL developments represent significant engineering and logistical challenges. Nowhere is this more the case than Sasol Chevron’s Escarvos GTL (EGTL) plant in Escarvos, Nigeria. The project has effectively turned a swamp into a solid surface, with the aid of some 2,900,000m³ of sand and specially engineered pilings, designed to support and anchor the massive structures. The EGTL project is due to begin operations with a capacity of 34,000bpd boe, but this is expected to rise to 120,000bpd boe within 10 years of its commissioning. The challenges of building in such a remote location have taken their toll, as has the escalation in commodity prices. It was initially expected to be complete by 2009, but this date has now slipped until 2011, while its costs will have ballooned from an initial US$1.7bn to an estimated US$6bn.

GTL and the environment

One concern surrounding GTL is its environmental impact, particularly in terms of greenhouse gas emissions. According to Guy de Kort, general manager of Shell Gas & Power’s global XTL development division, who was speaking at SMI’s Gas to Liquids 2008 conference, a recent study concluded that GTL plants produce about the same amount of CO₂ as a modern refinery. Mike Phillipson of Foster Wheeler gave a presentation on carbon capture and sequestration (CCS) for GTL plants. He explained that the deployment of such a technology is complicated by the fact that CO₂ is generated at many stages of the GTL process and is required for some vital chemical reactions.

As a result, there is little advantage to gained from combining techniques and the amount of CO₂ that can be captured from pre-combustion techniques is capped at around 40 per cent. Mr Phillipson indicated at although costs vary significantly, depending on projects, the cost of CO₂ mitigation in terms of US$/t is extremely similar for both pre- and post-combustion techniques. In general, post-combustion methods are likely to be favoured if GTL operators are required to make their plants ‘capture-ready’ or if they are required to sequester as much CO₂ as possible. An alternative to CCS, which is especially applicable to integrated GTL plants, is to use the CO₂ produced for enhanced oil recovery (EOR) or sell it to other parties for that purpose. EOR has another role to play in the industry, in the form of limiting the reserves of natural gas available as feedstock for GTL plants, along with pipelines, LNG and domestic consumption. As pointed out by Alan Gelder of Wood Mackenzie, LNG and GTL differ substantially in their appeal to investors, with the latter holding the advantage with regards to gearing to oil prices. GTL also comes out on top in terms of logistics as its products fit into the established supply chain and do not require expensive dedicated ships to be built. However, LNG is a more mature technology, while as can be seen from the delays experienced with Oryx’s start-up and the problems associated with EGTL, GTL still has some way to go in this area.

Added value

Mr de Kort highlighted that GTL products burn more cleanly than conventionally-refined fuels and this leads to better air quality, an attribute with particular appeal to developing countries such as China who have been struggling with poor air quality in their major cities. This, combined with good biodegradability, makes them highly suitable for use in environmentally sensitive areas. Another consequence of the cleaner burning nature of GTL products is a marked reduction in engine noise, due to reduced cylinder pressure, which can lead to maintenance benefits. There also exists a great deal of potential for increased performance, particularly if engines are optimised for GTL fuels. However, this is unlikely to occur, until the proportion of GTL products in the transport sector mix increases substantially. Mr de Kort predicted that in the medium term, the greatest opportunities lie in the heavy-duty sector (presumably due to the increased focus on maximising fuel efficiency). More immediately, GTL technology can be used to produce extremely high-quality lubricants, for use in a number of applications. This includes engine oils, where their thinner nature can lead to increased fuel efficiency. All of these attributes combined, suggest that it may be possible for GTL products to command a premium in the years ahead. He also described a recent test flight with the Airbus 380, which successfully flew with one engine being supplied with a 40 per cent GTL jet fuel blend and demonstrated no adverse effects.

Another benefit of GTL technology is that the Fischer-Tropsch process can be harnessed to produce electricity, enough to power both the plant itself and often to export to other industrial plants or to the national grid, if available as well.

Riding out the storm

Like most large-scale energy projects, GTL plants are highly capital intensive. As a result, there are concerns as to how the sector will be affected by the financial crisis. A source, who spoke at the conference under condition of anonymity, commented that although GTL is a long-term industry, the effects of the financial crisis are not short-term and “will be with us for a number of years”. He explained that from the perspective of those involved with project finance, “Christmas had come early” in the sense that no-one is lending any money and that this state of affairs could well last until the end of 1Q09. The source pointed to the full or partial nationalisation/refinancing of many banks as a potential barrier to GTL project finance, as governments tend to prefer organisations under their control to keep their money within the country’s economy rather than tying it up in large offshore projects. In addition, there is likely to be a shift away from focusing on return on equity in favour of maintaining a strong capital base.

Fortunately for the industry, it has several factors working in its favour in the long-term. For example, it is anticipated that the global economic slowdown will lead to reduced project costs, as the price of commodities such as steel start to fall and the availability of skilled labour increases. This is predicated, to some extent, on the assumption of less infrastructure projects coming to fruition and it is expected that the GTL sector will not be immune. The 2007-08 period has already seen a reduction in the number of such projects, but many in the industry believe that this attrition has effectively weeded out the less financially and technically sound projects, in favour of their stronger peers. Secondly, like any new technology, costs are expected to fall as a result of economies of scale and technological advances.

One good example of this process is the move towards modularisation, which is being championed by new entrant, GTLpetrol LLC, which is looking to build 15,000-25,000bpd plants. To this end, it is aiming to maximise the level of standardisation and prefabrication within its plant designs. The advantages of a modular approach are reduced design, engineering and deployment complexities. This can result in significantly cheaper projects.

There also exists a great deal of potential for GTL technology in the form of associated gas from offshore oil deposits. Currently around 150bnm³ of natural gas is wastefully flared each year, because it is uneconomic to bring it to market. The installation of small GTL plants on offshore oil platforms would generate significant value, reduce net CO₂ emissions and could do this without any logistical issues.

Other topics presented at the conference, included a presentation by Matthias Wagner on GTL F1 AG’s semi-commercial scale pilot plant, which is based on a proprietary advanced slurry cobalt catalyst; a look at the suitability of a model-based approach to GTL process development and optimisation by Costas Pantelides of Process Systems Enterprises and an extremely interesting talk on the potential of combining GTL technology with underground coal gasification by Peter Bond, MD of Linc Energy.

SMI’s conference proved to be an extremely worthwhile two days of talks from members of the GTL industry and informed discussion. It took place at the excellent Copthorne Tara Hotel, in London, UK and set high standards in presentation and networking opportunities.

For more information on this subject, consider visiting the following websites:
www.smi-online.co.uk/events/default.asp?is=5&mst=1
www.sasolchevron.com/
www.shell.com/qatar/
www.oryxgtl.com.qa/