By DAVID BROWN
EXPLORER Correspondent

Rescue Nears for Stranded Gas

GTL On Verge of Coming-of-Age?

Graphic courtesy of Syntroleum

After years as the coming thing, gas-to-liquids (GTL) production appears ready to arrive.

Large-scale, commercial GTL plants should come online within three to five years.

In May, Qatar Petroleum said it is in talks with several oil companies to develop a GTL "megaproject" for production of up to 100,000 barrels per day.

Skeptics can be forgiven.

A survey of industry plans in the late 1990s would have found a dozen proposals for major GTL projects.

Today, not one of those is complete.

Only two are approved and under way, the Sasol-Qatar Petroleum Oryx plant at Ras Laffan and ChevronTexaco's Escravos GTL project in Nigeria.

All of the major oil companies express an interest in GTL.

Most have departments assigned to study GTL applications.

Yet Shell is the only major now operating a commercial GTL plant, a relatively small, 12,000-barrel-per day facility in Bintulu, Malaysia.

Capital Intensive

BP began liquids production last year at its GTL demonstration plant in Nikiski, Alaska. ConocoPhillips operates a pilot plant in Ponca City, Okla.

By the first week of June, the Ponca City facility had been "going through commissioning for 8-10 weeks, in pre-startup activities. We'll be starting syngas real soon," said Jim L. Rockwell, ConocoPhillips manager, gas-to-liquids in Houston.

A simple explanation of how it’s done: Gas-to-liquids technology, after years of promise, appears ready to make an impact on the world energy scene.

GTL typically begins with conversion of natural gas to synthesis gas, or syngas, through a reforming process.

The resulting hydrogen-carbon dioxide mixture then can be converted to long hydrocarbon molecules through catalytic reaction.

A final step produces shorter, liquid molecules. GTL output can include a variety of end-products, including synthetic fuels, either gasoline or middle distillates.

This GTL process is nothing new. A pair of German scientists, Franz Fischer and Hans Tropsch, developed the commonly used Fischer-Tropsch GTL conversion in the 1920s.

Companies continue to refine GTL techniques. Shell's current-generation process targets middle distillate production and is known as Shell Middle Distillate Synthesis (SMDS).

"Most people are looking at middle distillates. Low-temperature (GTL processing) is much less expensive to build. Low-temperature drives you more toward the diesel," Rockwell said.

He described GTL as "incredibly capital intensive," making cost containment a critical focus.

"The usual break-even is given at $20 a barrel, and $12-$14 a barrel of that is just the capital," Rockwell said. "And that's if you can build it in the United States on a Gulf Coast basis."

Economic Considerations

Most operators say economics favor GTL only when oil prices remain above a $20/barrel average. That helps explain why so many GTL proposals went on hold in the late 1990s.

Some companies believe they can justify GTL operations even when crude drops as low as $15/barrel.

As a rule of thumb, GTL operators expect to spend $20,000 for each barrel-per-day of plant production capacity, according to Rockwell.

By that measure, a 100,000 barrel-per-day GTL facility would cost $2 billion.

Economics also favor larger plants, Rockwell noted.

"You just can't build a 10,000 barrel-per-day plant. You have to have better economies of scale," he said.

Qatar Petroleum awarded a $675 million engineering and construction contract to Technip-Coflexip for the Oryx GTL plant, projected to produce 34,000 barrels per day.

That's close to the $20,000 per barrel level. But total project cost would be $900 million, Qatar Petroleum said.

Another requirement for economic GTL is "cheap gas," Rockwell observed.

The industry sees GTL as a way of monetizing stranded or remote natural gas that would not otherwise be marketable – gas that has little or no current economic value.

Some gas might even have a negative economic value, when producers face a penalty for flaring gas, for instance.

And the world contains abundant remote gas reserves to feed GTL expansion.

"When I go around to conferences and hear people talking, they're talking about one million to 1.5 million (barrels per day of GTL production) in 15 years," Rockwell said.

GTL Offshore

GTL technology may enable the production of synfuels on offshore facilities, a boon for operators with significant reserves of deepwater natural gas.

But those facilities will be built later rather than sooner, predicted Joe Verghese, vice president-technology, oil and gas, for ABB Lummus Global Inc.

"The offshore is still, in my view, something that will take more time to come to fruition," he said. "The migration of technology from onshore to offshore is a hurdle."

Verghese identified several areas of concern that will affect offshore GTL development:

GTL is much more complex than the industry's current offshore operations. "With GTL you are introducing petrochemical processes. You start to see high temperature reactors, product fractionators, air separation units etc., in an offshore setting," he said.

Offshore GTL systems need to be fitted into a limited space.

"You have a situation where offshore systems are much more congested, compared to onshore, with the attendant issues of safety and maintainability," he explained.

GTL facilities operating offshore must be designed to withstand deck movement.

"They've got to be motion-sensitive," Verghese said.

Right now, offshore personnel aren't used to anything as complex as GTL processing.

"The offshore operations culture of today is not geared to handle the complexity of GTL operations," he noted.

That makes offshore GTL considerably more problematic than onshore applications. "When you add all this up, it implies higher level of technology risk," Verghese observed.

New LNG Terminals

New GTL operations onshore will provide "feedback" for later offshore units, he said. As operators gain experience, they can begin to migrate the technology to offshore applications.

Economic risk also increases offshore. If the numbers now look marginal for onshore installations, they will appear even more questionable for higher-cost offshore facilities.

"How do you achieve the breakthrough economics?" Verghese asked. "The momentum clearly now is for onshore plants. The economics there are much better understood."

From an offshore standpoint, and in the near term, the industry might put its money into new LNG facilities offshore.

According to the American Bureau of Shipping, at least five and as many as 20 LNG terminals could be built for U.S. offshore installation in the next 10 years.

In response to this, Verghese stated: "These are primarily terminal concepts for the importation, storage and re-gasification of LNG.

"When we come to the LNG scene, there are projections of escalating imports of LNG into the United States because of the longer term gas deficits in this market," Verghese said.

These offshore structures will incorporate facilities for storage and re-gasification of LNG shipped in by trading LNG carriers from low cost supply sources worldwide.

Verghese said new offshore LNG terminals have a clear advantage over onshore LNG facilities in the permitting process.

Significant delays are anticipated in securing the necessary approvals for construction of new onshore storage and re-gasification facilities.

However, from a product flexibility standpoint, the delivery of a distillate product slate is favored over LNG since, in the short-to-medium term, LNG supply could exceed demand in both the Pacific and Atlantic basins.

In these circumstances, GTL as a solution for monetizing stranded gas gains becomes more attractive.

Middle distillate synfuels from GTL, even at maximum foreseeable production rates, would hardly be a ripple in the overall product volumes traded in the market.

Strategy Shift

Rockwell said oil companies at first expected to license and apply existing GTL technology, but now are developing their own approaches.

"When you do all the combinations, there are probably hundreds of processes out there," he said.

Two of the best-known providers of proprietary GTL technology are Sasol in South Africa and Syntroleum in Tulsa.

Syntroleum has shifted away from being solely a process licenser, said John Ford, the company's director of communications and investor relations, who retired after giving this last interview.

"Our strategy has changed over the past couple of years. We thought when we started we would have a technology we could license and simply collect the royalties," he said.

"What we've discovered is that, while this is still a viable strategy, we're at the mercy of someone else's timetable, as to when and whether these producers build a plant," he added.

Now the company looks for equity positions in GTL projects, and could even become a plant operator itself.

Syntroleum also is working on a 10,000-15,000 barrel-per-day barge plant under a U.S. Department of Defense contract, with the ultimate goal of producing synfuels near a given theater of operations, Ford said.

"They could save a lot of the costs of transporting fuel, which as you know are enormous in the military," he noted.

Development Positives

Ford sees several positive signs for the near-term development of GTL:

The funding and initiation of the Sasol-Qatar Petroleum GTL plant.

"A lot of projects have been proposed. To date, there has not been a single, economic-scale GTL plant built. The good news is, one is being built," he said.

The world's resource base of natural gas and significant reserves of currently unmarketable gas promise a bright, long-term future for GTL.

"We've signed a number of agreements in Russia. In the course of producing oil there, they flare a lot of gas," Ford said.

"We're looking at situations where people have a problem, whether it's low-Btu gas or stranded gas or gas that couldn't be brought to market."

Synfuels from GTL are environmentally advantaged, since they contain no sulfur, aromatics or heavy metals.

Ford noted that many countries, including the United States, have adopted regulations requiring the reduction of sulfur levels in diesel fuel.

"What this is doing is creating an increased demand for low- or no-sulfur diesel, which means refiners will have to spend a lot of money to reduce the level of sulfur in diesel," he said.

With its relative purity, GTL synfuel can be blended into refined fuels to help meet the mandated standards.

Ford acknowledged that GTL has been slow to develop.

"A paradigm change like this isn't going to happen overnight. But it's accelerating, and we're excited," he said.

He also offered an explanation for the wide industry interest in GTL, despite the current lack of an operational, large-scale, commercial GTL plant.

"Everybody wants to be second," he said. "Nobody wants to be first."