Shell's Pearl Project Could Change Global Energy Landscape

| About: Royal Dutch (RDS.A)

By Tony D’Altorio

Something big is happening in the desert of Qatar. A huge structure is taking shape. It’s a structure that may help change the global energy landscape.

It’s called Pearl and it’s a gas-to-liquids plant being built by Royal Dutch Shell (NYSE: RDS.A) and partner Qatar Petroleum with the help of more than 52,000 workers. This huge mass of concrete, steel and cables is the single largest investment made by Shell, with a development cost of about $19 billion.

The plant will turn natural gas, piped in from Qatar’s North Field sixty kilometers offshore, into high-quality, cleaner-burning fuels and lubricants.

A Pearl of a Project for Shell

During the next few weeks, Shell will build up the stock of gasoil in its tanks on site. Then the company will be able to sell its first cargo of liquid fuels sometime later this month.

It’ll be a crucial moment for the company. Pearl is one of 20 major projects that Shell has invested heavily in over the past few years. And make no mistake, Pearl is a major project.

  • Pearl will be a significant participant on the world petroleum stage.
  • Once fully operational by the middle of next year, it will generate eight percent of Shell’s total energy production.
  • Making this the company’s main engine of growth in 2012.

The Pearl project also represents a big bet by Shell on natural gas. It’s a bet that will see Shell produce more gas than oil starting next year.

And it’s not the only bet on natural gas by Shell, as ably pointed out by my colleague, David Fessler.

The reasoning behind this bet on gas was explained by Shell’s CEO, Peter Voser. He said the company expects gas demand to rise by 50 percent up to 2030 and to grow “much faster than oil.”

The key to Pearl’s success will be its ability to turn lower-value natural gas into higher-value products, which are based on oil prices, such as diesel. In the past, similar projects haven’t been economical. But higher oil prices have helped change the outlook for Pearl.

Pearl, together with the Qatargas 4 LNG plant that will produce liquefied natural gas, will generate $4 billion of cash a year at $70-per-barrel oil prices.

Not bad for a project that’s based on “old” technology. Shell is commercializing on a grand scale and cashing in on gas-to-liquids technology first developed in the 1920s!

Pearl’s Industry-Wide Ramifications

The industry is watching closely how Shell’s technology performs at Pearl. If it all goes according to plan, it could have implications for the market. Other gas-to-liquids plants may be planned.

How well Pearl does will also add to the debate currently going on in the industry about the relative merits of gas-to-liquids technology versus liquefied natural gas technology.

Frank Harris, the Head of Global LNG Consulting at Wood Mackenzie, doubts whether Shell would begin a project like Pearl today. He said the capital costs are too high and the prices for LNG have changed greatly since 2006 when Shell decided to go ahead with the Pearl project.

Mr. Harris is on to something. Today, with the market for LNG in Asia so strong, the economics are very different from five years ago.

For companies owning rich gas fields today, most would probably opt to turn it into liquefied natural gas rather than using gas-to-liquids technology to turn it into fuels like diesel.

Even Shell may not build another Pearl. Its CEO does not rule it out, but says he wants to see Pearl up and running before making any such decisions.

Either way, Shell does have one Pearl of a moneymaker on its hands.

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