The production of synthetic fuels, or "synfuels" (i.e., hydrocarbon-based transportation fuels that are "synthesized" from fossil fuels other than petroleum, such as natural gas and coal) has long been the preserve of pariah states. Famous examples of commercial-scale synfuels production include Nazi Germany during the Allied naval blockade of World War II, and South Africa during the international sanctions that characterized the later apartheid era. With these notable exceptions, however, the economics of synfuels production has historically not been favorable enough to merit large-scale production. The recent boom in U.S. shale gas production and subsequent fall in natural gas prices have had a drastic impact on the economic feasibility of gas-to-liquids [GTL] pathways, and the synfuels industry is poised for U.S. expansion on an unprecedented scale.
This article, the first of a three-part series on synfuels production in the U.S., examines how a long-term shift in energy prices is paving the way for GTL commercialization on an unprecedented scale. The second and third articles will address the economics of coal-to-liquids pathways, and the long-term impact of this new trend on syngas feedstock prices, respectively.
A word on nomenclature
Pathway nomenclature can easily confuse researchers because of wide variation in definitions. For the purposes of this article, the following definitions are used:
Synfuels: Synthetic transportation fuels produced from fossil fuels other than petroleum. While biofuels fall under some definitions of synfuels, it is explicitly excluded here. Note that this doesn't include the direct use of natural gas (e.g., CNG) in vehicles; rather, synfuels are only those that can utilize the existing transportation infrastructure.
Syngas-to-liquids [STL]: Any pathway that converts syngas to synfuels. This can be confusing as "gas-to-liquids" is frequently used to define the conversion of natural gas to synfuels. Note that natural gas and syngas have different compositions, despite the fact that both are in gaseous form: natural gas is largely methane, while syngas is largely carbon monoxide and hydrogen. Syngas-to-liquids, as used here, refers to any pathway that converts syngas to synfuels, regardless of the source of the syngas: syngas from biomass (biomass-to-liquids, or BTL), coal (coal-to-liquids, or CTL), or natural gas [GTL] are all STL pathways.
Syngas-to-liquids: The basics
Synfuels are unique, in that they can be produced from most carbonaceous feedstocks (although they are commonly called "biofuels" when produced from biomass, despite biomass being a carbonaceous feedstock). Coal has the longest history of being used as synfuel feedstock, although it fell out of favor in most countries following World War II due to the expense of converting solids to liquids by way of conversion to a gaseous phase (gasification), and the resulting high greenhouse gas emissions . Natural gas is a more attractive feedstock on both counts. In addition to having a smaller carbon footprint than coal, it can also be converted to liquids at lower expense due to its initial gaseous form (thereby eliminating the need for gasification).
Historically the most common route for converting carbonaceous solids to liquid fuels has been gasification, a process in which the feedstock is rapidly heated to very high temperatures (800-1500 C) and thereby converted into a gaseous blend of hydrogen [H2] and either carbon monoxide [CO], carbon dioxide [CO2], commonly known as synthetic gas, or syngas. In most cases the "raw" syngas leaving the gasifier will not have the composition necessary for conversion to liquid hydrocarbon fuels, and reaction with water and or oxygen via a process known as reforming is necessary (examples include steam methane reforming and adiabatic oxidative reforming). The feedstock pretreatment and gasification equipment costs alone for a commercial-scale gasification facility run in excess of $100 million . Utilization of natural gas as feedstock is both simpler and cheaper because the feedstock is already in gaseous form; rather than undergo rapid depolymerization under very severe conditions, natural gas (which is primarily methane, or CH4) can be separated into hydrogen and carbon monoxide via the same reforming process used to "upgrade" the gasification gases, thereby yielding syngas. In this way a synfuels facility can avoid substantial equipment costs by exclusively using natural gas as feedstock.
Abstract process schematic of syngas production pathway
A number of pathways are available for converting syngas into either hydrocarbon- or alcohol-based transportation fuels (e.g., methanol-to-gasoline synthesis, mixed alcohol synthesis, syngas fermentation), but the most popular route historically has been Fischer-Tropsch synthesis (FT synthesis). Put in very abstract terms, FT synthesis reacts desulfurized syngas over a colbalt or iron-based catalyst to form long-chain paraffins. Further reaction with hydrogen (hydrocracking) splits these paraffins into short-chain paraffins in the gasoline and diesel fuel ranges. The result is the conversion of natural gas feedstock to synthetic gasoline and diesel fuel.
Methanol-to-gasoline [MTG] has also achieved commercial-scale production in the past (specifically, in New Zealand in the 1980s), although it only dates back to the 1970s. Developed by Mobil (and now managed by ExxonMobil), the pathway has recently been adopted by several mid-scale coal-to-liquids and biomass-to-liquids projects in the U.S. and China. Again in abstract terms, the MTG pathway involves the conversion of syngas to methanol. The methanol is then dehydrated to dimethyl ether, which is finally reacted over a zeolite catalyst to yield high-octane gasoline.
The economics of gas-to-liquids synfuels
The economics of GTL synfuels production have historically been unfavorable due to the tight correlation between natural gas and petroleum prices. High petroleum prices were associated with high natural gas prices and vice versa, making natural gas ill-suited to compete with petroleum in the production of gasoline and diesel fuel. Anytime petroleum prices increased to the point at which synfuels looked attractive from an output value basis, input costs in the form of natural gas feedstock increased by at least as much, if not more. This relationship dates back to at least 1986, as can be seen here:
Percent change in WTI crude and natural gas prices, 1986-2009
A different look at the same monthly prices from 1986-2009 shows a strong historical correlation between the two commodities:
Correlation between petroleum and natural gas nominal prices, 1986-2009 (Source: EIA 2012)
If anything, natural gas has been the more volatile of the two commodities, with prices experiencing major spikes during unexpectedly-cold winters. The few examples of petroleum prices increasing more than natural gas prices were both brief and limited in magnitude. With the exception of South Africa, sustained synfuels production remained a historical footnote for the duration of the 20th century and first decade of the 21st century as a result.
Shale gas changes the relationship
2009 was a notable year for the energy markets in that natural gas and petroleum prices began to rapidly diverge. The primary cause of this was increased U.S. natural gas production driven by the new ability to access shale gas reserves. This divergence only became more substantial with time: by 2012 natural gas prices were making new decade lows, whereas WTI crude was up more than 200%.
Percent change in WTI crude and natural gas prices, 2002-2012
Furthermore, the U.S. Energy Information Administration is forecasting this divergence to become the new norm (at least through 2035):
(click to enlarge)
Historical and forecast percent change in WTI and natural gas nominal prices, 1986-2035 (Source: EIA 2012 Annual Energy Outlook)
It should be noted that the EIA forecast is based on the assumption that natural gas consumption by the transportation sector grows relatively slowly from 2010-2035 (5.9% annualized); the above natural gas price is likely too conservative if natural gas displaces a large volume of petroleum as transportation fuel feedstock. Still, the projected divergence between petroleum and natural gas prices will be unprecedented if it occurs. Based on the projected price for petroleum, natural gas is expected to be roughly 50% cheaper by 2035 than the historical relationship between the two commodities would suggest.
GTL comes to the U.S.
A number of commercial-scale GTL projects are currently under either construction or consideration in the U.S. to utilize this new dynamic. Coskata is a privately-held company based in Illinois that produces synthetic ethanol via syngas fermentation. Whereas the FT synthesis and MTG pathways employ inorganic catalysts to synthesize transportation fuels from syngas, the syngas fermentation pathway utilizes an engineered microbe strain that consumes CO and H2 and yields ethanol. While the company had initially intended to use a blend of biomass and natural gas as feedstock, it recently announced that its first several commercial-scale projects will now utilize natural gas as exclusive feedstock. This move will allow it to utilize a substantially cheaper feedstock (the EIA's 20-year projected average lower 48 wellhead natural gas price is equivalent to a biomass feedstock price of $60/MT, whereas biomass costs at the facility are calculated to be as much as twice that) as well as potentially eliminate the need for $100 million or more in capital costs per project. Based on current sensitivity analyses for the syngas fermentation pathway, these changes could reduce the pathway's minimum fuel selling price [MFSP] by 25% or more .
A couple of monster GTL facilities are also being considered for construction in the U.S. by companies such as Sasol (SSL) and Royal Dutch Shell (RDS.A). Sasol recently announced plans to build a GTL project in Louisiana that will have a synfuel capacity of up to 1500 MGY and a total cost of $10 billion (by way of comparison, this is more than twice the combined total capacity for all of the existing biomass-to-hydrocarbon fuel facilities in the world at the end of 2011). RDS is also currently looking for a site on the U.S. Gulf Coast on which to build a large GTL facility. While the potential project's capacity has not been announced, Shell already operates a GTL facility in Qatar that produces 2100 MGY of transportation fuels from natural gas (Sasol also operates a "small" 500 MGY GTL facility in Qatar). The sheer scale of these larger facilities means that just one produces enough gasoline and diesel fuel blendstock to meet roughly 1% of U.S. annual consumption of the two fuels (projected to reach a combined 180 BGY in 2012 by the EIA).
While it has become cliche to describe the surge in U.S. natural gas production resulting from shale gas as "revolutionary", it truly has transformed the face of transportation fuel production in the U.S. A roughly $1 trillion investment in U.S. GTL facilities would yield enough gasoline and diesel fuel blendstock to match future U.S. consumption of the two fuels (ignoring natural gas availability). Just ten large GTL facilities of the type planned for Louisiana would produce as much transportation fuel as the combined output of the 200 or so corn ethanol facilities in the U.S. While demand for GTL products has never been an issue, energy prices haven't justified placement of these facilities in the U.S. until recently.
Of course, natural gas isn't the only cheap syngas-to-liquids feedstock currently available in the U.S. The next article in this series will look at the economics of the coal-to-liquid pathway in the U.S.
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