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Jonathan Selsick
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An active researcher of the markets, developing innovative quantitative models. Flagship quantitative tactical rotation solution designed to deliver alpha across all market cycles is available to in a Separately Managed Account format for HNWI.
  • Is GTL an alternative to Picken's Plan? 0 comments
    Apr 3, 2011 1:53 AM | about stocks: SSL, RDS.A
    I am a big fan of Boone Pickens and his efforts to reduce our dependence on foreign oil by utilizing our vast natural gas reserves for transportation. The crux of Pickens Plan is to convert to natural gas the 8 million 18-wheelers which consume 2.5 million barrels of oil per day. At an estimated  $40,000  per truck conversion  this will cost $320 billion. In addition we would need to build out a natural gas fueling infrastructure – another big expense. The plan is for a large part of this to be subsidized by the taxpayer with the idea that it will create hundreds of thousands of jobs,  reduce our dependence on foreign oil and also greenhouse gas emissions - since natural gas is a much cleaner burning fuel.
     
    There is another way of utilizing our natural gas which does not get much attention and that is converting the gas to liquid. There are a handful of plants around the world – mostly in Qatar – that have large GTL (gas-to-liquid) facilities. The technology is proven and there are two companies that have the expertise in this space namely Royal Dutch Shell (RDS) and Sasol (NYSE:SSL). The plants range in size from 32,000 bbl / day to 140,000 bbl / day. Sasol recently partnered with Talisman on some of their shale gas properties in Canada and are exploring the feasibility of a GTL facility. The cost to build these types of plants is very expensive – based on Shells most recent project which ended up being way over budget – is somewhere in the range of $100,000 per bbl / day of capacity. To replace the 2.5 million barrels Pickens is targeting would cost $250 billion – still cheaper than the cost of converting the vehicles and of course no need for a new fueling infrastructure.
     
    Joshua Schneyer and Edward McAllister at Reuters published an interesting article this week with an eye opening statistic:
     
    1.       In terms of energy equivalent gas is currently one fourth the price of oil. At $107 a barrel on Friday, buying 3.6 million barrels of oil on futures markets would cost $385 million. At $4.33 per million BTU for U.S. natgas futures, buying the energy equivalent in gas -- around 19.5 trillion British thermal units -- would cost $84.5 million. In other words we would save about $300 million per day or $110 billion per year based on current prices.

    With the current disconnect between the price of oil and natural gas the market forces may be in place for the change to happen without the need for taxpayer subsidies by converting some of our gas to liquid.  The major oil  companies have positioned themselves by acquiring large natural gas assets. If The Pickens plan is successful they will have a ready market for this gas. If not, perhaps they will convert it to liquid via a GTL process since the economics are still compelling. Either way is a benefit to our country.  So the Pickens Plan may in effect be a gift to the energy companies by enabling them to sell the gas without the added capital expenditures of converting to oil. 
     
    Just a thought but would love to hear from any energy experts on the GTL option.
    Themes: Gas to Liquids Stocks: SSL, RDS.A
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