What Does Shell's Giant Louisiana GTL Project Say About U.S. Natural Gas Prices?

| About: Royal Dutch (RDS.A)
This article is now exclusive for PRO subscribers.

The gas-to-liquids ("GTL") concept for U.S. natural gas from shales just received a fresh boost. Last week, Louisiana Governor Bobby Jindal and the oil major Royal Dutch Shell (RDS.A, RDS.B) announced the selection of a potential site for Shell's Gulf Coast GTL complex. The location for the proposed facility will be in Ascension Parish on the Mississippi River near Sorrento, Louisiana. While the GTL project is still in early stages of technical and economic evaluation, with the final investment decision not expected for another two years, the selection of a site is an important step that should allow Shell's teams to conduct more detailed planning, technical analysis and begin the permitting process. Should Shell move forward with the project, the company expects project costs "to be well in excess of the minimum [$12.5 billion] spend that was agreed upon with the State of Louisiana."

Shell is receiving an economic incentive package from Louisiana: the project would qualify for Louisiana's Industrial Tax Exemption Program and the recently created Competitive Projects Payroll Incentive which gives a 12% payroll rebate for each job created in the State. The incentives also include a performance-based grant of $112 million to reimburse costs associated with necessary public road improvements, land acquisition and other infrastructure costs.

Should Shell ultimately decide to go ahead with the construction, the capital expenditure will be one of the largest in the U.S. history for a single industrial project. A two-train Pearl GTL project in Qatar that was commissioned two years ago cost Shell over $18 billion to complete.

The major difference between Pearl GTL and the proposed facility in Louisiana is that the economic cost of natural gas feedstock in Qatar is very low (the "stranded gas" supply comes from the enormous 900-Tcf North Field), while in the U.S. Shell would have to pay market price for the gas supply. The fact that Shell is making another tangible (and not inexpensive) step in early project development signals the major's view that natural gas prices in the U.S. will likely remain very low for decades to come, while distillate prices will stay strong.

This basic economic premise is shared by another major Integrated Gas player, Sasol (NYSE:SSL) of South Africa, who is working on its own potential GTL project in Louisiana. Sasol's proposed GTL facility on a site near Lake Charles would produce up to 96,000 barrels of naphtha and diesel per day. This would be Sasol's second GTL facility: the company's existing Oryx plant in Qatar was commissioned in 2007 and has capacity to produce 34,000 barrels of synthetic products per day.

The U.S. "shale gas revolution" may be entering a new phase. While the previous ten years have been characterized by the discovery of new vast sources of low-cost natural gas and liquids and perfecting new extraction technologies, the next decade may be dominated by gigantic Integrated Gas projects which will include LNG, Gas-to-Liquids and Gas-to-Chemicals solutions. The total amount of capital required for the development of those projects may be comparable or exceed total spending in the natural gas upstream sector in the U.S. during the next decade.

Shell's and Sasol's mega-projects, if implemented, would spell good news for the U.S. manufacturing. They also represent a more environment-friendly energy solution compared to heavy oil refining or bitumen upgrading. The GTL process uses two primary feedstocks: purified methane (which is used in homes' kitchens) and oxygen. The product slate is dominated by cleaner-burning transportation fuels, such as synthetic diesel and jet fuels, and cleaner versions of naphtha, a chemical feedstock, and specialty base oils that are the building blocks for lubricants, plastics and detergents.

Shell's GTL Technology

Shells efforts to produce liquid transport fuels from natural gas go back 40 years and include two successful commercial projects.

(Click to enlarge)

(Source: Royal Dutch Shell)

  • 1973: Shell takes the Fischer-Tropsch process that converts gas and other feedstocks to liquids and further develops it.
  • 1983: Shell builds a plant in Amsterdam for larger scale tests on paraffin synthesis and conversion to make GTL products.
  • 1993: Shell completes construction of the first commercial GTL plant at Bintulu, Malaysia designed to produce 12,500 barrels per day of high quality GTL products. In 1997, the Bintulu plant sustains an explosion in the air separation unit caused by air pollution from forest fires. Technical improvements during the plaint repair raise production capacity to 14,700 barrels a day. Production resumes in 2003.
  • 2006: Qatar Government approves the Pearl GTL project. The plant will be ten times the size of the Bintulu facility.
  • 2011: Pearl GTL ships first load of synthetic products in June 2011. The project's is completed in five years at a total cost of $18 billion, the high end of the original estimate.
  • 2013: Shell announces the selection of a site for a potential large-scale GTL project in Louisiana.

Case Study: Pearl GTL in Qatar

Shell's Pearl GTL facility in Ras Laffan industrial zone in Qatar makes synthetic oil products from natural gas, including cleaner-burning diesel and oils for advanced lubricants. Production at Pearl began in June 2011. The two-train plant has capacity to produce 140,000 barrels of oil equivalent a day of liquid products. Pearl also produces 120,000 boe a day of condensates, liquefied petroleum gas and ethane for industrial uses.

(Click to enlarge)

(Source: Royal Dutch Shell)

Pearl uses natural gas production from Qatar's North Field which is the world's largest natural gas field. It contains over 900 trillion cubic feet of natural gas, about 15% of the global total. Two unmanned offshore platforms each operate 11 wells. The gas flows through two pipelines to processing facilities at Ras Laffan.

Natural gas from the North Field is characterized by relatively high NGL and sulfur content and requires special treatment to protect the pipes from corrosion. Gas from the field goes through a separation process in which water and condensates are separated from the gas. Other components, such as sulphur, are also removed and cleaned. The gas is then cooled and the natural gas liquids are removed via distillation. The remaining pure natural gas (methane) flows to the gasification unit. The natural gas liquids are piped to Ras Laffan port and sold as chemical feedstocks and LPG fuel for heating appliances and vehicles.

GTL facilities are complex plants that first combine and then break up and rearrange chains of atoms. Chains of different lengths have different properties, making a range of GTL products. The slide below highlights how the gas-to-liquids process works. The facility's very high cost is explained by multiple complex modules that it consists of and are briefly described below.

(Click to enlarge)

(Source: Royal Dutch Shell)

Purified methane from the raw gas treatment plant (which includes separation units and fractionators) enters the gasifier unit. In the gasifier, the methane and oxygen are converted, at a temperature of around 2,200-2,650°F (1,400-1,600°C), into a mixture of hydrogen and carbon monoxide known as synthesis gas, or syngas. The reaction produces heat, which is recovered to produce steam for power.

Pure oxygen for the gasification process is extracted from the air through Pearl's eight vast air separation units. Air is cooled to liquefy the oxygen and nitrogen. Distillation separates out oxygen in a "cold box" which helps to maintain the low temperature that is required to separate the oxygen. Each distillation cold box is as tall as a 10-storey building. Pearl's air separation units produce over 28,000 tonnes of oxygen each day.

After the gasification, the synthesis gas enters one of Pearl's 24 reactors. Each reactor holds a large number of tubes containing a catalyst (Shell's proprietary technology). The catalyst serves to speed up the chemical reaction in which the syngas is converted into long-chained waxy hydrocarbons and water.

The catalyst consists of tiny granules, just millimetres long with microscopic holes, containing minute metal particles. The total surface area of the microscopic holes in the catalyst granules is enormous, increasing the exposure of the chemical components flowing through this module to the catalyst. The synthesis process generates a lot of heat, which is also used to produce steam that in turn powers the GTL plant via steam turbines. All water in the Pearl GTL process is purified and reused in the utilities system of the plant to generate steam.

GTL Products

The plant creates a range of products from natural gas that would otherwise be produced from oil. Using another Shell proprietary catalyst, the long hydrocarbon molecules from the GTL reactor are contacted with hydrogen and "cracked" into a range of smaller molecules of different length and shape. Distillation separates out the products with different boiling points. The GTL process produces mainly a light distillate product slate which consists of synthetic naphta, gasoil, kerosene, paraffins, and base oils (slide below).

  • Naphtha is used as a chemical feedstock for plastics manufacture.
  • Gasoil is a diesel-type fuel that can be blended into the global diesel supply pool
  • Kerosene can be blended with conventional Jet Fuel (up to 50%) for use in aviation - known as GTL Jet Fuel - or used as a home heating fuel.
  • Normal paraffins are used for making more cost-effective detergents.
  • Base oils are used to make high-quality lubricants.

(Click to enlarge)

Alternative to Refining

As the outlook for a U.S. GTL industry is getting stronger, it is worth mentioning the potential impact that the new capacity may have on the oil refining complex. A GTL plant is in fact a refinery alternative. A GTL facility product slate competes directly with the supply produced by traditional crude oil refineries. While the two proposed facilities discussed above are not likely to come online until the end of this decade at the very best, their impact would be meaningful, if both projects were brought to fruition.

While the shale revolution in the US has brought a fast growing supply of crude oil and NGLs to U.S. refineries, it also creates new sources of competition. The NGL industry, with its fast growing and increasingly complex fractionation capacity, creates a stream of feedstocks for the chemicals industry and motor fuel blending. Those products have been typically produced by the crude refining complex. The proposed GTL projects would add competition on the distillate side of the supply.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.