Key Findings

Concerns over long-term crude oil availability, energy security and environmental legislation are driving new gas-based energy products from the demand side, with gas-to-liquids (GTL) one of the few options available to monetise stranded natural gas, alongside liquefied natural gas (LNG) and long-range pipelines.

The ability of GTL to work with existing oil-based products, infrastructure and distribution networks reduces the investment burden down the supply chain and makes modest demands on end-users. This also removes the need to book advance sales, giving GTL a substantial advantage over LNG.

However, large upfront capital costs and the changing price of rival energy sources make this a high-risk investment with an uncertain future: nevertheless, current high oil prices have spurred on several major commitments to the technology in the last year, including the largest ever single investment by ExxonMobil.

Further investment in GTL is necessary to bring down costs and create market acceptance for gas-based synthetic fuels (synfuels). The first wave of commercial-level GTL plants are expected to cost US$25,000-30,000 per barrel of capacity, making it more expensive than LNG, although second-wave developments are targeting costs of under US$20,000, which will provide some cushion in the event that crude prices fall.

The desire to monetise uncommitted gas reserves and move up the value-chain through processing are key drivers of GTL on the producer side, with stranded reserves of 5 Tcf and upwards seen suitable for the technology by the majors and smaller players working to commercialise reserves of down to 0.5 Tcf.

The Gulf, Africa, Australia and Venezuela are likely to represent the focus of GTL developments in the near term, given high levels of stranded and associated gas. This in turn will have an impact on the geography of hydrocarbon supplies, with repercussions for both energy trade and security.

The greener credentials of GTL are likely to attract incentives from consuming countries because of their proven ability to reduce carbon emissions and pollution. Tax breaks and subsidies are already in place for cleaner fuels in some states, with Europe and Asia at the forefront of this drive.

Gas-to-liquids (GTL) have really taken off over the last year, with ExxonMobil and Shell dipping a toe in the commercial market alongside the original front-runners - Sasol and ChevronTexaco - in a bid to position themselves for the new generation of greener fuels.

The development has been helped along by the wider trend favouring natural gas for energy generation, as concerns about the longevity, accessibility and security of crude oil supplies have grown - particularly if you listen to peak oil theorists. Increased efforts by producing countries to monetise 'stranded' or associated gas reserves and concern over carbon emissions in Europe and Asia have fed into the logic for natural gas-based technologies, as the world wakes up to the need for alternative energy sources.

Among gas-based technologies, GTL are thought to have particularly good potential given their ready fit with existing crude oil infrastructure and distribution networks, as well as their proven ability to reduce sulphur and carbon emissions. So far the practical application of this technology is envisaged through blends with traditional oil-based refined products, particularly in the transportation sector, which accounts for around a third of world oil demand. However, the long-term hope is that the auto industry and other end-users will develop technologies to work efficiently with 100% gas-based synfuels - displacing crude oil use in some sectors and providing a bridging, or transition technology, on the road to the hydrogen-based energy sources envisaged over the long-term horizon.

To date, developments in the market have been dominated by South Africa's Sasol, which has nailed its long-term fortunes to the GTL (and the related coal-to-liquids) banner in a significant way, with investments in South Africa and Qatar in alliance with US partner ChevronTexaco, and plans for new projects in Australia and Iran. However, over the last year, supermajors ExxonMobil and Shell have earmarked some US$13 billion of investment into the market, with interest also from ConocoPhillips, Marathon/Petro-Canada and Statoil as GTL technology reaches into the mainstream.

Market potential rests, to a large degree, on the ability of these players to carve out a market for alternative fuels, an issue where the relative cost of GTL compared with crude oil or other new technologies is likely to be key. The time-lag for existing projects to reach the operational stage means that GTL will remain a fringe market until at least 2012 with likely production of some 700,000 to 900,000 b/d based on existing plans (see table). Its fortunes are likely to be decided more definitively in the 2010-15 period, after the success of first-wave developments can be assessed.

Ballpark estimates for GTL production by 2015 have been released by a number of sources, with Sasol itself expecting the market to reach over 1.2 million b/d - of which its own operations with ChevronTexaco are expected to take at least a 50% share. More bullish estimates from World Gas Intelligence foresee a market of 2 million b/d by 2015, of which some 60%-80% could be clean diesel given the product mix proposed at current GTL developments.

This places GTL in one of the most fertile seams of the energy market. Consumption of middle distillates as a whole is expected to increase by some 3 to 6% a year in the years to 2015, from 27 million b/d in 2005, led by increased demand for diesel in the individual transportation markets in India and China in particular. Taking the most bullish GTL 10-year production estimates of 2 million b/d, this would give GTL up to 7% of the world diesel business by 2015. Not enough to trouble crude oil's market dominance, maybe, but enough to start shifting the balance of energy trade and consumption preferences over the longer term.

Economics of GTL

But all this is just speculation at the current time, based on the hope that current investment in GTL will start to bring down the high upfront capital costs of the technology and make it competitive with alternative fuel sources, not least of which is crude oil. Needless to say, a high oil price climate is beneficial to GTL development, as it is to other non-oil and non-conventional fuel sources, although the exact economics of GTL production are still a work in progress, given only limited commercial-scale experience to date.

In the 1990s, estimated GTL plant costs were put at US$50,000 and upwards for each barrel of capacity - limiting interest in the technology when oil prices were in the sub-US$25/b zone. However, advances in technology have now pushed down costs to some US$25,000 to US$30,000 per barrel for the first wave of projects involving facilities of 34,000 to 50,000 b/d, a level which has drawn in mainstream interest with crude oil prices in the US$35-50/b range. Pioneers are also looking to 'go large' for new projects in order to reap projected economies of scale and bring down costs further; Sasol is looking to triple capacity at its Oryx GTL plant before the first 34,000-b/d phase comes online in March 2006, while Shell's first effort in Qatar is set to push the boundaries further at 130,000 b/d. For its part, ExxonMobil is aiming for a 154,000-b/d 'monster', with expected integrated costs of US$7 billion. This is the company's largest ever single investment and marks a significant endorsement for GTL technology and gas-based fuels by the world's leading oil company.

The current commercial target for most players is to bring down plant costs to some US$15,000-US$20,000/b capacity, although none of the current wave of projects looks likely to realise this goal. Sasol-Chevron seems to be the most ambitious developer, with initial figures suggesting cost targets of US$20,000 to US$23,000 for the extension phase of Oryx, compared to nearer US$28,000 for the first phase (see table). The emergence of GTL projects with upstream components also raises the prospect for developers to realise economies through the supply chain. Integrated Qatari projects are looking at costs of US$46,000 per barrel of GTL capacity, based on initial figures from Shell and ExxonMobil, while Nigeria's Escravos project is looking at a more hefty US$50,000 per barrel of capacity, much to the chagrin of Nigerian lawmakers who have called for a review of the costs.

Reaching for economies of scale demands plentiful cheap feedstock - something which not all gas-producing countries are well placed to provide. Like LNG, feedstock prices over US$0.50 per million British thermal unit (MMBtu) are seem as uneconomic by mainstream GTL investors, ruling out most reserves with access to pipelines, power generation facilities or petrochemicals, all of which are likely to yield higher returns. Based on the current figures, major GTL investors have also set minimum supply levels of 500 MMcfd for 20-30 years - entailing recoverable reserves of at least 5 Tcf, although work to commercialise reserves below 5 Tcf is under way by smaller independents. One such player, Rentech, estimates that it can make gas-based diesel competitive with regular diesel at prices of over US$35/b and a plant size of 10,000 b/d (see graph, right), which would entail reserves of some 100 MMcfd. However, this still requires a feedstock cost of less than US$1/per MMbtu, which brings associated and stranded gas reserves in the Gulf States, Africa and Australia to the fore and, at the macro-level, begins to shift the overall geography of energy supplies away from the Middle East, which holds over 66% of oil reserves, but under 40% of gas.

This suggests that immediate barrel-by-barrel economics are only one side of the equation given a number of non-market factors involved in energy usage, not the least of which is energy security, which puts a premium on diversifying both suppliers and sources. Growing interest in the environmental impact of energy use is another non-market factor that will favour the development of gas-based technologies, with some consuming countries already providing incentives for fuels with lower carbon emissions, either in the form of tax breaks or higher prices. Conversely this impetus is likely to take an increasing toll on oil-based fuel sources as efforts to reduce aromatics and sulphur content demand more costly high-end refining. This cost is also likely to increase for oil-based fuels as the supply trend towards heavier oils and non-conventional sources continues in response to falling light crude availability and strong demand.

Producer Potential and Existing Developments

But while gas-based energy does offer the potential to change the geography of energy supplies, developments in GTL to date have largely been led by existing oil producers in Middle East and Africa as they seek to monetise associated gas reserves and move up the value chain through processing. However, greater regional diversification is expected as the technology gains credibility, likely following in the slipstream of its better-known big brother, LNG, which is already on the brink of becoming a globally accepted energy source.

South Africa and Sub-Saharan Africa

South Africa has been at the cutting edge of GTL and related coal-to-liquids (CTL) technology, largely because of political isolation and then embargoes during the Apartheid years, which pushed the government towards energy self-sufficiency. Hefty government funds supported the emergence of technology to commercialise gas-based fuels using South Africa's large coal resources, which were put into practice at Sasol's 150,000-b/d Secunda plant. However, where available, natural gas was found to be a more economic alternative to coal, giving rise to the first commercial GTL operation at Mossel Bay, South Africa's only significant natural gas reserves. Nevertheless, limited remaining reserves mean that prospects for future GTL developments in the country are bleak without a large influx of external supplies. This is a key factor behind Sasol's aggressive pilgrimage to the Middle East and northern Africa in search of more sustainable reserves to commercialise its technology.

One such prospect is Nigeria, where plentiful natural gas and limited marketing prospects, combined with a government policy to end associated gas flaring by 2008, have created a strong economic rationale for gas-based processing. Nevertheless, an attractive resource base has been held back by equivocal political commitments to the technology, which have delayed ChevronTexaco's Escravos GTL project for the last five years, where Sasol's Slurry Phase Distillate (SSPD) technology will be used. Even after the award of EPC contracts in 2005, Nigeria's senate is still querying the cost of development and the choice of contractors, which may yet mean further delays to the project beyond the current 2008 timetable. Nevertheless, if political hurdles are overcome, the availability of large volumes of stranded natural gas reserves and a committed investor base give Nigeria good potential for further development.

Elsewhere in Africa, Angola and Equatorial Guinea, both have the stranded gas reserves required for commercial GTL, although the investment climate for downstream remains less favourable than upstream. Other emerging gas plays such as Mauritania and Namibia lack the reserves necessary for commercial GTL development at the current time, although this could change with further exploration and/or advances in adapting GTL technology for smaller reserves.

Qatar and the Gulf

What Sub-Saharan Africa lacks, Qatar has in spades, including a welcoming investment climate and a strong reserve base based on the 910 Tcf of reserves held in the offshore North Field. Government-led investment in gas processing through the state-owned Qatar Petroleum (QP) has supported the country's efforts to become the 'GTL capital of the world', bringing in nearly US$19 billion in investment commitments over the last year alone and likely yielding at least 400,000 b/d of GTL production by 2012.

Nevertheless, Qatar's commitment to high-value projects by top-tier players means that entry barriers for further GTL initiatives will be high. In addition, a decision to put a moratorium on new projects for at least three years, as a result of previous over-commitment on gas mega-projects, does rather take the wind out of Qatari opportunities in the short term, with proposals by ConocoPhillips, Marathon/Petro-Canada and Sasol-Chevron affected by the delay (see table). This may yet provide an incentive for interested players to seek investment opportunities elsewhere in order to get on the GTL ladder, although both ConocoPhillips and Marathon have stated their commitment to Qatari ventures in the longer term.

Neighbouring Iran too has the kind of reserves that become interesting for GTL, although growing oil production, a strong domestic gas market and greater flexibility on gas exports through pipelines mean that the rationale for high-end gas processing has been less of a priority in Qatar. Indeed, Iran has still to start construction of LNG facilities despite a long-term interest in the technology, suggesting a more cautious steady approach to monetising its gas reserves. However, the assignment of South Pars phase 14 to GTL, and talks with Sasol, Shell, PetroSA and others on GTL, suggest that Iran is willing to test the water - if only for one plant initially . The allocation of further resources to the business is likely to depend on the success of that first project, although Iran also has a more limited investor base to contend as a result of US unilateral sanctions and reservations by some non-US players over the regulatory and political stability.

Elsewhere in the Gulf, a number of states hold the reserves necessary for GTL ventures, although conditions aren't ripe for investment at the current time. These include Saudi Arabia, which has ruled out gas exports, the UAE, where large-scale gas reserves remain difficult to extract, and Iraq, where political and regulatory uncertainty rule major foreign investment commitments out, for the near term at least.