Low Natural Gas Prices Yield Risky Ventures. Will They Work?

Quick quiz: What will the price of natural gas be in ten years? What about 20 years?

Tens of billions of dollars ride on getting the answer right.

The problem with gas right now is that there’s so much of it, because of skyrocketing reserves in shale formations, that prices in North America seem stuck in the historically low range of $4 per million Btu. At those prices, producers are casting about for other ways to make money from natural gas.

One potential solution to the gas glut is to export liquefied natural gas (LNG) from North American terminals to Asia where it can fetch a higher premium. Other companies, notably Calgary-based Talisman Energy, think the solution could be a North American gas-to-liquids (GTL) plant, which could produce liquid fuel for cars or planes.

In March, Talisman announced a partnership with the South African group Sasol, one of the few companies globally that has deep experience with the technology, to explore a GTL plant for shale gas in British Columbia. If built, the plant could eventually yield 96,000 barrels per day of diesel-type fuel.

GTL plants convert gas into liquid petroleum products using the Fischer-Tropsch process, which involves purifying the gas and putting it through a number of reactions to get one of five products: kerosene, for jet fuel; gasoil or diesel, for vehicles; base oils, for lubrication; paraffins, for detergents; and; naphtha, for plastics processing.

The GTL path is attractive for a number of reasons, according to Ian R. Nathan, a senior research analyst at New York-based Energy Intelligence Research. First, while gas prices are historically low, oil prices are hovering around $100. This means companies can make enormous profits on the spread.

For example, Royal Dutch Shell’s Pearl GTL plant in Qatar, which opened in early June, will generate $4 billion a year if oil prices stay at $70 per barrel. Even with Shell’s more than $20 billion investment in Pearl, the numbers look good.

“You can see why folks are starting to think if gas prices remain stubbornly low and oil prices remain stubbornly high, GTL is a good move,” Nathan said.

Also, more isolated natural gas patches, like Talisman’s Cypress A and Farrell Creek gas assets in British Columbia, would require expensive infrastructure to reach markets. As Talisman noted in a press release announcing the deal, GTL is “a strategic alternative to traditional North America pipeline or LNG markets.”

But the companies have not committed themselves yet. They only awarded a contract for a feasibility study last week and don’t expect to make a decision until late 2012.

The danger of plowing billions of dollars into a GTL project is that the companies can’t reverse course if gas-fired power generation replaces coal plants, as some analysts have predicted, and gas prices pick up.

“It’s not like you can say, ‘GTL is just not compelling, I’m going to export that gas,’” Nathan said of that scenario.

What is clear is that, whether prices go up or down, natural gas or its derivative products will be an increasing part of the energy economy in the coming decades.

Article appearing courtesy Txchnologist.

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