Making Fuel From Natural Gas Gains Favor, Threatening Crude Oil: Spotlight
Making Fuel From Gas Gains Favor, Threatening Oil: Spotlight
Warri, Nigeria, Sept. 24 (Bloomberg) -- In the mangrove
swamps 140 miles east of Lagos, Chevron Corp. and Sasol Ltd. plan
to spend $1 billion on a plant that will transform natural gas
into diesel fuel. Four years from now, the factory will produce
30,000 barrels of fuel a day without using a drop of oil.
Using natural gas to make fuels, long considered a process
of last resort, is gaining favor. Better technology has halved
production costs in the last four years, and higher oil prices
are making the process more competitive. Atlantic Richfield Co.
is experimenting with the technology in the U.S., and Royal
Dutch/Shell Group and Exxon Corp. are also examining it.
While big oil exporters fret that this year's surge in crude
prices to $23 a barrel could allow output from high-cost fields
to resume, a more distant threat could come from Sasol and
others, who are coming around to the idea that making fuel from
gas can compete with refining it from oil, analysts said.
``In Nigeria, there's more gas than there is demand, so why
not turn it into diesel that you can sell?' said Adam Sieminski,
an analyst at Deutsche Banc Alex. Brown.
The potential is great. Without local markets or
multibillion-dollar pipelines, natural gas produced alongside
crude oil is largely worthless. In Nigeria, for example, rigs
offshore burn gas as waste, a process known as flaring that is
literally valuable gas going up in smoke.
The world's gas reserves remain relatively untapped. At
current production rates, there is enough gas left underground to
last some 63 years, compared with 41 years of oil. In Iran, home
to 15 percent of the world's gas reserves, annual production
represents only 0.1 percent of its holdings.
Potential
Chevron and Sasol see the potential for big profits. In
June, they agreed to form a joint venture to build an unspecified
number of so-called gas-to-liquids plants around the world during
the next decade. Since then, Sasol shares have risen 7 percent.
While still in its infancy, the effort and others like it
are raising questions about the price-boosting strategy of the
Organization of Petroleum Exporting Countries, which pumps about
one of every three barrels of oil worldwide. While the group sits
atop more than three-fourths of the world's oil reserves, its gas
holdings are just over 40 percent.
OPEC output cuts have helped crude prices to double this
year, yet those high prices are encouraging more competition from
gas-to-fuels plants, which in turn could someday reduce oil
demand.
``OPEC is cutting its own throat,' said George Chiwara, an
analyst at Standard Equities in Johannesburg.
Fourteen gas-to-liquids projects are under consideration
worldwide, and if built they could produce 1 million barrels of
fuels and chemicals a day, according to Howard, Weil, Labouisse,
Friedrichs Inc., a U.S.-based brokerage.
Gas-to-liquids technology has been used for decades when oil
was hard to get. Still, no one knows if the technology will prove
profitable on a large scale. Sasol, formerly held by the South
African state, made fuel from coal during the apartheid era, when
oil imports were banned in an attempt by the U.S. and its allies
to force an end to racial segregation.
Lowering Costs
Improving technology has been cutting the cost of the
conversion process ever since it was invented by German
scientists in 1923 and used by the Nazis as a way of getting
around an oil shortage during World War II.
In the past four years alone, the cost of producing a barrel
of diesel fuel from natural gas almost halved, making the process
competitive when crude oil is at or above $15 a barrel, well
below the almost $24 today.
Knowing that, the race is on to be first with a viable gas-
to-liquids process. Environmental benefits -- the fuels produced
give out less pollution than standard oil products -- only add to
the appeal.
Getting There First
``It's all about who can get to market first with an
appropriate technology,' said Campbell Parry, an analyst at HSBC
Securities in Johannesburg. ``And this technology is standing in
pretty good stead at the moment.'
In recent years, U.S. companies such as Rentech Inc. and
Syntroleum Corp. have been trying to sell a similar technology to
big oil companies. Syntroleum foresees small plants that can be
profitable making as few as 2,000 barrels of diesel a day. It has
seen interest from Texaco Inc., Enron Corp. and Kerr-McGee Corp.
of the U.S. and YPF SA of Argentina, now part of Repsol SA.
Near Bellingham, Washington, Syntroleum in July started a
test project at an Arco refinery, making 70 barrels a day. If
successful, Arco said, use of the process could be expanded,
perhaps to help exploit gas deposits in Alaska and Indonesia.
Shell, the only other company to operate a commercial gas-to-
fuels plant, ran a 12,500 barrel-a-day plant at Bintulu,
Malaysia, until an explosion in January of last year. Exxon is
experimenting with the process. Yet their technology isn't as
good as Sasol's, analysts said.
``They are 20 years behind,' said Parry. ``Sasol has the
technical edge.' |
