New GTL Developments

Spending $40 billion for an Alaskan gas pipeline to the lower 48 seems less and less feasible every day.  $20 billion for a short pipeline to Valdez plus another $20 billion for a LNG plant seems to offer only slight advantages over the big line. Other small pipeline options fail to monetize the the full volume of available North Slope gas.

It's always tempting to talk about Gas-To-Liquids (GTL) to convert Alaskan gas to petroleum products but the cost never seem to add up.  I think this is because many GTL projects like Shell's Pearl convert gas to refined petroleum products (low sulfur diesel, kerosene etc). An Alaskan GTL plant only needs to convert gas into petroleum liquid in the C6 to C16 range, i.e. something liquid at atmospheric pressure and pumpable.  Such a material could be blended with crude oil, moved down TAPS, and sold as crude oil.

Another factor working against GTL plants is size. Plant size drives up cost.  The heart of a GTL plant is the Fischer-Tropsch reactor.  The F-T reaction is exothermic (gives off heat) so reactor size becomes is dependent on effective heat transfer.  An  F-T reactor is fed by syngas produced by reforming natural gas.  Some syngas plants require pure oxygen to form syngas.  An expensive air separation plant must be built to supply the pure oxygen.  An air separation plant adds both capital cost and operating cost.

What if the size and cost of a GTL plant could be reduced and a GTL plant could be customized to the needs of Alaskan gas?  A new outfit is commercializing a technology that might just fit the bill. CompactGTL is scaling up a modular GTL technology that can convert Alaskan gas to synthetic crude oil at lower cost than other GTL processes.  (LINK to CompactGTL presentation) Here are the advantages I see for the CompactGTL process:

1) Reduced reactor size. CompactGTL claims to have reduced reactor size by a factor of 10 through the use of  mini-channel reactors.  I believe in that claim.  The mini-channel reactors integrate a reactor within a plate type heat exchanger. This type of heat exchanger provides very high heat transfer rate.  CompactGTL has implemented this type of reactor for both the steam methane reformer (SMR) and the Fischer-Tropsch (FT) reactor. Size reduction will yield cost reductions.

2) No oxygen required. The CompactGTL process does not use an autothermal reformer therefore no costly air separation plant.  That's a cost reduction.

3) No carbon dioxide separation required.Alaskan natural gas contains about 12% carbon dioxide (CO2). The CompactGTL process does not require CO2 removal.  This reduces cost compared to pipeline alternatives.

4) Modular Design. Modular design suits Alaskan construction needs.  Any gas line project envisions modularized gas treatment plants.  Incremental deployment of CompactGTL using modules would take years and extend the oil production benefits of gas reinjection thus optimizing the total field production.

5) Synthetic Crude Oil. The CompactGTL process is geared to produce an unrefined product.  That keeps cost low and options open.  A synthetic crude could be blended with ANS crude or batched to Valdez. The product would be valued near the price of crude depending on the capabilities of the buyer's refinery.  Note - a FT synthetic crude is not an exact replacement for crude oil, it lacks aromatics, the key ingredient of gasoline. On the plus side a FT synthetic crude lacks low value heavy cuts and troublesome sulfur.   FT synthetic crude is ideal for clean diesel, kerosene and naphtha production.  Converting Alaskan gas into a crude oil equivalent would forever break the market link to cheap shale gas.

6) Economics.  CompactGTL shows one cost comparison in their presentation. Since they are currently focused on floating production, storage and offloading (FPSO) units I'll use that cost unescalated. i.e. "Alaska Factor" equals 1.00,  I figure the cost of building a module on a ship will cost the same as deploying a module to the North Slope.  Crunching those numbers I find that a full deployment of CompactGTL for Alaskan gas would cost upwards of $68 billon and it would produce about $15 billion annually in gross revenue if the product is priced at $100/bbl.  The capital figure is 1.7 times higher than a gas pipeline but the synthetic crude product sells for 5 to 6 times the price of natural gas so that a BTU of North Slope gas could sell for 3.5 more if converted to liquids. These are of course very rough calculations, but the conclusion points in the right direction.

Other considerations

1) Timing.  CompactGTL is currently in the commercialization phase with a demonstration plant funded by Petrobras. It will be some years before we're ready to talk deployment to a cold region.  In those years I doubt the gas to liquids value ratio will change all that much.  I also doubt that Alaska will ink a deal to sell gas as LNG into a market flooded with cheap shale gas and cheap shale gas derived LNG.

2) GTL Trend.  The world is full of cheap gas and stranded gas. CompactGTL is only one of many outfits focused on converting stranded or wasted gas into useful liquids. Technological leaps in catalyst and reactor design may push GTL into full commercial in North America in the near future.

3) NGLs.  Most urban Alaskan would like a big pipeline to deliver gas to their homes at an affordable price.  That may never happen and Alaskans need to make other plans for in-State energy needs.  A GTL plant does not exclude the possibility of propane and butane (NGLs) recovery from North Slope gas upstream of a GTL plant.  The economics of a GTL plant is not dependent of the BTU content of the feed gas, so a GTL plant would not compete with the interest of supplying Alaskans with affordable home-grown energy from NGLs.

2011 - Year of the Yawn

I had greater expectations for the Alaska Gas Pipeline in 2011. To recap -

1. The open season process was expected to yield announcements of precedent agreements for long term commitments to ship gas.  The agreements may or may not have been reached, but no public announcement was forthcoming.  Chances are any agreements reached are so heavily conditioned that they represent no commitment to do anything in the here and now. 
2. In 2011 I expected a viable shipper for a 7 MMTPA Valdez LNG plant to step forward.  What actually happened was that Governor Parnell voiced support for a tidewater LNG project. The Governor's comments had the unintended consequences of delaying submission of resource reports by the Alaska Pipeline Project (TransCanada and ExxonMobil).
3. 2011 Started with two Alaska Gas Pipeline projects - The APP (TransCanada & Exxon Mobil) working to the scope as defined by the Alaska Gas Inducement Act (AGIA) and The Denali Project (ConocoPhillips & BP).  I had an expectation that the projects would merge in 2011.  Instead Denali folded in May citing "open season efforts have not resulted in the customer commitments necessary to continue work on its Alaska North Slope gas pipeline project".  

What's next? - for starters spot Henry Hub gas closed the year at $2.97/MMBTU (see chart for 2011 natural gas prices).   That's astonishing and sobering to any proponent of an Alaskan Gas Pipeline.  Gas that cheap in December is partially due to a mild lower 48 winter but mainly a function of  the glut of shale gas. The 200 day average price is right at $4/MMBTU - essentially the low profit range to drill and produce a shale gas well.

In 2012 the North American gas markets will have little appetite for Alaskan Gas.  Billions will be spent to build Gulf of Mexico LNG export capacity and preliminary studies will be launched to look into the viability of at least one lower 48 Gas to Liquids (GTL) plant.  Anti-fracking stories will continue with little effect on the continued development of lower 48 shale gas resources. The annual average price of 2012 gas may fall within the $3.50 - $5.00/MMBTU range. No new nuclear power will come on line in 2012, but a few gas fired plants will come on line to replace aging coal plants.

Throughout 2012 Alaskans will come to grips with the increasing unattractiveness of Alaskan Gas.  The best comment this year came from Steve Kirchhoff, Vice President – Americas, ExxonMobil Gas and Power Marketing Company in a presentation to the Resource Development Council of Alaska in this video. In this presentation Kirchoff states that "You can't dabble at LNG"

Shale Gas Apocalypse* - Ending?

What would it take to end the shale gas apocalypse* ?  Maybe a ton of new laws constraining shale gas development and destroying thousands of good paying jobs, or maybe.....Monetize and export shale gas as LNG, and convert shale gas to liquid fuels.

I favor LNG exports and gas-to-liquids (GTL) for three reasons - Jobs building LNG export plants, Jobs building GTL plants and Jobs building the Alaska Gas Pipeline.

It's one thing for this lonely blog to promote the idea but the industry is beginning to take advantage of abundant, cheap shale gas.

Today we have news that LNG company Cheniere is planning a second LNG export plant  near Corpus Christi Texas (Rigzone Link) (Marketwatch Link) RigZone quote:

Cheniere Energy announced Friday that its wholly owned subsidiary, Corpus Christi Liquefaction is developing a liquefied natural gas (LNG) export terminal at one of Cheniere's existing sites that was previously permitted for a regasification terminal. The LNG export terminal site is located in San Patricio County, Texas , and it is anticipated that the terminal would be primarily supplied by reserves from the Eagle Ford Shale, located approximately sixty miles northwest of Corpus Christi . The proposed liquefaction project ("Corpus Christi Project") is being designed for up to three trains capable of producing in aggregate up to 13.5 million tonnes per annum (mtpa).

The combined export volume of the Cheniere export  projects will equal about 4 BCFD which is about 88% of the capacity of the Alaska Gas Pipeline.  What's great about the LNG export terminals and GTL plants is that they represent new demand.  The scale of these projects is large enough to move markets and increase the gas price, hopefully into a long term stable range that will promote the Alaska Gas Pipeline.

*(my term for super low natural gas prices caused by lower 48 shale gas production)

Shell, Shale, and GTL

Cheap shale gas in the lower 48 is attracting the attention of LNG exporters (LINK) and now Shell is looking at building a large Gas-to-Liquids (GTL) plant in the United States. (LINK). Quote (link and highlights added):

By JAMES HERRON  Royal Dutch Shell is in the early stages of planning projects to turn natural gas into fuels like diesel in the US, of similar scale to its huge project in Qatar, Andy Brown, executive vice president of Shell, said in Qatar Monday.  "We are looking for places where gas is cheap and [oil] products are expensive," he said at a press briefing at the World Petroleum Congress in Doha, Qatar. "Clearly the US is something we're looking at."  Shell is only interested in large-scale projects similar to the $18 billion Pearl gas-to-liquids plant it has developed in Qatar, Brown said. The first phase of Pearl GTL is now producing at close to full capacity and the second phase started over the weekend, he said.

 What can an $18 billion investment yield?  According to the Shell website Pearl converts 320,000 BOE of gas into:

• - 140 kboe/d of gas-to-liquids products (2 trains)
• - 120 kboe/d of natural gas liquids and ethane

At today's prices I estimate that's equal to about $8.5 billion in gross annual product revenue.  The 1.8 BCFD of gas feed stock  would cost about $2.5 Billion leaving a gross margin of  $6 Billion.  Assume operation, maintenance and utility cost of $1 Billion and a Pearl type GTL plant will yield $5 billion annually EBIT.  After taxes the rate of return is in the attractive range.  I assume the capital cost in the lower 48 will be higher than Qatar, so the rate of return is probably in the 12% to 15% range.

How does this relate to an Alaskan Gas Pipeline?  First don't get your hopes up for Shell to build a world scale GTL plant in Alaska - construction cost are much higher than the lower 48 and the pipeline infrastructure is already in place on the Gulf Coast.  A lower 48 GTL plant of this scale does help Alaska - it soaks up 1.8 BCFD of gas, roughly 40% of the 4.5 BCFD capacity of the Alaskan Gas Pipeline.  Keep in mind GTL is expensive, but outfits like Shell can buy gas at $3.5/MMBTU and sell liquid products at $16/MMBTU.  There's also the possibility that more lower 48 GTL plants will be built and the gas demand could easily exceed the volume of the Alaska Gas Pipeline.

Ultimately sponging up cheap lower 48 shale gas with GTL plants and LNG export plants will help create demand for Alaska's gas.

 

Natural Gas Prices - Up?

Lou Kilzer of the Pittsburgh Tribune-Review wrote this story "Natural gas prices set to jump with exports" taking issue with plans to export LNG from the lower 48. In the story he quotes Boone Pickens as saying "we're truly going to go down as the dumbest generation." referring to plans to export LNG.

He also details more LNG export plans, specifically:

Freeport LNG Expansion LP, together with Liquefaction LLC, applied on Dec. 17 to export 1.4 billion cubic feet of natural gas per day from a terminal port near Freeport, Texas. Lake Charles Exports LLC, a subsidiary of British-based BG Group and Houston-based Southern Union Company, applied to DOE on May 6 to export 2.0 billion cubic feet a day from its Lake Charles, La., facility.

If the DOE approves those requests, combined with the Sabine permit, the total 5.2 billion cubic feet a day proposed for export would represent 8.4 percent of U.S. production, a Tribune-Review analysis determined.

The story also bemoans the fact that the US imports 10% of our gas needs. According to the Energy Information Agency (EAI) gas imports in 2010 averaged 10.4 BCFD. For comparison the proposed Alaska Gas Pipeline will export 4.5 BCFD of gas to Canada, offsetting about half of our natural gas imports.

In summary, according to the article, exporting LNG is a bad idea according to the author because:

1. LNG exports will drive up gas prices
2. We would export clean energy and import dirty oil
3. We are dumb

Let's examine these outcomes and fill in the blanks;

1. Exporting LNG will drive up natural gas prices - GOOD. Current pricing in the $4/MMBTU range will not support job growth in America. $6/MMBTU gas puts Americans to work - building LNG plants, building pipelines, and building petrochem plants. Maybe even building the Alaska Gas Pipeline. I don't see a problem with that. For once we can export a product to Asia and keep the jobs at home.
2. Importing "dirty" oil sounds just awful doesn't it? The fact is that high sulfur, thick crudes are less expensive and our technological leadership in refining allow us to use the materials. American know how, cheaper products - can't beat that.
3. Are we dumb? I don't think in those terms. Markets are pretty smart at figuring out how to maximize returns. The Pickens Plan seeks to convert our trucking fleets over to compressed natural gas. I'd call that a pretty good idea, it would be even better if Boone was spending his money instead of reaching out for my tax dollars to fund the plan. Of course increased domestic use of gas for transportation will drive up price which is OK with me since that will spur development and build domestic employment.
   

I can offer a few ideas, and I think these will build a better America:

1. Support the conversion of LNG import terminals into export terminals. Conversion of these facilities is the most cost effective way to get into the LNG export market.
2. Let's get serious about Gas To Liquids. Our cheap natural gas and coal can be used to make clean liquid hydrocarbon fuels. Fuels that will burn in our existing cars trucks and trains without all the taxpayer funded investment required by the Picken's Plan. Domestic GTL will help protect us from overseas supply disruptions.
   
3. Let's build facilities in this country instead of building overseas. Let's build LNG export terminals, new petrochem plants, and new pipelines including the Alaska Gas Pipeline. Building here equals jobs here.