Last week, South African-based Sasol Ltd. cleared a major regulatory hurdle to build the United States’ first Gas-to-liquids (GTL) plant near Lake Charles, Louisiana. The U.S. Army Corps of Engineers approved Sasol’s wetland modification permit to build the industrial complex that would use natural gas as a feedstock to produce 96,000 barrels of diesel fuel and other liquids per day. If built, estimated construction costs are between $11-14 billion and the complex will be the largest foreign investment in the history of the state of Louisiana.
The logic behind Sasol’s big capital spend is relatively simple: Sasol is making a bold bet that natural gas in the U.S. will remain relatively cheap compared to oil on a BTU basis. Since 2009, the price ratio of crude oil to natural gas has spread significantly, with oil gradually rising, while natural gas has remained relatively flat.
Figure 1 Source: EIA. Figures based on 5.8 Mbtus per barrel
The rocky history of large scale GTL projects has led developers and investors to become increasingly skeptical and cautious of large undertakings. With the help of Shell’s Middle Distillate Synthesis (SMDS) process, which carries over 3,500 patents, both Qatar and Malaysia are among the few with success in building viable plants. Qatar’s Pearl project began in 2012 and produces 140,000 b/d, while Malaysia’s Bintulu plant, which began in 1993, produces 14,700 b/d. South Africa’s national oil company, PetrolSA, holds the distinction of operating the world’s first GTL plant, which began in 1992 and produces 22,000 b/d.
Figure 2 Shell's Pearl GTL project in Ras Laffan Industrial City, 80 km north of Doha, Qatar
With Shell’s GTL success in both Qatar and Malaysia, the U.S. Gulf Coast energy sector was dealt a major setback last December when Shell announced that it was cancelling its proposed GTL plant in Louisiana. Some of Shell’s concerns included the lack of skilled labor, rising project cost estimates, increased uncertainty of future domestic natural gas prices, and concerns about a stagnating demand for gasoline. The graph below depicts BP forecasts regarding global oil liquids and natural gas demand.
Figure 3 Source: The 2014 BP Statistical Review
Sasol’s hopes to turn America’s record production of natural gas into the more valuable oil liquids will depend on its proprietary Sasol Slurry Phase Distillate Process. Like Shell’s ultra-secret SMDS process, Sasol’s three-state process combines three patented technologies. Sasol has refined this process while partnering with Qatar Petroleum to build a 32,400 bpd plant that produces diesel, naphtha, and liquid petroleum gas.
Figure 4 Source: QP-SASOL joint venture Investor Presentation
While the final decision from Sasol on whether to move forward with the Louisiana project is expected in the fall, after examining engineering evaluations and financing options, the GTL community was reminded this week just how troubling building a GTL plant can be. Chevron Nigeria’s 33,000 bpd plant came online this week and the numbers are not pretty. The project was completed nine years behind schedule. The initial estimate for the plant was $1.7 billion, but in the end constructions costs totaled nearly $10 billion. This hefty cost overrun and absurd production delay could make Sasol think twice whether the time is right for the U.S. to become the next major GTL player.
By. Chris Pedersen