Anyone of a betting nature may take a look at the forward swaps market on natural gas and think the small premium asked for forward-dated gas prices do not reflect the relative value of natural gas relative to oil.
Cleverer heads than ours are looking at ways to play the arbitrage opportunity that has opened up between oil and natural gas prices since the advent of shale gas caused the collapse of natural gas prices in North America. According to Bloomberg’s Businessweek, today’s price of $4.18 is equivalent to about $24 a barrel of crude, while oil is trading at about $100 a barrel in New York.
One of several reasons to think natural gas may have a brighter future than current prices suggest is nearing completion in the Qatari desert. Over 21 million cubic feet of concrete, 120,000 tons of steel, nearly 7,000 miles of cables and 100,000 miles of pipes have come together in the world’s largest oil & gas construction site run by Royal Dutch Shell. Pearl GTL (“gas-to-liquids”), as it is known, is hardwired to the world’s largest natural gas field — Qatar’s North Field — and has just started production that will ramp up by next year to 120,000 barrels per day of downstream oil products, from detergents to diesel fuel and everything in between. Pearl has cost Shell and its partners in the region of US$18 billion and taken 52,000 workers to complete, according to the FT. The firsts and “largests” reads like something from the Guinness Book of Records and as such, a video by the project’s CEO makes interesting watching.
The most important ‘first,’ though, is in proving the economic viability of the gas-to-liquids technology that Shell has taken 35 years and poured millions of dollars into perfecting. Unquestionably the technology works, and on the scale of Pearl, Shell will no doubt make a solid economic case. The issue for the US is, can the technology be made economic on the smaller scale of US shale gas fields? Shell isn’t being publicly drawn, but when you look at the pace at which the group is expanding into natural gas at the expense of oil exploration (Shell will become a larger gas producer than oil producer by next year), you have to think they are on to something.
True, for the foreseeable future most natural gas will be traded as gas or LNG, but Shell will be looking to apply the 3,500 patents they have taken out on every step of the GTL process to good effect at other major gas fields around the world, as the planet becomes increasingly short of oil and may be as importantly willing to pay a premium for the ultra-clean distillates the GTL process produces. Pearl alone extracts 600 tons of sulfur a day from the gas producing very low sulfur distillate products such as aviation kerosene and diesel fuel, said to be so pure it looks like water.
Turning natural gas to hydrocarbon liquids, whether for fuel for transport or as feedstock for chemicals, will not in itself make the US self-sufficient or entirely independent of imported oil, but should the economics prove sufficiently attractive, it could significantly reduce dependency, particularly if future administrations gave financial incentives to GTL similar to those they gave to biofuels.
By. Stuart Burns
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