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October 6, 2011
Natural Gas-to-Liquids Coming to the U.S.
Attentive investors may have noted an announcement last week by the large South Africa-based energy and chemicals company Sasol. The firm said it was commencing an eighteen-month feasibility study to determine the commercial viability of one of two options: either a two million tons per annum or four million tons per annum Gas-to-Liquids, or ‘GTL,’ production facility in southwestern Louisiana.
This would be the first GTL facility in the United States, indeed in the Western hemisphere. The liquids produced are expected to be generally kerosene and allied products, for diesel or jet fuel.
This could be the start of a major movement to, effectively, substitute abundant, cheap natural gas produced within North America, for expensive, imported crude oil. The economic, balance of payments, financial and investment implications are enormous.
Heretofore, this potential substitution has been stymied by a ‘chicken and egg’ problem. Advocates of greater use of natural gas as a transportation fuel—people like T. Boone Pickens, and the largest developer of shale gas, Chesapeake Energy—have run into the practical obstacle of natural gas not being a convenient choice for consumers, businesses or institutions.
Vehicles have to be fitted with adaptation devices and hardware, plus a large tank to hold compressed natural gas, or ‘CNG,’ squeezing out useful luggage space in passenger vehicles and potential cargo space in trucks and vans.
Futhermore, finding stations able to sell CNG at high volumes, dispersed conveniently in cities, towns and along highways, is nearly impossible and would be costly to deploy on a large scale, even if such equipment could be put in place at existing service stations. These stations are owned by integrated oil companies who are not entirely positively disposed to cannibalizing their existing conventional gasoline sales, nor cluttering up and complicating their current operations with a new one of uncertain demand level.
So, this new development is extremely positive from a standpoint of encouraging the demand for and consumption of natural gas in a different and much more user-friendly form. Truckers, bus lines, delivery companies, railroads and airlines do not have to change anything about how they operate. In fact, the diesel and aviation fuel from GTL plants, as demonstrated by the ones already built, separately, by Sasol and Royal Dutch Shell in Qatar, have less contaminants than ‘natural’ kerosene fuels refined from crude oil, and burn cleaner, too.
The United States currently consumes over 18-million barrels of crude oil per day, of which about 12-million barrels of it is imported—at a cost, today, of about $1.08-billion, or about $400-billion per annum, at today’s price of about $90 per barrel.
That is money that leaves the United States economy and contributes to its chronic trade and balance of payments deficit. The revenue, aside from Mexico and Canada, generally goes to unstable, unfriendly, despotic and/or corrupt regimes in the Middle East, Africa or Latin America, fuelling war, repression, terrorism or misery of one kind or another.
Should that money stay at home, it would be spent in communities across the U.S., benefiting consumers and businesses, generating jobs, and improving state and federal finances, lowering deficits. It would also encourage the growth of a new industry that would revitalize many sectors, in construction of facilities, manufacture of sensors, controls, and other tools and devices, and specialized equipment used in GTL and related plant and infrastructure.
In general, GTL projects have not been major revenue generators for any of these companies, as there have been few of them, and they are constructed over protracted time periods. However, it is quite possible that could change in the near future.
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is an investment and financial analyst based in Surrey, BC. He earned a BA in Economics from the University of Alberta and an MBA in Finance from the University of Toronto. He has managed institutional investment portfolios, lectured at colleges, managed investment research operations, and developed financial valuation models. For several years Ian was vice president at a U.S. investment research firm with extensive operations in India, where he worked and managed staff. He also ran his own investment counseling firm and advisory newsletter. He holds the Chartered Financial Analyst (CFA) designation and is a former president of the Saskatchewan and Edmonton CFA Societies.