The Rising Influence of Rising Affluence

[DewDiligence]

Shell’s ‘Pearl’ GTL Refinery Rises in Desert

[This is the largest individual hydrocarbon investment in the world; whether the project is bullish or bearish for Shell investors is open to question, however, as discussed below. Comments?]

http://online.wsj.com/article/SB20001424052702304703104575174081607418618.html

›Shell's $19 Billion Qatar Operation Aims to Convert Plentiful Natural Gas to Clean-Burning Diesel

›APRIL 16, 2010
By GUY CHAZAN

RAS LAFFAN—In the desert sands of Qatar, Royal Dutch Shell PLC is fine-tuning a $19 billion plant that will turn the country's abundant natural gas into an odorless diesel, one of the most expensive gambles on clean fuel in the history of the energy industry.

Pearl GTL, or gas-to-liquids, is Shell's flagship project, showcasing its ability to manage huge, technologically challenging projects and market advanced fuels. It "epitomizes what we are capable of," says Andy Brown, Shell's Qatar country manager.

It's also potentially highly lucrative [uh oh—there’s that waffle word, “potentially” :- )]. A global supply glut has pushed down the price of natural gas, and the ability to turn gas into oil products with crude over $80 a barrel could deliver big profits for Shell and Qatar when the plant starts production next year.

GTL symbolizes the oil majors' high-stakes search for new and unconventional sources of crude oil. Barred from the easy-to-reach crude of the Middle East, majors like Shell are squeezing oil out of the tar sands of Alberta, Canada, and the shales of North Dakota, and making advanced biofuel from wild grasses and algae. Part of that search, GTL uses chemical reactions to physically change the composition of gas molecules, yielding an odorless, colorless fuel similar to diesel, but without the sooty pollutants.

No one has ever built such a big GTL plant before, though. The technology is expensive and requires enormous amounts of energy to achieve the conversion. Critics say the economics of alternatives such as liquefied natural gas, or LNG, where gas is cooled and pressured to liquid form, are much better. [Comments from anyone?]

As a result, global interest in GTL, once touted by Qatari officials as the "fuel of the 21st century," has waned. Other oil companies, including Exxon Mobil Corp. have abandoned their own plans for big GTL plants.

Shell probably won't be able to replicate Pearl, which covers 556 acres (2.25 square kilometers), anywhere else in the world—at least not on such a vast scale. Evan expanding in Qatar may prove hard. The emirate has imposed a moratorium on all new gas projects until it can assess the impact of existing developments on its North Field, the world's largest gas deposit.

"GTL is an evolutionary dead-end for the oil industry," says Bernie Picchi, a long-time observer of the sector and portfolio manager at Palisade Capital Management LLC. "Pearl is very impressive and will be very profitable for Shell, but it's essentially a one-off."

For Shell, which has been slammed in the past for cost overruns and delays on some ventures, the project is a badge of honor, proof it can deliver a massive project on time and on budget. On April 14, crews laid the last major structural piece to its gas-trains. Construction is expected to wrap up this year.

Its startup next year will mark a turning point in the fortunes of a company whose output of oil and gas has declined for the last seven years straight. Pearl and a sister LNG project, Qatargas IV, will produce 350,000 barrels of oil equivalent a day, about 10% of Shell's current production, and increase the company's cash flow by $4 billion a year.

GTL is based on a process developed in the 1920s in Germany, which used it to turn coal into badly needed petroleum during the World War II. Later, South Africa's Sasol Ltd. became the world leader in the technology after a United Nations-led embargo against the country's apartheid regime stopped oil imports.

Shell started exploring GTL during the oil shocks of the 1970s and opened its first gas-to-liquids demonstration plant in Bintulu, Malaysia, in 1993.

Under the process it developed, natural gas is purified, mixed with oxygen and fed into reactors containing a cobalt catalyst. The gas turns into waxy hydrocarbons that can be refined into products such as naphtha, kerosene and gasoil, a diesel-type fuel.

Shell spiked ordinary diesel with Bintulu's GTL to create a high-performance blend. An Audi race car that ran on a GTL blend won the Le Mans endurance race three years running.

But there were risks in deploying Bintulu's technology on a larger scale. Another big GTL project—Sasol's Oryx GTL joint venture with Qatar Petroleum—experienced serious technical hitches in its start-up phase and is still not operating at full capacity.

Critics also questioned the economics of such an energy-intensive process. According to Deutsche Bank analysts, an eye-popping 40% of the feedstock gas is utilized as fuel in GTL [!], compared with 15% for LNG.

Shell and its partner Qatar Petroleum needed to assemble a 40,000-strong workforce to build Pearl. They constructed a small town to accommodate them, complete with soccer fields, movie theaters and its own mayor [LOL].

Finding enough skilled workers was tough in Qatar's tight labor market. Half the welders supplied by one contractor failed to pass a basic skills test and had to be sent home. Shell had to build its own dock at Ras Laffan to handle the 2 million tons of imported equipment needed.

Pearl GTL is now the oil industry's biggest construction site, with thousands of workers putting the finishing touches on a maze of pipes, storage tanks, reactors, and cooling towers still swathed in scaffolding. On a hot day in March, red-uniformed operators pored over computer screens in the plan's central control room.

Shell's Mr. Brown dismisses concerns expressed by some Shell investors that the project will make money only if oil prices are high. The gas for Pearl is free, he says, and the operating costs low at only $6 a barrel. And it will produce highly profitable fuels such as base oil, used to make lubricants, and normal paraffins, an ingredient in detergents, as well as valuable byproducts such as ethane, used in the petrochemicals industry.

Doubts remain as to whether GTL will work anywhere else, however. Few countries enjoy the same combination of cheap labor and a huge gas resource that Qatar has.

Mr. Brown rejects the criticism, too. First, Shell has space to expand Pearl, if Qatar lifts its moratorium. "And you can't immediately dismiss other locations for GTL," he says.‹