SPECIAL REPORT: GTL production will partially ease regional diesel, naphtha imbalances

March 19, 2007
Several commercial gas-to-liquids (GTL) projects will come on stream during the next decade.

Several commercial gas-to-liquids (GTL) projects will come on stream during the next decade. Their effect on the global downstream market, however, should be slight. Following the reported recent cancellation of ExxonMobil Corp.’s GTL project in Qatar, the successful start-up of the remaining projects currently in development would result in only around 11 million tonnes/year (tpy), or 250,000 b/d, of GTL diesel and 4 million tpy (100,000 b/d) of GTL naphtha coming into the market by 2015.

Although the announcement by ExxonMobil clearly illustrates the cost pressures being felt by the GTL industry, Wood Mackenzie still believes GTL can be a viable proposition with companies (such as Royal Dutch Shell PLC, Sasol, and SasolChevron) that are best placed to develop projects owing to their operational experience in GTL. All three of the major demand regions (North America, Europe, and Asia-Pacific) should develop large diesel deficits by 2015. In Europe and North America, the diesel deficits will be 54 million tpy and 14 million tpy, respectively. In Asia, the combined diesel and gas oil deficit is forecast to reach almost 23 million tpy. Planned production of GTL diesel should therefore readily find a market.

Fig. 1 shows some regional demand deficits and expected GTL product supplies.

Click here to enlarge image

Based on netback pricing, the most likely destination for GTL diesel produced in Qatar, Nigeria, and Algeria is Europe. This 8 million tpy of GTL diesel supply could lower Europe’s deficit in 2015 by 15% to around 46 million tpy. The remaining 3 million tpy of GTL supply would have a slighter effect on the deficit in Asia-Pacific.

The key demand region for naphtha is Asia-Pacific, which already has a rising deficit due to growing demand for basic petrochemicals. This deficit should reach nearly 90 million tpy by 2015. Both North America and Europe will be broadly balanced naphtha at that time.

Based on netback pricing, there should be greater variations in the destination for GTL naphtha than for diesel. The potential 3 million tpy of product from Qatar and Australia, however, which is likely to be exported to Asia will make minimal impression on the large deficit.

Why GTL?

GTL technology has been in development since the start of the 1900s, but its large-scale, worldwide application remains limited to only a handful of plants. The past decade, however, has brought renewed vigor to the field and several commercial fuels-oriented projects will come on stream during the next decade.

Some of the main forces for GTL as a gas-monetization strategy are:

  • Large, liquid markets for products. The two key products from a GTL plant are diesel and naphtha. Global diesel and gas oil demand is currently more than 1.1 billion tpy (22 million b/d). With global demand currently growing at around 3%/year, it is the fastest growing part of the demand barrel. Naphtha demand is more than 200 million tpy (4.7 million b/d), most of which is due to increasing demand for basic petrochemicals.
  • High-quality products. Diesel, naphtha, and lubricant basestocks produced using GTL technology exhibit unique high-quality characteristics. Diesel produced is low in sulfur, has a very high cetane number, and low aromatics content. The naphtha is highly paraffinic, giving higher ethylene yields when cracked vs. typical refinery naphthas.
  • Potentially higher value. GTL investment returns are more strongly influenced by the prevailing crude oil price than LNG; therefore, it can achieve a higher return in a high oil price environment.

Who is active?

Almost all of the world’s major international oil and gas companies now have some interest in GTL through demonstration plants or projects at various stages of commercialization. There remain, however, only two examples of GTL plants producing commercial products-those of Shell at Bintulu, Malaysia, and PetroSA at Mossel Bay, South Africa. The long-term future of the current plant at Mossel Bay is in some doubt due to a potential lack of gas supplies.

Shell’s plant at Bintulu has a capacity of 14,700 b/d and produces a range of specialty products. Having gained invaluable experience in the operation of a commercial GTL plant and in the marketing of the products produced, Shell is embarking on the next stage of its GTL strategy through the launch of the Pearl GTL project in Qatar. The first 70,000 b/d of GTL capacity at this integrated upstream and downstream project should be commissioned towards the end of the decade with 70,000 b/d of additional capacity coming on stream about a year later.

Sasol has developed great expertise in the production of synthetic fuels through its coal-to-liquids (CTL) plants in South Africa. It formed a joint venture with Chevron Corp. (SasolChevron) in 1999 to help globalize the application of its technologies. Both companies have GTL projects at advanced stages of development.

Chevron’s joint venture with Nigerian National Petroleum Corp. now has its 34,000-b/d GTL plant at Escravos, Nigeria, under construction. Sasol formed another joint venture with Qatar Petroleum in 2001 called Oryx GTL for the construction of a GTL plant at Ras Laffan, Qatar. This 34,000-b/d plant, currently in the commissioning phase, will be the first of a new wave of commercial GTL plants. In conjunction with Qatar Petroleum, SasolChevron has announced plans to expand this plant to 100,000 b/d and is also pursuing the potential for another 130,000-b/d integrated plant in Qatar.

ExxonMobil had signed an agreement with Qatar’s government to build a 154,000-b/d plant at Ras Laffan by 2011. In February 2007, however, both companies decided not to progress the GTL project in favor of pursuing the development of the Barzan project in the North Field to supply domestic gas.

Marathon Oil Corp. is planning to build a 120,000-b/d GTL plant in Qatar, possibly in conjunction with partners including Petro-Canada, although this project has currently been put on hold by the Qatari government.

ConocoPhillips Co. is planning a two-phase project in Qatar to produce a total of 160,000 b/d of products, although this also has been put on hold by the Qatari government.

BP PLC has evaluated several potential sites for a commercial plant but has yet to make any positive project announcements.

Click here to enlarge image

Table 1 lists existing GTL capacity and the projects in development that we consider to have the strongest chances of coming to fruition. Three projects, representing the next generation of GTL, are likely to come on stream before 2010 and others will follow close behind.

In addition to the projects listed in Table 1, many other projects have been proposed, covering most regions of the world with substantial stranded gas reserves. Further projects using gas from Qatar’s huge North Field have strong potential, with SasolChevron, ConocoPhillips, and Marathon the main contenders to develop this.

Australia’s Northwest Shelf is also a good prospect for GTL development. Other projects have been proposed in South America, Russia, Indonesia, and other parts of the Middle East. These projects, however, are not firm enough for us to include in our forecasts of additional diesel and naphtha supply from GTL.

Where and when?

Fig. 2 shows our assessment of the likely timing of the proposed GTL projects. The successful development of these projects would result in 425,000 b/d of GTL products coming onto the market by 2015, of which half would be from Qatar.

Click here to enlarge image

GTL remains capital-intensive compared to refining or LNG, and there is technical risk associated with GTL. In a high oil-price environment, however, the economics of GTL have the potential to be superior to both refining and LNG.

The Feb 20. 2007, announcement by ExxonMobil that it has cancelled its GTL project in Qatar clearly shows the cost pressure being felt by the GTL industry. Wood Mackenzie, however, still believes that GTL has the potential to create significant economic value, especially in a high oil price environment. Assuming that the first few projects are implemented successfully, we expect that it will catalyze development of more projects by giving confidence in the technology to the key stakeholders: host governments, finance providers, and project developers. There is certainly the scope for more projects to be developed within this time period, taking GTL capacity beyond that shown in Fig. 2.

Which markets?

The main products from GTL plants are diesel, naphtha, and lubricant base oils. Smaller volumes of LPG, n-paraffins, and waxes are also produced. The vast majority of these products will be exported from the producing countries.

Determining the most likely destination market requires an analysis of regional supply and demand balances for those products, combined with an assessment of the relative netback prices available to the supplier from the different regions. Netback prices are derived from forecasts of delivered pricing for naphtha and diesel in the respective markets-based on our projections of international refining margins-and analysis of likely freight costs for the movement of clean products from the country of production to target markets.

GTL products can potentially command price premiums vs. traditional diesel and naphtha produced from crude refining due to their better properties. GTL naphtha commands a price premium due to its favorable properties for ethylene production.

GTL diesel, however, is less straightforward. The low specific gravity means that it does not meet current diesel fuel specifications and cannot be used directly as a transport fuel. Its low sulfur content, high cetane number, and low poly-aromatic content, however, make it a valuable blendstock.

Click here to enlarge image

Table 2 illustrates the properties of GTL diesel compared to conventional ultralow-sulfur diesel.

GTL diesel’s value as a blendstock in Europe will be limited, however, because most refineries have already invested to produce low-sulfur fuels and many will not be cetane constrained or have problems meeting poly-aromatic specifications. In Asia-Pacific, however, where fuel-quality specifications are starting to move towards European standards, the influence of GTL diesel quality could be greater.

A further application for GTL diesel is in fuels marketing; GTL diesel can be blended with conventional diesel to produce premium-priced products marketed as high-performance fuels. Shell has pioneered this approach, using product from its Bintulu facility.

Click here to enlarge image

Wood Mackenzie has performed netback analysis for most of the proposed GTL sites in the world. Fig. 3 shows our view of the likely trade flow for GTL products.

Based on netback pricing, the most likely destination for GTL diesel produced in Qatar, Nigeria, and Algeria is Europe. There will be greater variations in the destination for GTL naphtha; product from Qatar and Australia is likely to be exported to Asia. The US will be the target market for Nigerian GTL naphtha, and Algerian GTL naphtha will likely flow to Mediterranean Europe.

Global oil product balances

Global diesel demand is expanding faster than total oil demand, driven primarily by the road freight sector and from passenger vehicles switching from gasoline, particularly in Europe. Current global diesel and gas oil demand is around 1.1 billion tpy (22 million b/d) and is projected to grow at an average rate of around 2.7%/year through to 2015 to reach 1.5 billion tpy (30 million b/d).

Our forecast for GTL capacity development shows that about 11 million tpy (0.25 million b/d) of GTL diesel could hit the market, less than 1% of total demand. All three of the major demand regions should develop large diesel deficits by 2015. In Europe and North America, the diesel deficits will be 54 million tpy and 14 million tpy, respectively (Fig. 1).

In Asia, the combined diesel plus gas-oil deficit could reach nearly 23 million tpy. The planned production of GTL diesel should therefore readily find a market.

Based on netback pricing, the most likely destination for GTL diesel produced in Qatar, Nigeria, and Algeria is Europe. The planned GTL plants in those countries would produce just more than 8 million tpy of diesel, potentially lowering Europe’s diesel deficit in 2015 by 15% to around 46 million tpy. The remaining 3 million tpy of GTL supply would have a lesser impact on the deficit in Asia-Pacific.

Global naphtha demand is also increasing due to growing demand for basic petrochemicals. Demand is currently more than 220 million tpy (5 million b/d) and will grow to more than 310 million tpy (78 million b/d) by 2015. The projected GTL naphtha supply of 4 million tpy (0.1 million b/d) would meet less than 2% of total global demand.

The key demand region for naphtha is Asia-Pacific, which already has a growing deficit. This deficit will reach nearly 90 million tpy by 2015. North America and Europe will remain broadly balanced in naphtha at that time.

Based on the resulting netback price forecasts, we expect greater variations in the destination for GTL naphtha than for diesel. The potential 3 million tpy of product from Qatar and Australia will likely be exported to Asia, making a small dent in the huge deficit there. The US will be the target market for Nigerian GTL naphtha, and Algerian GTL naphtha will likely flow to Mediterranean Europe.

In summary, GTL products will meet a small percentage of global oil product demand in the next decade. The influence of GTL diesel and naphtha on regional supply-demand balances will be small.

The effect of GTL diesel imported to Europe is the most significant, potentially reducing the forecast deficit of 54 million tpy by about 15%. The relevance of naphtha supply into Asia, however, is negligible.

The authors

Click here to enlarge image

Aileen Jamieson ([email protected]) is product manager, global products’ outlook, for Wood Mackenzie, Edinburgh. She joined Wood Mackenzie’s downstream consulting team in 2001, specializing in crude quality, refining, and oil product supply. Jamieson has been involved in detailed analyses of refining and forecasts oil product supply-demand balances for Europe, US, and Asia Pacific. Before joining Wood Mackenzie, she worked for ExxonMobil Corp. for 5 years in both technical and commercial roles. Jamieson holds a BEng (1996) in chemical engineering from Edinburgh University.

Click here to enlarge image

Gordon McManus is an analyst for downstream research for Wood Mackenzie. He joined Wood Mackenzie’s downstream research team in January 2006 to work on oil product demand analysis. Before joining Wood Mackenzie, McManus was program manager within Frost & Sullivan’s chemicals practice, where one of his responsibilities was to lead research into the rapidly developing biofuels market in Europe. He also acted as lead analyst on many consulting projects for clients including Shell, BP, Barclays, Octel, and ICI. McManus holds a BSc in chemistry from the University of St. Andrews, Scotland, UK, and a PhD from the University of Cambridge, UK.