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Cheap Natural Gas Has Made This 85-Year-Old Technology Profitable

Although natural gas has become plentiful and cheap in the United States, using it in ways that would make it a practical alternative to petroleum, such as vehicle fuel, has proven challenging.

It's not that it can't be done. German scientists figured out how to convert natural gas to liquid petroleum products back in the mid-1920s.

Such products, particularly diesel fuel and synthetic engine oil, can be used in today's cars, trucks and jet planes today with virtually no modifications – a huge advantage over other natural gas fuel alternatives, such as compressed natural gas (CNG).

But the natural gas-to-liquid (GTL) process is expensive and requires large and costly facilities. Relatively cheap oil throughout the 20th century made GTL uneconomical for decades.

However, as the price of oil has risen in recent years, and as vast new reserves of natural gas have been discovered, interest in GTL technology has rekindled.

"With high crude prices, the economics of gas-to-liquid fuel have started to look much better," Sander Cohan, principal at energy-analysis firm ESAI Inc., told The Wall Street Journal.

It should be noted that GTL technology has nothing to do with the more familiar liquefied natural gas (LNG) process, which simply chills the gas into a liquid state for transport. GTL actually converts the natural gas into petroleum-like products, which would help reduce U.S. dependence on imported oil.

"The real prize is using natural gas to power our own vehicles," said Money Morning Global Energy Strategist Dr. Kent Moors.

Shell as Pioneer

Royal Dutch Shell PLC (NYSE: RDS:A, RDS.B) began production at its $18.5 billion Pearl GTL plant in Qatar earlier this year, with the first shipment of GTL base oil destined for lubricants arriving in Houston last month.

Shell estimates the plant will reach full production next year, converting 1.6 billion cubic feet of natural gas a day into 140,000 barrels of liquid fuels like kerosene and base oil in addition to 120,000 barrels of other products, such as condensate and liquid petroleum gas.

It already has at least one marquee customer: Qatar Airways has announced it will transition to GTL-based fuel in all of its aircraft next year.

Shell says the Pearl plant will account for 8% of its total production next year, making it the company's single biggest engine of growth. Last year Shell projected the plant would generate $6 billion a year in profit assuming oil prices at $70 a barrel. West Texas Intermediate (WTI) oil is now trading at over $100 a barrel.

Meanwhile, the price of natural gas has declined from between $6 and $7 per thousand cubic feet to less than $4 per thousand cubic feet. The more the prices of oil and natural gas head in opposite directions, the more profitable GTL becomes.

Just yesterday (Monday) Shell said it was considering building a GTL plant in the United States.

"We are looking for places where gas is cheap and [oil] products are expensive," Andy Brown, the managing director of Shell's Pearl project, said at a press briefing at the World Petroleum Congress in Doha, Qatar's capital. "Clearly the U.S. is something we're looking at."

That spread has other energy companies looking at GTL opportunities now.

Back in September Johannesburg, South-Africa-based Sasol Limited (NYSE ADR: SSL) said it is planning to build a $10 billion GTL plant in southwestern Louisiana. Sasol built one of the first GTL facilities in Malaysia, which it operates jointly with Shell.

Chevron Corp. (NYSE: CVX) has partnered with Sasol on a GTL project in Nigeria expected to be completed in 2013.

Other big oil companies, such as Exxon Mobil Corp. (NYSE: XOM), are expected to jump on the GTL bandwagon if the Pearl operation and others prove successful.

Ways to Profit

If GTL is such a great idea, why are there only a handful of plants?

The issue is the enormous capital cost of building the facilities and the time it takes to build them – Shell's Qatar plant cost more than triple initial estimates and took five years to build. It's a major commitment, and companies may fear a change in market conditions that would make GTL less lucrative.

Nevertheless, supplies of natural gas appear plentiful and on the rise, which should keep prices down, while the price of oil is expected to soar in coming years.

Eventually, more GTL plants will be built; the early beneficiaries will be those that took a chance and started early, namely Shell and Sasol.

But there will be other winners as well, most notably the developers of natural gas in the United States, such as Chesapeake Energy Corp. (NYSE: CHK), EnCana Corp. (NYSE: ECA), Cabot Oil & Gas Corp. (NYSE: COG), Forest Oil Corp. (NYSE: FST), and Devon Energy Corp. (NYSE: DVN), who will have another market for their product.

Such gas producers should benefit from the current ramping up of the LNG export market in the meantime, so their future looks bright indeed.

One small company that could turn GTL into its own gold mine is Carbon Sciences Inc. (OTC: CABN). Carbon Sciences' streamlined method of converting natural gas is cheaper and requires smaller facilities, which would make it practical to build much smaller GTL plants than those of Shell and Sasol.

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