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The Peninsula On-line: Shell says Pearl GTL project will be profitable

Web posted at: 2/22/2007 9:15:40
Source ::: Agencies

Dubai • Royal Dutch Shell Plc is pressing ahead with a scheme to turn Qatari gas into superclean fuel even after soaring costs forced ExxonMobil Corp to drop a similar project.

Exxon’s withdrawal leaves Shell as the only large international oil company with such plans in the Gulf. Shell’s project is facing rising costs that may push the cost to $10bn from an earlier estimate of $5bn.

Inflation through the oil and gas industry globally has exacerbated rising costs in Qatar. Shell said it had incorporated higher costs when it gave the go-ahead for its Pearl GTL project last year. “Nothing has changed,” said Andy Brown, Shell’s manager of operations in Qatar. “All the cost information was included in the final investment decision.”

Shell and Qatar today are to break ground on Pearl, one of a string of projects that form part of Qatar’s plans to get gas to market from the North Field — the largest pure, or non associated, gas field in the world. With so many projects being built, developers have struggled with shortages of manpower, rising prices for raw materials such as steel and other bottlenecks.

One investor said Shell could be continuing with the project despite rising costs as it needs access to Qatar’s reserves. Shell is under pressure to boost its holdings after saying in 2004 it had overstated proven reserves for years.

“Shell has not got the sort of reserves and low-cost projects that some of the other majors like Exxon and BP have,” said Colin Morton, fund manager at Rensburg Fund Management. That may make give Shell a more strategic motivation beyond costs for the project, which marked its return to Qatar after an absence of about 10 years. Shell discovered the North Field in the early 1990s.

Rising costs could hinder other investments in ventures like the 140,000 barrels per day Pearl plant, which will convert gas into liquid fuels such as naphtha. “Cost escalation … is hardly conducive to further investment in this form of project,” said Citigroup in a research note yesterday. “Other proposed developments in the region must be seen as under threat.”

Citigroup analysts forecast Pearl would generate a nine per cent internal rate of return based on a $15bn cost. This is below the 10-15 per cent firms normally target. But a Shell spokesman said the cost of $4-$6 per barrel of oil equivalent for Pearl is still at the low end of Shell’s target of $4-$8 for large exploration and production projects.

“We recognise it is a complex project but with our experience we have every confidence in our ability to deliver Pearl as a profitable project beneficial to Shell, Qatar and our customers,” the spokesman said.

Exxon and Qatar Petroleum dropped their plans for the even larger 154,000 b/d Palm GTL plant on Tuesday. That scheme had an initial budget of $7bn when it was signed in 2004.

Shell was more likely than other major energy companies to make GTL work in Qatar due to its previous experience with a smaller project in Malaysia, analysts said. “Shell is ideally placed among the majors because of its GTL experience,” said Praveen Martis, a member of the Middle East team at global consultancy Wood Mackenzie. “Although it hasn’t got experience on this scale.” Shell has a 12,000 b/d gas-to-liquids plant in Bintulu, Malaysia, which started up in 1993.

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