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The Wall Street Journal: High Costs Slow Quest For Ultraclean Diesel

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By RUSSELL GOLD
February 23, 2007; Page A2

The rush to build a new industry that turns natural gas into an ultraclean transportation fuel is stumbling over rising costs, showing how tough it is for emerging fuels to compete with crude oil.

This past week, Exxon Mobil Corp. backed out of plans to build an enormous gas-to-liquids, or GTL, plant in Qatar. Yesterday, Royal Dutch Shell PLC broke ground on its own similarly sized GTL plant in Qatar, but said the cost might have tripled to as high as $18 billion.

•  The Hope: Energy companies have been investing in a potential petroleum substitute that turns natural gas into a liquid fuel.
 
•  The Problem: Gas-to-liquids projects have surged in cost due to overall oil-patch inflation.
 
•  The Result: Exxon Mobil this week joined other companies putting GTL projects on hold.
 
Escalating budgets are threatening to constrain the growth of the GTL industry, which produces a clear liquid that can run existing diesel engines without any of the sooty pollutants associated with diesel. The rising costs of steel, engineering and labor have led to steep inflation among major energy projects world-wide, underscoring how the rush to find new fuel sources is driving up the cost of developing them.

Higher costs have hit companies developing Canada’s oil sands, where crude is packed into tar-like deposits. Prices for corn and other crops have risen, in part, because of the U.S.’s increasing interest in ethanol.

Other than Shell’s Qatar facility, the only other GTL plant under construction also is facing cost pressures. Last year, Halliburton Co. took a charge to earnings because of delays and cost increases for the plant its KBR Inc. unit is building in Nigeria for Chevron Corp. and Sasol Ltd.

Exxon officials wouldn’t say whether rising costs were the main factor in the decision to drop plans for the Qatar GTL plant. “Deciding not to progress with GTL is in line with our investment approach, which is very disciplined,” said Exxon spokeswoman Jeanne Miller.

Other GTL proposals, including projects led by Marathon Oil Corp. and ConocoPhillips, in recent years were put on hold.

Exxon’s decision is likely to cause other companies to rethink their commitment to GTL. Bernard Picchi, an energy analyst for research and trading firm Wall Street Access, who keeps close tabs on GTL, said he expects other GTL hopefuls “to take a timeout, a deep breath and re-evaluate the cost and technology.”

Using technology developed in Nazi Germany, the process of turning natural gas into liquids had long been too expensive to be commercial. Small-scale GTL plants in Malaysia, operated by Shell, and South Africa, by Sasol, have been in operation for years. Several years ago, the Middle Eastern nation of Qatar decided to encourage large projects to turn its natural-gas resources into an exportable liquid fuel. The scale of the facilities, as well as rising oil costs, were expected to make the GTL fuel competitive. The Exxon and Shell projects, alongside a project by Sasol, were set to generate more than 300,000 barrels a day of the fuel.
 
Qatar hoped the plants could help GTL put a dent in crude oil’s near-monopoly on the world’s largest energy market — powering the world’s vehicles — by creating an alternative fuel.

Shell Chief Executive Jeroen van der Veer, flanked by Qatar’s energy minister and Prince Charles of Britain, said yesterday that Shell had an advantage over other competitors because of the GTL plant in Malaysia it has operated since 1993. “For us, GTL is proven technology,” he told reporters in Qatar, according to Reuters. He said the project remained inside its development-cost estimates of $4 to $6 per oil-equivalent barrel of production over a period of time.

Based on that, total project costs have been pegged as high as $18 billion based on estimated lifetime output of about three billion barrels of oil equivalent. A Shell spokesman said that is comparable to other big exploration and production projects it undertakes.

At the same time as announcing the end of its GTL project, Exxon said it had been selected by Qatar Petroleum to participate in a project to tap offshore natural gas for the industrial and power sector. The project, in which Exxon will own a 10% stake, will deliver 1.5 billion cubic feet of gas a day by 2012.

—- Chip Cummins contributed to this article.

Write to Russell Gold at [email protected]

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