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Bloomberg: Shell’s Cost for Qatar Plant May Soar to $18 Billion (Update3)

July 27 (Bloomberg) — Royal Dutch Shell Plc, Europe’s second-biggest oil company, said it will make fuels from Qatari natural gas in a project that may cost as much as $18 billion, triple earlier estimates.

The project, known as Pearl GTL, will cost $4 to $6 per barrel of oil equivalent to produce, The Hague-based Shell said today in a statement. The venture is expected to produce the equivalent of 3 billion barrels of oil during its lifetime, the company said in a separate statement.

Oil and gas project costs are climbing amid shortages of equipment, labor and raw materials such as steel. A year ago, Shell said costs for its Sakhalin II venture in Russia’s Far East doubled to $20 billion. Shell today cut its 2006 output target.

“Shell is falling behind competitors in gaining access to traditional oil and gas opportunities,” said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh, who has a “hold” recommendation for Shell. “Their focus on expensive, unconventional projects like Pearl GTL is still to be proven.”

Shell spokesman Andy Corrigan declined to provide a figure for the project’s overall cost. Abdullah bin Hamad al-Attiyah, the Qatari energy minister, earlier this year estimated the cost of the gas-to-liquids project at $6 billion.

The Qatari GTL project involves developing offshore resources in Qatar’s North Field and turning them into fuels similar to diesel, Shell said. The facility will be built in Ras Laffan Industrial City.

Existing Plant

Shell’s oil and gas reserves at current production levels will run out in about nine years, the lowest level among its peers. Last year, Shell replaced 67 percent of its output, compared with 95 percent for BP Plc, using U.S. accounting rules. The reserves controversy led to the ouster of Shell’s chairman, investor lawsuits and fines from U.S. and U.K. regulators.

Shell today also said second-quarter net income climbed 40 percent to $7.32 billion as record crude prices overcame production losses in Nigeria. The company lowered its full-year output target, saying “no firm date can be given” for starting shuttered Nigerian output.

The gas-to-liquids process is based on technology invented in Germany before World War II, when liquid petroleum fuel was scarce. GTL was refined in South Africa during the trade embargo in the apartheid era. South Africa’s Sasol Ltd. was the first to begin GTL production in Qatar, when its 34,000 barrel-a-day Oryx plant opened in Ras Laffan in June.

At $4 a barrel, the Qatar venture would cost $12 billion.

Cost Concern

Shell already sells GTL fuels from an existing plant in Bintulu, Malaysia. The market for larger quantities is untested, and the fuel is more expensive than normal diesel. Shell is betting on rising demand for cleaner-burning car fuels, into which GTL can be blended to lower sulfur content.

State-owned Qatar Petroleum and Shell signed a production sharing and development contract in 2004 to build the plant. It will make 70,000 barrels a day of liquid fuels “by the end of this decade,” which will double to 140,000 barrels a day about one year later, said Jonathan Charles, a Shell spokesman. The project will also produce about 120,000 barrels a day of condensate, liquefied petroleum gas and ethane.

For the plant, Qatar Petroleum has marked out a 230-hectare site, which is close to other energy projects at Ras Laffan, a purpose-built industrial city 30 miles (48 kilometers) south of Doha. Ras Laffan already hosts energy projects including liquefied natural gas production units and shipping terminals, stretching demands on labor and materials.

The energy minister for Qatar, whose state oil company plans to be a partner in the Pearl project, in February said rising construction costs may postpone construction of oil and gas ventures in the Persian Gulf, a view he reiterated in April.

“I am still concerned by the rising cost of projects,” al- Attiyah told reporters in Doha on April 22.

To contact the reporters on this story:
Andy Critchlow in Dubai at  at [email protected];
Stephen Voss in London at  [email protected]

 

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