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Gulf Times (Qatar): Shell’s Pearl GTL project may breach $18bn

Published: Tuesday, 11 December, 2007, 02:44 AM Doha Time
LONDON: The world’s largest project to turn natural gas into transport fuels, Royal Dutch Shell’s Pearl GTL plant in Qatar, risks breaching its $18bn budget this year and won’t begin production until the middle of 2010, people close to the situation told Dow Jones Newswires late last week.

The Pearl gas-to-liquids project, entirely funded by Shell, has already seen its costs balloon from an original $5bn estimate to a $12bn-$18bn range.

The top end of that estimate, confirmed by Shell’s Qatar Country Manager Andrew Brown according to a Reuters report, contains $3bn in contingency costs to account for future delays and other problems, yet that could be chewed up entirely this year, a person with knowledge of the challenges in Qatar told Dow Jones Newswires last week. If so, that implies costs are set to rise further still, with delays caused by unexpectedly difficult groundwork when preparing the foundations for the onshore facilities, and problems securing the hundreds of valves required for the complex project in time, along with compressors.

Implied overrun costs are estimated to be some $20mn a day, the person familiar with the project said last week, which may rise further.

Shell carries all the financial risk, with the State of Qatar set to share revenue from its output.

The project is seen as critical within Shell. It will generate 10% of its production when it is fully operational, a person familiar with the project said.

The bad news for Shell extends to Qatar, which may see revenue later than it expected. The technology makes it a flagship project in Qatar, with Qatar Airways committing itself to become the first airline to use kerosene made from gas, so polishing its environmental credentials.

The country is also betting the Pearl project will bring long-term employment and technical skills to its people.

The core technology at Pearl isn’t new. The process to convert natural gas into liquid fuels was invented in the 1920s. But commercial-scale application of the process only began in the 1990s as world energy demand rose and the technology became cost effective as a way of developing natural gas resources stranded a long way from major markets.

Test drillings of the huge site at Ras Laffan City to gauge its suitability for construction failed to show up hard rock, complicating the original plan for footings. Other areas of the coastal desert site turned to the consistency of quicksand after it rained, worsening its suitability for building on. Combined, this forced a costly rethink of the foundation plans for Pearl, Shell biggest equity project.

Elsewhere, some specialist equipment from qualified suppliers to Shell can’t be produced in time, forcing it or its contractors to turn to Chinese suppliers. That has led to some quality problems that are contributing to delays.

Technical challenges are made worse by the limited experience of contractors in gas-to-liquids projects.

There is no doubt that Pearl is complicated. Shell says it will take up the area the size of more than 450 soccer pitches and requires 3,000 pumps, compressors, vessels and other equipment.

A far smaller project in Qatar, Sasol’s $1bn Oryx plant, has experienced operational problems since its start-up programme began earlier this year.

Oryx will have the capacity to turn gas into 34,000 bpd of diesel, naphtha and other liquid fuels but unwanted particles have been generated during the commissioning process, delaying its full start-up into next year. If the technology is proven at both projects “and costs contained at budgeted levels, considerable enthusiasm could follow,” Deutsche Bank said in a report dated on November 30. “In its absence, however, GTL is likely to play only a niche role in energy markets for some time to come.”

At Pearl, Qatar penciled in an expected start date in 2009, which implies the project is at least six months behind schedule. Shell, however, has said that when it approved Pearl it would start “around the end of the decade.”

Shell spokeswoman Saskia Kapinga said in an e-mail response to questions: “While it is being built in a challenging construction environment, progress so far is in line with our expectations at the time of the investment decision, with start up of the first train on-track for around the end of the decade.”

A train is an independent production unit and there are two earmarked for Pearl. “There may be capacity for a third train but it’s too soon to tell,” a person familiar with the matter said.

Kapinga reiterated that over its 25 years of operation Pearl will produce 3bn barrels of oil equivalent at a cost in the low- to mid-end of Shell’s range of $4-$8 a barrel of oil equivalent.

There are rising concerns at Shell about the problems, with an insider telling Dow Jones Newswires that a slowdown on expanding further into gas-to-liquids projects may have been discussed.

Jack Jacometti, Shell’s vice-president for global GTL development, has been told to rein in any plans to build such plants elsewhere, the insider said. Shell hasn’t announced any new projects since Pearl was approved and is focusing on the development of the fuel’s use in vehicles.

Jacometti couldn’t be reached for comment but a person close to the situation at Shell said a final investment decision “for another GTL project before the Pearl start up is unlikely.”

“We look for further opportunities for GTL growth,” Shell spokeswoman Eurwen Thomas said, adding that the company led the industry on the technology “and we look to capitalize on that.”

Pearl is forecast to produce up to 140,000 bpd of GTL fuels, such as a colorless diesel with fewer particulates to choke the atmosphere, and 120,000 bpd of liquefied petroleum gas and other byproducts.

In its recent report, Deutsche Bank estimated Pearl’s costs at $16bn, adding Shell would be able to recover a large part of any overruns due to the terms of its production sharing agreement with Qatar. A $4bn increase in costs to the bank’s $16bn assumption would cut only $900mn off of the project’s book value, it said. Alex Forbes of consultancy Gas Strategies in the UK has said he expects Pearl will eventually cost in excess of $20bn. –

Dow Jones Newswires 
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