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Shell Takes Aim at Biggest Prize in Energy

April 26, 2012, 1:15 PM GM

By James Herron

Shell is moving ahead with plans to build plants in the U.S. that could convert dirt cheap natural gas into high-valued diesel fuel, hoping to profit from an almost tenfold mark-up in prices that many analysts say is the biggest prize in the world of energy today.

With U.S. natural gas trading at the equivalent of $12 per barrel of oil, and crude oil at over $100 a barrel, the opportunity for profit is huge, but not without its risks. Building a gas-to-liquids facility would cost billions of dollars and take most of this decade to complete. The U.S. is already littered with money-losing long-term investments that fell victim to unexpected shifts in natural gas supply and demand.

Shell is the world’s leading operator of gas-to-liquids (GTL) facilities, which chemically convert natural gas into premium diesel, lubricants and chemical feedstocks. It operates the world’s largest GTL plant in Qatar and a smaller one in Malaysia.

The profitability of these GTL plants was a major contributor to Shell’s consensus-beating first quarter profits of $7.28 billion.

Similar plants in the U.S. could be potentially very profitable, said Shell’s Chief Financial Officer, Simon Henry. The company is looking at sites in Louisiana and Texas as the possible location for a plant producing at least 70,000 barrels a day of liquids from natural gas.

But the process is slow and complex. A final investment decision is unlikely to be taken within the next year and construction would probably take the rest of this decade, he said. The GTL plant in Qatar, which has a capacity of 140,000 barrels a day, cost around $18 billion and took five years to build.

Herein lies the risk. The boom in U.S. shale gas production itself is only five years old and many industry analysts question whether the resulting 10-year low in natural gas prices is sustainable in the long term. A large enough rebound in gas prices could render GTL uneconomic.

Mr. Henry admits that gas market dynamics are already shifting–even Shell is slowing its drilling for gas in the U.S. because prices are so low and supply so abundant. “There is a significant switch going on in the industry,” away from drilling for shale gas and towards drilling for shale oil, he said. This means, “gas supply will come down a bit,” which could give more support to prices, he said.

There are also signs that domestic U.S. gas demand could increase, reducing the surplus supply and raising prices. There are numerous schemes in the works to cool gas into liquid form so it can be exported, or used to drive trucks and buses. Shell has two such schemes of its own underway in Canada, Mr. Henry said.

The volatility of U.S. gas prices has caught out investors in the past. Several multi-billion dollar liquefied natural gas import terminals lie unused on the U.S. coastline, built to meet import needs that were completely eliminated by the surprise surge in shale gas production.

Whether a costly GTL plant is left similarly idle will be down to Shell’s ability to accurately forecast where the market will be in the 2020s and beyond. It is a risk, but with its decades of experience, there is perhaps no one better placed than Shell to take it on.


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