The What and Where of GTL

GTLs are a great way to exploit stranded natural gas, located in fields far from markets and with no gas pipeline network. The GTL process converts natural gas into a synthetic crude which then can be further processed into a wide range of liquid fuels and waxes. It can produce a wide range of near-zero-sulfur fuels (

Until recently, manufacture of GTL products was confined to one PetroSA plant in Mossel Bay, South Africa, and a Shell pilot plant in Bintulu, Malaysia. During the 2000s, BP, ConocoPhillips and ExxonMobil all planned and then abandoned major GTL ventures. However, Shell started up production at its world-scale Pearl plant in Qatar in 2011, and soon ramped up to make 140,000 barrels a day of fuels and base oils there. Sasols Oryx plant had begun production of GTL fuels in Qatar even earlier, in 2007. Now the $10 billion Escravos plant in Nigeria (a joint venture of Chevron, Sasol and Nigerian National Petroleum) is in the commissioning phase.

Using Sasols proprietary Slurry Phase Distillate process and having 33,000 b/d of capacity, Escravos expects to be producing by mid-year. So by the end of 2014 global GTL output (of all products) should total 13 million metric tons per annum. GTL plants with integrated base oil units can deliver a premium product slate, with synthetic base oil, paraffin cuts and waxes amounting to up to 30 percent of the output by volume.

The base oil that is produced is of a very high quality, with properties equal to or better than Group III+ derived from crude oil. And though relatively insignificant in its impact on regional fuel demand, Pearls 1.4 million tons of GTL base oil capacity represents over 20 percent of current global Group III supply.

As historically low natural gas prices spur renewed interest in GTLs, another wave of plant construction is beginning to form. Current focus is on much smaller GTL plants, which are quicker to build, require much less capital and can be deployed on much smaller gas fields. There are three such projects under way in the United States at present. However in December, Royal Dutch Shell judged that the record-low natural gas prices in the United States were insufficiently low or sustainable to support a massive plant proposed for Sorrento, La., even though it was announced as recently as March 2013. Nevertheless, South African energy firm Sasol is still planning to build a GTL plant nearby in Louisiana which likely will include base oils.

Driving the Decision

The thermal efficiencies of the GTL process are relatively low, so natural gas feedstock prices must be low for GTLs to compete with products from crude oil. But GTLs also must compete with alternative uses for liquefied natural gas (LNG).

There were steep declines in natural gas prices from January 2011 to April 2012, with a slight rise in plant construction costs.

Shell said their own escalating project costs caused their change of heart in Louisiana. Originally estimated at $12.5 billion, by the time the company withdrew the price was said to be $20 billion.

But there are still significant margins to be had for GTL fuels and an even wider margin for base oil, versus current prices for natural gas feedstock. Even after adding in capital and operating expenses, analysts at E-Meta Ventures estimated that GTL Group III margins easily would have topped $1,000 per ton for much of 2011 and 2012.

For Shell to walk away from such significant margins suggests that there were much wider considerations in play than fuels and base oil margin capture. Capital costs for an LNG plant can be approximately 40 percent lower than for a GTL plant, as David Whitby of Pathmaster Marketing explained at the European Base Oil & Lubricants Summit in Budapest last September. When shipping and other costs are taken into account, and as opportunities increase for LNG to be used as a transport fuel, GTLs can face stiff competition for limited downstream investment funds. As well, LNG schemes are generally more cost-effective even against very large GTL plants (2.5 million t/y and greater) where GTL economics are most attractive. The critical criterion tends to be whether the potential market can utilize LNG for heating, electricity generation or petrochemicals in sufficient volumes.

However stranded gas remains an issue and there is increasing interest in building small GTL plants where they can give access to the thousands of small gas fields containing less than 0.5 trillion cubic feet. Although such GTL schemes may be more expensive on a per-gallon basis than larger plants, they may win hands-down against LNG alternatives.

For Sasol, waxes are more valuable products than base oils. Their planned GTL plants are likely to produce mostly high quality diesel, waxes and chemicals, although the company says the Louisiana venture someday could make up to 9,000 daily barrels of base oils after 2020.

Rising Competition

By contrast Shell has a number of strategic options and advantages to exploit. They are actively exploiting the quality dimension by branding certain GTL products (e.g. Risella X Top Tier process oils; Ondina X medical white oils; Diala S4 ZX-I transformer oils; and most recently, Pennzoil Ultra synthetic motor oil made with PurePlus GTL base oils). Shell could also choose to turn their considerable base stock cost advantage into sales.

Or, perhaps this oil giant will develop a strategy based on both, and deliver a differentiated top-quality offer at a competitive price into the market. In any scenario, against the increasingly commoditized and specification-led industry, an advantage exists and also allows Shell to have a strong proposition to original equipment manufacturers. With such strong marketing messages it is widely expected that they will continue to keep their GTL base stocks in-house.

On one level, the current 13 million tons of annual GTL capacity and the further 7 million tons of planned capacity are a tiny contribution to the global product pool, with little immediate prospect of more plants coming forward. We believe, however, that GTL-derived base oils represent one factor, amongst several, which could create a tipping point towards markedly more competition across the lubricants value chain.

Even if Shell continues to reserve GTL base oil for themselves, their 1.4 million tons amount to over 20 percent of a global Group III capacity which is already oversupplied and set to grow significantly over the next few years. Even if further GTL plants add little to Group III+ supply, as currently forecasted, a proliferation of small GTL plants could provide incremental Group III supplies.

So, is there an elephant in the room?

Base oil refiners may reflect that their ability to build and operate plants has always depended on decisions dominated by fuels considerations. Now, with GTLs, that dependence seems compounded by judgments on long-term natural gas prices.

New GTL plants, alongside new Group II and Group III refineries, would further depress base oil prices, and if they are capable of flexing their base oil output they will add a further uncertainty into the base oil price outlook.

Lubricant marketers have seen supplies of higher quality base oils rise in recent years; price spreads between Group I and Group III have narrowed. It is becoming easier for smaller marketers to access the raw materials needed to blend premium products, which can be critical to succeed in specification-driven markets such as Europe.

With the right procurement and marketing strategies, dynamic players below the top tier stand to make inroads into the majors business.

So if there is an elephant in the room, whether large or small, we believe he is telling us success in lubricants is even less about assets and size and even more about great sales and marketing.

London-based Stuart Speding is director of Downstream Consulting at RPS Energy, which advises clients on all stages of the lubricants value chain including refining, branding, M&A, sales channels and market entry strategies. A specialist in automotive lubricants, he has over 20 years of experience with Mobil, BP and Castrol. John Unsworth, Ph.D., is senior consultant at RPS, after a successful 25-year career with Shell where he worked on high-value, technical innovations and launches such as Shell FuelSave and Shell V-Power Nitro Plus. Senior consultant John Sargeant has direct experience with the lubricants industry in the Americas, Asia and Europe, and was with BP and Castrol for nearly 30 years. For information, e-mail stuart.speding@rpsgroup.com or phone 011-44-7775-99-6658. Web: www.rpsgroup.com/downstream