Shell Puts Pearl Under Microscope


Royal Dutch Shells proposed gas-to-liquids joint venture in Qatar will be subjected to extra scrutiny in coming months, due to escalating estimates about what it could cost.

Recent news reports quoted Shell Chief Executive Jeroen van der Veer stating that the company will look closely at the rising price tag for the project, which has been planned in conjunction with Qatar Petroleum and which includes a base oil plant originally scheduled to open three years from now. Van der Veer added that the company aims to make a final decision this year on whether to proceed with the project.

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Industry observers said those developments and statements raise the possibility of the project being delayed, at least.

I can’t say whether the cost issue – or others – are likely toalter Shells plans regarding a final investment decision, said Gabriel Wayne, an analyst with consultant PFC Energys Gas Group. However, the scale and complexity of the plant and other constraints specific to Qatars gas industry certainly have the potential to cause a delay in Shells decision to go ahead.

Plans for the Shell project, which is dubbed Pearl, call for a plant with capacity to convert natural gas into 140,000 barrels per day of fuels and other oil products. It was designed to be built in two stages, the first scheduled to begin operating in 2008 or 2009. That stage was to include a 9,600-b/d base oil plant.

The overall cost has been estimated at $6 billion, but industry observers say it surely has risen due to escalating expenses for such projects. Costs for steel and other construction materials, as well as energy, have jumped due to strong global demand.

Shell officials have declined to say how much the price tag has increased, but news reports suggest the runup has given them pause. In an April 22 article, Reuters quoted van der Veer telling reporters in Doha, Qatar, There will be a very thorough and in-depth look at what the whole cost escalation means for this project. We have to think about what it means.

Shell and Qatar Petroleum signed an integrated development and production sharing agreement in July 2004, outlining the fiscal and legal terms for the project. The companies have yet to sign contracts for engineering, procurement and construction, which would represent a final investment decision. Those activities are normally covered under single contracts, but the joint venture split them up earlier this year in an effort to attract scarce contractors.

Reuters quoted van der Veer saying, We are at the pre-financial investment decision stage – we hope that we can take a decision this year. The article added that he did not identify a price at which the project would become prohibitive.

A Shell spokesman said yesterday that he was not aware of van der Veers statements, and he declined to comment on the likelihood of the project proceeding. We are still in the pre-investment decision phase, Axel Zander said. Pearl is the first GTL project of this size and scale to be considered by Shell, and progress continues to be good.

Other potential challenges to the project have arisen beside costs. There are questions about adequacy of human resources and infrastructure in Qatar to support such a project. Qatari officials have expressed concerns about its North Field, the natural gas source for Pearl, being over-exploited by a large number of potential plants. A moratorium on agreements for new projects does not apply to Pearl, but PFCs Wayne suggested the same concerns could apply the brakes to Shells project.

I would imagine thatpressure from the Qataris could also play a rolein taking a slightly more conservative look at the project in the current environment, he said.

At the same time, Wayne added that Shell has a lot of incentive to complete Pearl.

For Shell, the Pearl GTL project is oneof considerable strategic importance dueto implications for the firms downstream business in Europe and generally because of the importance of gas in Shells current and future portfolio, he said.

Pearl is one of three GTL joint ventures that Qatar Petroleum has entered that plan for base oil plants. South Africas Sasol is preparing to open a 34,000-b/d GTL plant and plans, in a joint venture with Chevron, to build an 8,000-b/d base oil plant there within two years. ExxonMobil plans to build by 2011 a 154,000-b/d facility that would include a 30,800-b/d base oil plant.

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