Gas-to-Liquids:A Great Technology but is its Great Future Behind It?
More large-scale investment in gas-to-liquids capacity seems highly unlikely. But look closely and you will find GTLs impact on lubricants markets is powerful and may be game changing. John Unsworth, Spyros MichalakakisandJohn Sargeantfrom lubricant industry consultancy Senka present the current state of play.
At the start of this decade, a few energy companies were making huge investments in GTL technology, and for good reason. It promised to exploit otherwise stranded natural gas fields far from markets with no pipeline network.
There were high hopes of a GTL industry with production of perhaps 1 million barrels per day. The investment case was boosted not only by its green credentials but also by an expectation that crude prices would stay high relative to gas.
It has become clear, however, that while some determined companies have pressed ahead and reaped the benefits, most have been deterred by investment risks, an adverse price environment and some operational problems.
The rise and demise of GTL has been driven by the potential volumes and values of fuels, especially diesel. The prospect of producing high-quality base oils was always a secondary consideration.
GTL converts natural gas into a range of high-quality liquid fuels – typically near-zero sulfur diesel or kerosene – and waxy products, which can be turned into API Group III base oils and other specialties.
GTL capacity is dominated by Shell, which has a combined 155,000 barrels per day of production capacity at a joint venture refinery in Qatar and a wholly owned facility in Malaysia, and by Sasol, which has 112,000 b/d of capacity in joint ventures and partial licensing agreements in Qatar, Nigeria and South Africa. Total annual capacity amounts to 267,000 b/d. Projects under construction could add a further 38,500 b/d, whereas abandoned projects would have increased capacity to around 600,000 b/d – a far cry from 1 million b/d.
Sasol, with its long interest in synthetic fuels, was the GTL pioneer, first at Mossel Bay (now run by PetroSA) and then in joint ventures with Qatar Petroleum and Chevron/Nigeria National Petroleum Corp. These plants produce naphtha, kerosene and diesel but do not extend to other higher-value products. The company recently said it saw no more GTL projects in the foreseeable future.
By contrast, Shells early experience with its Bintulu pilot plant in Malaysia, demonstrated the importance of lower-volume, higher-value non-fuel products. Plant viability over the protracted period of technology development from 1996 to 2011 was dependent on local sales of high-purity, odorless waxes with zero aromatics content, branded Sarawax.
Bintulu was also sustained by the retail value of Shell V-Power diesel around 2010 when the formulation in several European markets contained a proportion of GTL, which enabled a latest technology marketing claim.
At Pearl in Qatar, Shell found it initially almost impossible to market non-aromatic, near-zero sulfur diesel as a stand-alone fuel because its density did not satisfy international automotive diesel specifications. Consequently, not only did GTL diesel (50 percent of its total GTL product slate) not achieve its expected enhanced value, it needed to be discounted against standard diesel.
Other problems have beset GTL projects, most notably their voracious appetite for capital. Pearls cost soared to almost U.S. $20 billion. ExxonMobils similar-sized plant in Ras Laffan, however, was abandoned. Ironically, this was the only other GTL process designed to exploit the value of GTL base oil.
Cost escalation led Shell to cancel its 140,000 b/d Sorrento plant in 2013. It in turn stimulated interest
in much smaller GTL plants, which are quicker to build, require much less capital and can be deployed
on much smaller gas fields. Despite several design studies, interest has faded since 2014, with only one project now ongoing – Juniper in California. Velocys Oklahoma City plant started production in mid-2017 but shut down a year later following a process leak and a change in business strategy.
Lube Supports GTL
As GTL plants failed to realize their initial, fuel-centered ambitions, non-fuel outputs have provided a valuable revenue stream. Locally sold wax at Bintulu proved a blessing and there have been other valuable products such as niche but significant drilling fluid components. Their market value per ton proved to be almost 100 times higher than that of conventional ultra-low sulfur diesel, and their near-zero aromatics content gave high biodegradability and low toxicity, unlike their conventional oil-based competitors.
But for Shell, GTL base oil from Pearl has delivered some of the best long-term value. Its high quality matches or exceeds mineral-derived Group III. No other GTL manufacturer produces base oils, and, as the global lubes market leader, Shell has sufficient internal demand to take all its GTL-derived base oil stocks.
Shells more than 1 million metric tons per year of GTL base oil production represents a significant share of global Group III capacity. On the other hand, the combined GTL middle distillate (diesel and kerosene) production of around 122,000 b/d from all plants is a drop in the ocean compared with 35 million b/d global consumption of refinery middle distillates. It is little surprise that GTL diesel has never been able to leverage its quality benefits in the same way.
Finally, and critically, the GTL investment case relied on a sustained, significant differential between crude and natural gas prices. The high oil price from 2012 to 2015 relative to gas made GTL diesel highly profitable. But since then, price differentials have moved decisively against further large-scale investment. The near-to-medium-term economic outlook argues against the risk of financing any large scheme.
It is always possible that small, tactical GTL plants could be built especially where governments see a value in exploiting resources such as landfill gas and where feedstocks may be subsidized.
Impact on Lubricants Markets
Shell is in a unique position as the only source of GTL base stocks, although, as we speculated in 2014, Shell had a range of strategic options to deploy them. It has branded the technology Pure Plus synthetic, with a nod to its origins in natural gas but emphasizing engine cleanliness and protection. There is nothing new in these claims, as many of its competitors are making similar, justifiable claims based on their own proprietary technologies with various Group III+ and additive systems.
Much more significant, however, has been Shells ability to exploit the cost advantage of GTL versus polyalphaolefins, a premium base stock for top-performance engine oils. Although different substances, lubes made with Pearl GTL base stocks are able to meet the same critical standards as those made using PAO especially for some key grades.
Our investigation concludes that the cost advantage in European markets could amount to more than $0.50 per liter against lubes using PAO – more than enough to win price-sensitive business for some viscosity grades like SAE 5W-30. Shell has used that advantage to increase its penetration in some key markets, like original equipment manufacturer first-fill oils. It has also moved into aftermarket relationships, supplying genuine oils (OEM branded products) where its technology is evident to customers.
This kind of supply arrangement is unusual for Shell in Europe. In time, building on this relationship through the vehicle warranty life within OEM franchised workshops, Shell aims to expand its own brand and reputation in the much larger independent workshop aftermarket, once the warranty period is over.
The most notable example of this strategy was seen when Shell recently won the BMW business from Castrol, breaking a 15-year supply relationship. Our observations show that this battle is being fought out in almost every large OEM deal with other majors, such as ExxonMobil also fighting hard for this OEM and workshop business.
Further afield, Shell has just secured a strategic partnership with Mahindra & Mahindra, which must surely undermine the Indian carmakers hitherto strong relationship with Castrol. GTLs are a central feature of the new deal.
The significance of this battle cannot be overemphasized since, in a European automotive lubricants market that is essentially flat but profitable, sales to OEM workshops and independent workshops can attract above-average margins. Shell is most likely to regard the cost reduction that GTLs provide as a useful investment in growing volume and influence with new business customers and pass much of it along to them.
Shell, with its in-house supply position, may have an advantage for some years, at least for certain viscosities where GTLs offer both performance and cost advantages, at least until other factors such as ultra-thin oils predominate, which could erode GTLs cost advantage. And we have seen Fischer-Tropsch derived base oils referred to in some of ExxonMobils Mobil 1 formulation material safety data sheets. Is the future already arriving?
With the powerful impact GTL is likely to have on lubricant markets for some years, it is way too soon to be writing its epitaph. Rather, we might reflect that it is not the first exciting technology to be undermined by financial forces and practical