Thursday, January 19, 2006

Gas-to-Liquids Impact

Yesterday's New York Times featured a story on the growing global industry to convert natural gas into synthetic diesel fuel, but it stopped well short of considering the implications of this expansion. Neither did it convey a clear idea of what is driving this development, beyond the economics of high oil prices. The actual story is more complicated. Although gas-to-liquids (GTL) has many positives, there is at least one significant drawback worth considering.

The historical perspective in the article was generally correct. The science behind this process has been around for many decades, helping to fuel Hitler's armies in World War II. Interest was revived in the 1970s, with plants built not just in Apartheid-era South Africa but also in New Zealand. Until very recently, however, GTL products have been much more expensive than conventional refined products from crude oil. The first large new GTL plant, a Shell facility in Malaysia, was helped by sales of valuable waxes and other byproducts, but the global markets for these products are too small to drive broader GTL expansion.

The prize here is twofold: harvesting the locked-up value of natural gas fields that are too far from markets to justify building pipelines, and producing diesel fuel that burns more cleanly than conventional diesel, especially with regard to particulate pollution. The Times cites a study by Cambridge Energy Research Associates (CERA) suggesting that GTL will contribute almost a million barrels per day of synthetic liquid fuels by 2010 and up to 2 million by 2020. As the cost per barrel of building GTL capacity falls, these numbers will continue to ramp up, tapping trillions of cubic feet of "stranded" gas. And there's the rub. At some level, GTL competes with the other technique for bringing stranded gas to market, LNG, or liquefied natural gas.

Today there's plenty of gas to fuel both processes, and the criteria for choosing one or the other are different enough that both can coexist. However, GTL has important advantages over LNG. Its output ships in conventional product tankers, rather than the expensive floating thermos bottles required by LNG, and it doesn't need costly and NIMBY-prone receiving infrastructure. If the capital costs of GTL fall faster than those for LNG, the former could eventually squeeze out the latter.

That would complicate plans to cover a growing fraction of US natural gas demand with imported gas, largely in the form of LNG. If the source gas isn’t available, because it’s been turned into diesel, then power plants will have to burn other fuels. While that could spur demand for additional renewable electricity from wind and solar, these are intermittent sources, so at some point there’s no substitute for a fossil-fuel fired plant, unless it’s a nuclear reactor. To put this in perspective, the 150,000 barrel per day Exxon project cited in the article will consume 1.8 billion cubic feet per day of gas, about the same quantity used last year by all the gas-fired power plants in the Northeast (New England plus NY, NJ and PA.)

As a consequence of these downstream tradeoffs, the net long-term environmental benefits of GTL are ambiguous. GTL fuel certainly burns cleaner than regular diesel, and that’s important because of the growing demand for diesel fuel, particularly in Europe. But the energy consumed in making GTL diesel dissipates much of the greenhouse gas benefit available from using natural gas directly, and the choice of GTL over LNG could result in more emissions from coal use.

Even if none of this product ever turns up at a service station in the US, it will still have a positive impact on fuel prices. The quantities of GTL under development may be small, relative to global oil consumption of 84 million barrels per day, but they represent an important component of incremental supply, where a million barrels per day one way or the other could be the difference between $35 oil and $50 oil. And by helping cover Europe’s growing diesel deficit, it will ensure that the US can continue to rely on a source of gasoline imports that we’d be hard-pressed to do without.

On balance, then, GTL is an important new source of clean liquid fuels, contributing to the global oil supply, but it complicates the prospect for wider use of natural gas in countries reliant on imports of LNG, including the US. As a result, its total environmental impact is mixed.

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