Good Article on the Oil Companies and Cleantech

Red Herring magazine did an article on the Cleantech sector titled, “Big Oil’s Clean Hedge” that I was quoted in recently.
The article heavily quotes ChevronTexaco as it is one of the few oil companies that has a policy allowing managers to talk to the press.
Most of the article talks about what the oil companies are doing in clean technology, where they are investing money, and how they view the sector. The oil company managers that did give quotes are heavy on the PR as you would expect, but all in all Red Herring wrote a fairly balanced view with some interesting twists.
My contribution boiled down to pointing out that like them or not, the oil companies spend a lot of money in this sector compared to anyone else, so we really need to watch what they are up to, not treat them like pariahs.

Gas-to-Liquid: Its Time Has Come

Gas-to-Liquid (GTL) technology has been around for nearly a century. Known as the Fischer-Tropsch process (FT), it converts gas into a liquid fuel in the form of a refined crude or even a final product such as (clean) diesel. Until recently, conventional wisdom has been correct: use of GTL has been limited by high capital and operating costs. [ In the FT process, synthesis gas (or syngas, H+CO) is reacted in the presence of an iron or cobalt catalyst. End products are determined by the length of the hydrocarbon chain which, in turn, is determined by catalyst selectivity and reaction conditions. Possible end products include kerosene, naphtha, methanol, dimethyl ether, alcohols, waxes, synthetic diesel and gasoline, with water or carbon dioxide produced as a byproduct. Natural gas or coal can be the raw feedstock. ]

Several drivers, however, have combined to change that situation entirely: – Dwindling world oil reserves and high exploration costs – Impending limits worldwide on sulfur content in diesel fuel – Vast quantities of “stranded gas” identified – Technology advances, thanks to substantial programs by the oil majorsVery recently, these same oil companies have announced multibillion dollar GTL projects. Last October, Shell announced a $5 billion plant in Qatar, and estimated production costs at less than $4 per barrel. As the NY Times reported (Oct 16), Exxon Mobil is also building a plant in Qatar, at a cost of $10 billion, and the South African company Sasol is constructing a 34,000-barrel-a-day GTL plant in Qatar that is expected to come online in 2005. Together with ChevronTexaco, Sasol is negotiating with the government to build another 120,000-barrel-a-day GTL plant.

Conocophillips announced its own $5B plant to be built in Qatar. (Seems Qatar is the place to be!) BP’s commercial pilot plant in Alaska is operational.The petroleum industry has found more than 5,000 trillion cubic feet (tcf) of natural gas in remote locations, an energy equivalent of 500 billion barrels of crude oil. Most of this resource is abandoned in place because of the prohibitive cost of transportation infrastructure.

A new company, World GTL, Inc. was founded in 2000 by industry veterans. Their plan is to acquire ownership rights (in some cases production rights) to certain stranded gas fields at deeply discounted prices, and capitalize on opportunities that now exist to convert these “stranded” natural gas fields into synthetic petroleum products.Why don’t the majors do this themselves? They do hold on to larger fields and may eventually develop them as LNG sources (or increasingly, with GTL), but they have no interest in smaller fields, e.g. under 3 tcf. This leaves a huge opportunity for players like World GTL. In fact, majors have already said they’d license their GTL technology and help with plant financing. (There is an analogy to the independent oil company movement over the last 20 years in the US. The majors decided that shallow water drilling in the Gulf was not going to work with their overhead costs and targeted IRRs, so they left the area to small independents who have done very well indeed.)Turning Stranded Gas into Proven Oil ReservesWorld GTL has come up with an interesting strategy. Once the development is done on a project (i.e. secure gas rights, do site plan, license technology, do preliminary engineering, arrange financing, sales agreements, etc.) previously stranded gas reserves with little to no value will essentially have been converted to “in the ground” gasoline and diesel inventories which can be easily monetized in the international oil market. World oil companies are struggling to rebuild and expand their proven reserves which have dropped to dangerously low levels. Reserves can be borrowed against, and this critically important for these companies, not only to be able to invest in the development of those resources, but as a contribution to their balance sheet. The majors are spending an average of more than $5 per BOE (barrel of oil equivalent) just to find bookable reserves today (and that’s not even counting the “fully developed” cost to produce). Every dry hole drilled adds to the problem.World GTL estimates that ten cents will cover development costs needed to get a BOE to “bookability”, and there is a long list of buyers who will jump at the chance to buy these BOE’s for $1. (Actually better than BOE, because it’s zero sulfur fuel.)Thus venture returns are possible even before the plant is built. Once it is built, the fully developed cost of production is less than $5 per barrel of finished product, and refinery demand for sulfur free blending stock is already booming. New EPA regulations drastically limit sulfur content of diesel fuel beginning in 2006. Other regions are doing likewise, and refiners have very limited means to comply, especially in light of the lessening supply of lighter crude oil.The company is currently raising $40 M to take their program to the next level and build two small commercial GTL plants. A great deal of information is available, including a collection of recent articles in the business press.

First published in a UFTO Note by Dr. Ed Beardsworth.