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Gold, Silver, Oil, and Others
Gas to Liquids: The Fuel of the Next Gilded Age for the US?
Posted by: Martus Kloppers (IP Logged)
Date: November 14, 2012 10:34AM
The U.S. will overtake Saudi Arabia and Russia as the world’s top oil producer by 2017, reported the International Energy Agency (IEA) on Monday. According to the IEA report, the U.S. could become a net exporter of oil by 2030 and could become almost energy self-sufficient by 2035. This sudden upsurge in the outlook for US oil production is largely driven by developments in upstream processes which enable producers to unlock reserves of oil and especially natural gas which was previously thought uneconomical or impossible to extract.
This new found supply of cheap natural gas could spell great things for companies operating in the Gas to Liquid (GTL) arena. GTL plants convert natural gas into fuels such as gasoline or diesel using either the Fischer-Tropsch or Mobil processes. By combining the hydrocarbon molecules in the methane-rich natural gas streams the processes form longer chain hydrocarbons that constitute the resultant synthesis fuels.
When Royal Dutch Shell (RDS.A) first built its $18 billion GTL plant in Qatar, many believed it would be a one- of-a-kind investment, mainly due to the enormous capital requirements and relatively poor return on investment which could be achieved elsewhere, given the exploration costs and supply limitations of other natural gas reserves compared to more conventional crude refineries. However, given recent developments, cheap, clean fuel from natural gas could become a very real possibility, particularly since the gap in cost between crude oil and natural gas has continued to widen. The benchmark Henry Hub price continues to trade below the $3.50 (mmBtu) mark, after hitting record lows in January 2012, this while Brent Crude prices continue to trade well above $100 dollars per barrel.
Add to this equation a shortage of refining capacity in the U.S., and you have a seemingly ideal case for investment in GTL technology. The world’s three main players in the GTL arena, Shell, Sasol (SSL) and Petrobras (PBR) have all shown renewed interest in U.S. GTL projects. According to Shell’s vice president for global liquefied natural gas (LNG), De La Rey Venter, the company has big plans for natural gas, ranging from supplying the gas in liquefied form to long range trucking operations as an alternative to diesel fuel, to converting drilling and fracking units to run on gas.
Petrobras has approved the use of GTL technology for use in its operations. They will be using technology developed by CompactGTL, which uses smaller, modular processing units typically employed to minimize off-gas flaring by converting gas to useable liquid products.
However, the company with the biggest potential for turning cheap natural gas into gold is Sasol, a South African petrochemical company. Sasol has already demonstrated a knack for turning low cost, seemingly low value products into high value fuels and chemical derivatives. Sasol’s GTL technology developed from its experience in operating the largest coal liquefaction plant in the world, producing high grade fuels from very poor quality coal using Fischer-Tropsch technology. In fact, Sasol’s primary business is based on coal-to-liquid (CTL) and GTL technology, differentiating them from other petrochemical companies.
Sasol (SSL)’s first GTL plant dates back to the 1990’s when it licensed a GTL process to PetroSA, a South African state owned oil company. Since then, Sasol has globalized its CTL and GTL business by forming a number of joint venture companies. It owns a stake in the Oryx GTL plant in Qatar, had an economic interest in the Escravos GTL plant in Nigeria and is currently pursuing other ventures in Uzbekistan, China and the U.S.
Apart from its GTL and CTL businesses, Sasol also has a widely diversified chemicals business. Most of the chemicals in its portfolio are extracted from its Fischer-Tropsch processes as high value by-products. These products include, amongst many others, solvents, co-monomers, ethylene, propylene and waxes.
Sasol’s most profitable assets remain its two CTL refineries in South Africa. With a production capacity of 160,000 barrels a day, these refineries not only benefit from an abundant supply of low-cost raw material, but the volatile local currency and current Brent Crude prices both work in Sasol’s favor, making their South African operation highly profitable. Add to the equation the fact that these assets were built when capital costs (and crude oil prices) were far lower than they are today and you find that unlike most other CTL and GTL ventures, Sasol is ahead of the game in more ways than one.
As with most emerging market stocks, Sasol has seen an overall decline in stock price over the past couple of months, currently trading around the $41 mark from a 12-month high of $54 in March 2012. While the stock would most likely experience continued volatility in the short term, the longer-term outlook could hold a lot of upside potential. The company’s stock price still hasn’t recovered to pre-crisis levels ($65 per share in 2008) and with the new developments in the energy market, combined with the current weak South African Rand and high crude oil prices, Sasol should be well positioned to continue an overall rise in value over the next 12 to 24 months.
Stocks Discussed: RDS.A, SSL, PBR,