A release valve is in sight for a crippling gas glut

Gas-to-liquids plants and LNG offer a beacon of hope

March 01, 2011

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Illustration by Luc Melanson

At least one aspect of the shale gas “revolution” is turning out to be quite predictable. “The gas prices in North America are behaving pretty much as expected,” says John Manzoni, chief executive officer of Talisman Energy Inc. “It’s all about supply.”

The narrative likely won’t change until sometime next year, he predicts. Deflated gas prices brought on by the sudden proliferation of horizontal wells in basins that are fast becoming household words “could be here for a while.”

The outlook belies a broader shift. In industry and government circles alike, the conversation is moving from concern over plummeting prices and disappearing windfalls to a serious exploration of ways to put a dent in the surfeit of gas that has overrun North American markets.

A release valve for the growing bottleneck emerged in a deal late last year between Calgary-based Talisman and Sasol Ltd., a South African energy and chemicals company. In a December acquisition, Sasol forked over $1.05 billion for a 50 per cent stake in Talisman’s Farrell Creek shale gas project in northeastern British Columbia. The deal includes a commitment to study the feasibility of building a gas-to-liquids (GTL) plant in the region that could convert liquids-rich gas into a variety of petrochemicals and transportation fuels like diesel and jet fuel.

Under the terms of the deal, Sasol agreed to pay $260 million up front, plus carry 75 per cent of Talisman’s future capital expenditures in the region up to $790 million. The joint venture will allow Talisman – which plans to double its rig count in the basin from four to eight this year – to develop an estimated 9.6 trillion cubic feet of gas representing 27 per cent of the firm’s Montney leases. Talisman expects production from the region to ramp up to between 50 and 60 million standard cubic feet of gas per day this year with break-even prices at $4 per thousand cubic feet.

The planned feasibility study will take two years to complete. Blueprints for the GTL plant are in large part driven by the growing spread between oil and natural gas prices. “We believe there has been a structural shift in the dynamics between natural gas and oil prices,” says Leon Strauss, senior group executive with Sasol. “If gas prices stay low and the relative difference between gas prices and oil prices stays high, [Talisman] could also benefit from converting their gas into high-value GTL products.”

Sasol’s Oryx GTL plant in Qatar cost $1 billion to build
Image courtesy Oryx

Crude oil prices jumped 25 per cent through the fourth quarter of 2010, the International Energy Agency notes, and were flirting with the auspicious $100-per-barrel mark by January 2011. Should the brush with three-figure oil prices persist, the consequences could be severe. “Recent price levels already pose a real economic risk,” warned the Paris-based IEA in its January report on oil markets. Triple-digit prices “in the past have clearly been associated with economic problems.”

The growing split between oil and gas prices has seen companies returning to oily assets. At Talisman, “We’re particularly leveraged to the oil price,” Manzoni says. In 2010, the Calgary firm sold $2.2 billion in assets. A 35 per cent reduction in spending on dry gas in North America is planned for 2011. “That has allowed us to reposition the portfolio substantially,” Manzoni adds, calling GTL “a very interesting option for the future.”

The shifting price scenario has not gone unnoticed among industry watchers. “People are looking for oil when five years ago that would have been a ridiculous idea,” observes Joseph Doucet, a professor of energy policy with the University of Alberta. Sasol’s conversion technology is appealing so long as gas prices remain flat relative to oil. “If there’s no spread, you can get jet fuel from oil.”

A West Coast GTL plant gives Talisman another way to monetize its B.C. gas assets. “On their own, their only ability to sell the gas would be to the industrial market in North America, and we’ve all seen what’s happened to prices,” says Sasol’s Strauss. His firm currently operates GTL plants in Qatar and Nigeria. The conversion technique uses a patented Fischer-Tropsch process the company developed in the 1950s and later used to help South Africa skirt an apartheid-era oil embargo in the 1980s.

The process harnesses chemical reactions to turn synthetic gas into waxy synthetic crude oil. The conversion yields low-sulphur diesel, naphtha and some liquefied petroleum gas. A mixture of light hydrocarbons, naphtha can in turn be used as a feedstock for producing ethylene, itself a petrochemical building block. GTL plants are ideally suited for gas-rich countries like Canada, Sasol says. The case for using the technology is bolstered by a growing demand for cleaner-burning transportation fuels to power some of the 20 million personal vehicles that fill Canadian roads.

Producing diesel and jet fuels from natural gas is “significantly” less carbon-intensive than oil sands-derived fuels, Strauss notes.

Ironically, the North American natural gas price outlook could also undermine the economic argument for building a capital-intensive GTL plant. The Oryx plant in Qatar cost Sasol roughly $1 billion to develop. Premium sales outlets for liquefied natural gas (LNG) in the galloping economies of the Pacific Rim could prove a more attractive alternative. Asian oil-indexed prices are running well above their gas-on-gas counterparts in North America, says an application to the National Energy Board by the KM LNG Operating General Partnership.

“LNG sold under new long-term supply contracts to the Far East is currently priced around 90 per cent of oil on an equivalent heating-value basis,” says a report prepared by global brokerage firm Poten & Partners in support of the export application. “There is significant opportunity to capture long-term market share for suppliers that demonstrate a strong likelihood of successful startup during the 2014-2018 period.”

At Talisman, Manzoni is not ruling out future overseas shipments even as the company explores opportunities with Sasol. In the Montney formation, “We can sell the gas while we’re studying the option of the gas-to-liquids plant,” he says.

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