Oil, gas, and the future of GTL

By Sanjiv Save | September 7, 2016

In 2013, I published an article entitled Viability of GTL for the North American Gas Market[1]. In it, my colleagues and I discussed how exploration and production activity had increased the supply of shale gas five-fold in the period between 2006 and 2010.

At the time, it was a revolutionary development, one that had the potential to open up new markets for gas-to-liquids (GTL) technologies.

We’ve since revisited our assessment, this time within the context of the latest Energy Information Administration (EIA) data. The results surprised us.

In the United States, production of dry shale gas had actually increased about ten times between 2007 and 2014, from 1.3 trillion cubic feet (TCF) to 13.4 TCF. The trend was indisputable—one which, at the time, showed no signs of abating. In one year alone, 2013–2014, there was a staggering 25% increase in dry shale gas production. The impact on global energy markets, especially the once-prolific liquefied natural gas (LNG) projects, was tremendous.

A similar scenario seems to be evolving in Canada and Mexico. There, the latest available EIA estimates for unproven-but-technically-recoverable shale gas reserves are 573 and 545 TCF, respectively.

This raises a telling economic question. If natural gas prices recover to a higher price point, development of these reserves could, in effect, impose a price ceiling once this Canadian and Mexican production comes online. The impact could be massive, because estimates of these natural gas reserves have increased significantly all over the world, advanced by new technology and industry innovation. Particularly large shale-gas reserves have been identified in China, Argentina, and South Africa.

Not to be outdone by the gas glut, reserves and production of shale oil have also expanded in a big way. Combined with the reduction we’re seeing in global energy demand, these reserves have helped keep the oil-to-gas-price ratio low—too low for the kind of economics that make GTL technologies commercially viable.

There’s another important difference between shale gas and shale oil: ease of transportation. To ship liquefied natural gas over large distances, we need a sophisticated logistics chain. In places where pipelines aren’t practical or feasible, other solutions must be found. Today, the process begins with cryogenic cooling. This reduces volume, so the gas can be loaded onto specialized ships in the form of LNG. Regasification takes place at the destination port, where the product is directly transferred to terrestrial pipelines that carry it to consumers.

By comparison, oil is relatively easy to transport. And, being an internationally traded commodity, its prices are much more likely—at least, more likely than North American natural gas prices—to recover significantly by the time a commercial GTL plant could be brought online, sometime post-2020. This is supported by the latest EIA forecast, which in May 2016 suggested an oil price recovery of more than 40% between 2018 and 2021.

It gets worse. Between 2021 and 2040, the ratio of crude prices to gas prices is expected to be in the range of 22:1. This, even as some experts anticipate gas prices increasing by 20% in the same period.

Where—and how—will it end? How high can the oil-to-gas price ratio go, and at what point will it balance out?

A high oil-to-gas price ratio is good news for the future of GTL technology in North America. What we need now is the financing to build the plants and infrastructure, so more premium GTL products can get to consumers who are waiting to buy them and reap the benefits.

[1] Hydrocarbon Processing magazine, January 2013