Shell Oil's Gas to Liquids Plant in Qatar could Earn $ 10 Billion a Year

This article is cross-posted from an article originally published on Al Fin Energy blog

Gas to liquids (GTL) is becoming a very profitable enterprise. Not everyone can invest $20 billion in a GTL plant. But to reap $10 billion per year in profits from an investment of $20 billion, is very close to true alchemy.

More on Pearl Qatar GTL:

Now gradually increasing production, Pearl sucks in huge volumes of natural gas from the gargantuan North Field under the aquamarine Gulf and — in a feat of seeming alchemy — transforms the gas into jet fuel and diesel and other liquids far more valuable than natural gas these days. Eventually, Pearl could earn Shell $10 billion per year, justifying its nearly $20 billion cost. _NYT

Notice that the $10 bn figure is for "eventual profits." For now, Shell will have to settle for a mere $4 bn free cash flow per year -- at an oil price of $70 per barrel. At higher oil prices, profits will exceed $4 bn proportionately.

Shell has said that the project would generate USD 4 billion of free cash flow a year at full production in a market with crude oil prices, the main determinant of the price of diesel, at USD 70 per barrel.

Shell will say only that returns are in line with other integrated gas projects, but given that Brent crude now sells for over USD 110 per barrel while the gas going into Pearl is effectively free, it could clearly be a significant contributor to one of the world's biggest corporate capital spending budgets at some USD 30 billion this year alone.

Analysts said that crude prices would have to fall below USD 40 per barrel before the plant loses money. The Qatari government's decision to buy a stake in Shell, reported to be approaching 3% may be further evidence of Pearl's cash delivery potential. _SteelGuru

Russia's Gazprom needs to take a long hard look at Shell's GTL achievements in Qatar -- particularly at a time when global gas prices are falling, and Gazprom's customers are pulling out the long knives for the corrupt Russian national gas company:

Gazprom said Thursday its profit plunged by a quarter due top falling gas exports and billions in back payments to EU nations now probing the Russian giant for price fixing and intimidation tactics. The world's largest natural gas company attributed its 23.5 percent drop in first-quarter net income to a sharp decline in sales to both Europe and the ex-Soviet states - two of the slowest-growing regions in the world.

It also reported a one-off $2.4 billion (78.5 billion ruble) payment to European clients who managed to negotiate a lower price after threatening to take the Russian state firm to court. The profit was still a strong $11.1 billion (357.8 billion rubles) and debt was down heavily. Brussels is formally probing Gazprom for effectively trying to bully eastern and central European nations into buying its pipeline gas at elevated prices and then preventing them from trading any excess supply.

The probe comes a year after official raids on the offices of Gazprom's European partners and amid widening EU efforts to diversify its sources of energy supplies. Gazprom on Wednesday suggested that Russia's broader national interests were being threatened by the investigation and demanded respect for its "status as a strategic organisation" under federal law. _Profits Plunge at Gazprom

Al Fin energy analysts have promoted scalable GTL for years now. While a $20 billion plant is not considered small scale, several companies are competing to provide technology for small and medium scale GTL plants -- to take profitable advantage of stranded gas, offshore gas, and currently flared gas.

These small and medium scale GTL plants will not earn $10 bn a year -- or even $4 bn a year -- but they will provide a handsome profit return on investment as long as oil prices remain high.

The best long term solution for global energy involves advanced factory-built scalable nuclear technology, along with advanced development of unconventional liquid fuels from gas, coal, bitumens, kerogens, gas hydrates, and biomass.

The move to GTL, in the light of high oil prices and low gas prices, is a good place to start.