Ex-BP chief, Chelsea owner among executives to target small-scale GTL

By EDUARD GISMATULLINE
Bloomberg

Tony Hayward, the ex-head of BP, and Roman Abramovich, the billionaire owner of London’s Chelsea Football Club, are vying to prove small-scale plants that turn natural gas into liquid fuel can make a profit.

The technology is attractive today for two reasons. First, the shale boom in North America has flooded the market with gas, making it cheap relative to oil. Second, in many countries drillers are no longer allowed to burn off gas that’s a byproduct of oil drilling.

The market to stop gas flaring at oil fields alone could be worth $375 billion, according to Oswald Clint, a Sanford C. Bernstein & Co. analyst in London. While a $19 billion Royal Dutch Shell project in Qatar has proved gas-to-liquids works in very large plants, the challenge is making it economic on a smaller scale.

“The primary problem has been confidence that the technology can be deployed commercially,” said Hayward, who invested in February in CompactGTL, which plans to convert gas into liquids at Brazilian oil platforms.

“Once commercial proof of the concept has been delivered, and once we have a plant operating that has made an acceptable return on investment, then perceptions will change,” he said in an e-mail.

Stepped In

Hayward and his partner Ian Hannam, an ex-JPMorgan Chase & Co. banker, together stepped in to restructure the unprofitable business in February.

Abramovich, who made billions in the Russian oil industry, has been building its stake in Velocys Plc, a $400 million company that’s working on technology to make fuel from shale gas in the US.

“Small-scale projects located in places where the gas would otherwise be flared essentially have zero or even negative feedstock costs,” said Meredith Annex, a New York- based analyst at Bloomberg New Energy Finance. “This allows them to be much more cost-competitive than large-scale projects in regions where gas is market-priced.”

Velocys and CompactGTL, both based in the UK, are working on gas-to-liquids plants with a maximum capacity of 15,000 bpd, which is about a 10th the size of Shell’s Pearl venture in Qatar, the world’s largest. Chevron this year started work on a 33,000 bpd Escravos plant in Nigeria, expected to cost $8.4 billion.

Even on a smaller scale, gas to liquids is expensive. The plants cost about $100,000 for each barrel of capacity to produce liquid fuels. Both companies say that they can make the business profitable.

Commercial Prospects

“We’ve made several investments in green energy over the past couple of years,” said John Mann, a spokesman for Abramovich. “We identified this field as one with good commercial prospects as well as the potential for a positive impact on the environment.”

In addition to earning money from flared gas, GTL can also make fuel at remote fields without pipelines to markets. The key component of the gas-to-liquids conversion is the Fischer-Tropsch reaction pioneered by German scientists Franz Fischer and Hans Tropsch almost a century ago.

On July 29, CompactGTL and undisclosed investors agreed to spend $50 million to build “the world’s first commercial” small-scale GTL plant in Kazakhstan, set to start at the end of 2017.

The same day, Velocys along with US’s Waste Management Inc. and NRG Energy Inc. said it would build a plant in Oklahoma that will take less than 24 months to enter “full commercial operation,” the UK company said.

Energy Revolution

GTL production has the potential to produce the equivalent of 32 billion bbl of liquids, or about a year’s worth of global oil demand, Bernstein analysts wrote in a November report titled “What if Small-Scale Gas to Liquids Was the Next Shale Gas? Are We on the Verge Of Another Energy Revolution?”

Velocys is using technology developed at the US Pacific Northwest National Laboratory in the 1990s for space exploration, said Roy Lipski, the company’s CEO. The micro-channel technology, developed for reactors to make oxygen in space, can be used to convert synthetic gas into fuels.

Extra-Terrestrial

“The US government retains rights to micro-channels for extra-terrestrial applications,” Lipski said.

Some oil companies, including France’s Total, have supported Velocys’s research, while Shiloh Industries Inc. of the US has invested in manufacturing capacity to make reactors, Lipski said.

CompactGTL and Velocys are now competing to fit their GTL reactors to floating production units planned by Petroleo Brasileiro SA, or Petrobras, which is developing giant oil discoveries off Latin America.

“It is a huge global market opportunity,” said Iain Baxter, a COO at CompactGTL. “We welcome competition, there is plenty of room.”

CompactGTL, with the help of founding shareholder Coller Capital, adopted the research started in 2000 by Accentus, which at that time was part of the UK nuclear industry. Coller is still a major stakeholder in the company after the arrival of Hayward and Hannam, Baxter said.

Offshore Gas

Several oil companies are interested in CompactGTL reactors in addition to Petrobras, he said, declining to name any. The company is courting new projects in Russia and some former Soviet republics.

Dutch SBM Offshore NV and CompactGTL are designing floating production, storage and offloading vessels, or FPSOs, with fitted GTL reactors to utilize associated gas and reduce flaring.

The partners “are still working together, and we are excited about CompactGTL’s first onshore project, which will help to mature the technology,” said Paula Farquharson- Blengino, a spokeswoman at SBM Offshore.

“Petrobras has identified the need to gather further information about the GTL technologies currently under assessment,” said Danielle Chevrand, a spokeswoman at Petrobras. “Thus, the company will wait for the conclusion of the studies before it can evaluate the projects associated with these technologies.”

Velocys’s GTL demonstration project with Petrobras ended operations last year, Lipski said.

“We are confident that we will be invited to bid for” this kind of FPSO, “although their timing for this is not presently certain,” he said.

Velocys shares fell 2.4% to 215 pence in London.

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