Market bears smell blood as China scrambles to plug capital outflows
* Yuan dropped to lowest in more than eight years against dollar
By John Kemp
LONDON Dec 19 Gas producers urgently need to find a way to turn abundant and low-value gas supplies into more valuable transport fuels like gasoline, diesel and jet.
The fracking revolution has so far had a bigger impact on gas than oil. Soaring production has depressed the price of dry gas, and condensates like propane and butane, even as the price of crude oil remains close to record levels (on an annual basis).
The big gap between gas and oil prices is especially pronounced in the United States, where the shale gas revolution originated, but looks set to spread around the globe.
Credible estimates suggest global shale resources will double the conventional gas resource base. But estimates of shale oil resources are much smaller (so far). Gas prices therefore seem set to remain much lower than crude in the medium term.
For gas and condensate producers, the pressing question is how to find new ways to market their production to capture more of the value associated with high-priced oil rather than the depressed value associated with fuel gas.
The simplest solution is to export gas to regions where gas prices are still linked to oil, including Asia and parts of Europe. More than a dozen U.S. companies have applied to the U.S. Department of Energy for permission to begin exporting natural gas from the United States to higher-paying customers overseas.
But it is unlikely to provide a durable solution as oil-indexation comes under pressure and new sources of both conventional and shale gas are developed overseas.
The alternative is to find ways of getting more gas (methane) and gas liquids (ethane, propane, butane and pentane) into the transport system, where road users, railways, shipping companies and airlines would pay much higher prices.
GAS IN TRANSPORT
Gas could enter the transportation system through several routes. Small quantities are already used by cars and trucks running on compressed natural gas (CNG) or liquefied natural gas (LNG). But CNG and LNG require extensive vehicle modifications and specialised fuelling infrastructure, and roll out has been slow.
CNG and LNG have so far been restricted to companies operating large fleets of vehicles (refuse collectors, mass transit operators and some postal services) with their own centralised refuelling stations that do not rely on the public filling station network.
In future, the most promising market for LNG may be in ocean shipping, where oil tankers, bulk carriers and container ships could all use cheaper, cleaner burning LNG in place of dirty fuel oil.
The other option is to transform natural gas and natural gas liquids into conventional liquid fuels like gasoline and diesel, so they can utilise the existing distribution and retail infrastructure and be employed in regular cars and trucks, as well as on the railways and even in aircraft.
Some gas liquids, like butane with four carbon atoms (C4) and pentane with five (C5), are already blended in small quantities directly into the regular gasoline supply, where they make cars easier to start in winter. But their tendency to evaporate in hot weather limits the amount that can be blended into gasoline without causing a lot of pollution.
Lighter molecules, such as propane (C3), ethane (C2) and methane (C1) cannot be blended into liquid gasoline at all because they are not liquid at ambient temperatures and would evaporate immediately.
Most petroleum refining processes separate lighter molecules from heavier ones (distillation) or break up larger and heavier molecules into smaller and lighter ones (cracking and coking) to maximise the yield of lighter and more valuable products that can be sold separately for a premium.
In the past decade, refineries in the United States and Asia invested heavily in cracking and coking units, in the expectation that the global crude oil supply would be increasingly dominated by crudes with a much higher proportion of heavy molecules.
But the fracking revolution has turned that expectation on its head. Instead of increasingly heavy crudes, the global refining system is faced with a growing abundance of light crudes, condensates and natural gas. Rather than breaking up heavy molecules, refiners and gas producers need to find ways of combing small light molecules in the C1-C4 range into slightly larger molecules in the C5-C12 range (for gasoline) or C8-C21 (for diesel).
The most well-known route for combining small hydrocarbon molecules into larger ones is the Fischer-Tropsch gas-to-liquids (FT-GTL) technology discovered by German chemists in the early 20th century.
In a typical GTL process, methane or another fuel is partially oxidised to produce synthesis gas, a mixture of hydrogen and carbon monoxide. The carbon monoxide is then reacted with steam to produce carbon dioxide and yet more hydrogen.
Hydrogen and carbon monoxide are then reacted over a nickel, iron or cobalt catalyst to produce hydrocarbon molecules. The catalyst and the ratio of carbon monoxide to hydrogen can be selected to alter the proportion of different hydrocarbons in the resulting mixture.
Most existing FT-GTL processes have been designed to maximise the production of molecules in the diesel range, but it is also possible to produce jet fuel or gasoline. Unlike conventional gasoline and diesel, FT-GTL products contain little or no sulphur so are ultra-clean burning.
The other route for combining smaller hydrocarbon molecules into larger ones is alkylation. Light molecules such as propane, butane or pentane are reacted with isobutane in the presence of a catalyst (either hydrofluoric or sulphuric acid) to produce isoheptane (iC7), isooctane (iC8) or isononane (iC9) respectively which are prime blending components for motor gasoline.
The resulting liquids, collectively known as alkylate, have a high octane-rating, contain no sulphur, and do not evaporate easily causing air pollution, so are ideal for blending into high performance clean burning gasoline.
Alkylation plants are found in many oil refineries. Worldwide alkylation capacity is more than 2 million barrels per day. Most existing alkylation plants use isobutane, butane and propane from the refineries own distillation and catalytic cracking units (liquid refinery gases, LRGs). But in future alkylation units may be expanded to use newly plentiful liquids from gas production (natural gas plant liquids, NGPLs).
In the United States, where the market has become saturated, the need to find more valuable markets for all the surplus gas and gas liquids has become urgent. The Gulf Coast refineries are now storing almost 38 million barrels of propane alone, up from 25 million at the same point last year.
Booming liquids output from the condensate-rich Eagle Ford shale has created significant oversupply. Only record exports have kept inventories in check. In the first nine months of 2012, the United States exported nearly 44 million barrels of propane, up from just 16 million barrels in the same period four years earlier (). Stocks of other liquids like butane and pentanes are also at record levels.
Some gas and liquids can be use in petrochemical production. Chemical companies have announced plans to build several new ethylene crackers and other processing units to make use of all the cheap gas and condensate that has become available. Dow Chemical and LyondellBasell have both announced plans to build big new plants making high-purity propylene by 2014-2015.
The more valuable outlet would be to inject an increasing amount of gas and condensate into the transport market. Shell and Sasol are both studying plans for new FT-GTL plants along the U.S. Gulf Coast. Some refineries may also expand alkylation capacity, either in the United States or overseas.
For the time being FT-GTL looks more promising, because it can select for diesel and jet production, which are in short supply, rather than gasoline. Alkylation plants raise safety concerns (all those hot combustible gases mixed strong acids have occasionally been responsible for fires, explosions and toxic clouds).
But as long as natural gas prices remain significantly lower than oil, there will be a sharp incentive to pursue every route for turning abundant gas and gas liquids into transport fuels.
* Yuan dropped to lowest in more than eight years against dollar
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