A South African firm, Sasol, announced Monday that it would spend justover 1 billion Canadian dollars to buy a half-interest in a Canadianshale gas field, so it can explore turning natural gas into diesel andother liquids. Sasol’s proprietary conversion technology was developeddecades ago to help the apartheid government of South Africa survive aninternational oil embargo, and it is a refinement of the ones used bythe Germans to make fuel for the Wehrmacht during World War II.
The technology takes “a lot of money and a lot of effort,” said Michael E. Webber, associate director of the Center for International Energy Environmental Policy at the University of Texas, Austin. “You wouldn’t do this if you could find easy oil,” he said.
But with the huge spread between oil and gas prices, and predictions ofoil topping $100 a barrel next year, the conversion technology could be a“a money-maker for whoever is a first mover in that space.”
Several other companies have intermittently tried to make liquid fuels from natural gas or coal.For example, the energy company Baard has been planning acoal-to-liquids plant in Ohio but has not been able to pull the piecestogether, and Peabody Coal has discussed a similar plant.
Sasol figures that the natural gas needed for a gallon of diesel, plusoperating costs, comes to about $1.50 a gallon. In comparison, a gallonof diesel made from crude oil now costs more than $2, even beforerefining, and many forecasts are for the price of oil to go higher.
But there is a hefty cost of building the chemical plant to do theconversion, which might run over $1.5 billion for a new Canadian plantthat would handle 40,000 barrels a day.
The calculations also exclude another cost: greenhouse gas emissions,which may be higher for a conversion plant than a typical refinery,depending on how the work is done.
“Everything ugly is in vogue again,” said Josh Mogerman, an energy specialist at the Natural Resources Defense Council, which has been fighting a proposed coal-to-liquids plant in Ohio.
From a financial perspective, the technology is far from ugly. A barrelof oil has historically cost one to two times as much as the equivalentamount of energy from natural gas. But right now, vast supplies ofnatural gas from shale formations in North America have driven pricesdown, so oil is triple the price of the gas equivalent.
The new ratio creates “a very attractive economic option,” said Lean Strauss, senior group executive at Sasol.
While the operating costs favor conversion, the cost to build thechemical plant is another matter; gas-to-liquids plants are far morecapital-intensive than traditional refineries that make the sameproducts from crude oil.
A plant opened by Sasol in Qatar in 2006, in partnership with thenational oil company, Qatar Petroleum, cost $37,000 per barrel of dailycapacity, but costs in Canada would be higher, Mr. Strauss said. Sasolproduces 160,000 barrels a day of its liquids — diesel, naphtha andpropane — in South Africa. It also turns out jet fuel, which isroutinely blended into fuel for airliners departing from Johannesburg.In August, Sasol supplied 100 percent of the fuel for a Boeing 737 flight from Johannesburg to Cape Town.
In the deal announced Monday, Sasol acquired a 50 percent stake inFarrell Creek shale gas assets, in British Columbia. With the otherowner, Talisman Energy, it will begin a feasibility study early nextyear on building a gas-to-liquids plant, and Talisman will have theoption to own 50 percent of that.
Sasol is building a similar plant in Nigeria with Chevron,and last month, it completed a feasibility study in Uzbekistan. It alsorecently submitted a proposal to Shenhau, the Chinese coal company, fora similar plant.
The Sasol process cooks a hydrocarbon, either coal or natural gas, into afuel gas made of hydrogen and carbon monoxide. Using a patented processthat involves cobalt catalysts, it converts that gas into a mix ofliquids: 80 percent diesel fuel, 15 percent naphtha and 5 percent liquidpropane.
But the process is not 100 percent efficient. In fact, the finishedproduct has only about 62 percent as much energy as the raw materialdid.
In addition to losing energy, the process creates excess carbon dioxide,compared to burning the natural gas or coal directly for energy. Butstarting with natural gas, said Mr. Strauss, the amount of carbondioxide released per finished gallon of liquid fuel was comparable tothe carbon footprint of a gallon from a traditional refinery.
Environmentalists are not so sure. “It’s unclear right now,” said SimonMui, a scientist at the Natural Resources Defense Council. “There hasn’tbeen a large global experience in natural gas to liquids.”
But, he added, “it’s definitely not a greenhouse gas reductionstrategy.” And recovery of gas from shale can itself be energy intensiveand environmentally challenging, he said.
The Sasol move comes as Canada is increasing its production of oil from oil sands,which is clearly carbon-intensive. Environmentalists in the UnitedStates are trying to stop large-scale imports of oil from oil sands.
Mr. Mogerman, of the Natural Resources Defense Council, said that giventhe historical market prices for oil and natural gas, only countrieswith no other choice had pursued the conversion process. “The only oneswho’ve done it are people with their backs against the wall, and who hadno financial considerations,” he said.
But if oil prices stay high and gas prices remain low because of shale gas, that view could be history.