The race is on to cash in from America’s cheap natural gas.
Point being, until the price of the abundant, clean-burning stuff rises, profit opportunities abound.
It’s as simple as an Econ 101 lecture. Today we’ll check back in with a few of the front runners in the races to cash in…
Before we start, it’s important to realize you don’t need a master’s degree or a financial certificate to understand this opportunity.
A barrel of oil has approximately six times the amount of energy of one MMBTU of natural gas.
Using a ballpark price for one MMBTU of natural gas, around $3.75, you’ll see on an oil-equivalent basis natural gas trades for $22.50 a barrel.
Oil is trading at $100. Natural gas sells for $22.
Until those prices even out, there’s a massive opportunity brewing in the U.S. It’s a simple case of arbitrage — the process of taking something cheap and selling it almost immediately for a profit.
After all, with gas to liquids technology there’s a lot of meat on the bone to turn $22 natural gas into other more valuable oil-based fuels. Plus, as we’ll also discuss, there’s an opportunity to fuel vehicles with natural gas instead of gasoline — which begs the question: would you rather pay $3.00 to move your car or 60 cents?
As we covered recently, we’re already seeing part of the natural gas story play out. Residential and industrial electricity prices are down. Chemical manufacturers are enjoying cheap feedstock prices (as are some fertilizer makers.) Refiners are also cashing in by using cheap natural gas to fuel and blend their oil refining.
But clearly those factors have done nothing to reduce the price disparity between oil and natural gas.
The arbitrage carrot still dangles in front of the donkey. And that’s where our recent gas to liquids conversation comes into play.
Gas To Liquids (GTL)
The two big players in the GTL market are Sasol (SSL) and Shell (RDS.)
Sasol has operations all over the world, producing synthetic fuels, waxes and solvents. But the big opportunity here in the U.S. is for a proposed gas to liquids project near Lake Charles, LA.
Sasol has an existing chemical facility in the area, but in December last year gained approval for the engineering and design of a world-scale GTL project. According to the Wall Street Journal, “the plant would be the first in the U.S. to use ‘gas-to-liquids’ technology. Once seen as futuristic, the technology has gained traction in recent years as discovery of gas supplies have outpaced that of oil.”
The plant aims to take natural gas feedstock and produce 75% diesel, 20% naphtha and 5% liquid propane gas.
Add it all up it “would essentially put natural gas on par with higher-priced crude oil as a key raw material for transportation fuels” the WSJ reports.
The project is in the right neighborhood, too. Lake Charles is home to gobs of nat gas-related industries and downstream users — including a Phillips 66 refinery, a Citgo refinery, Basell, Air Produtcs, PPG industries, Alcoa, Firestone. There’s lots of infrastructure and plenty of nat gas flowing to the area. [Of note, Lake Charles is also close to two potential LNG export facilities Cheniere's Sabine Pass and Sempra's Cameron LNG.]
A more recent addition to the U.S. gas to liquids game is Shell. According to Penn Energy the company has selected a location for its world-class GTL project, near Ascension Parish, LA on the Mississippi River.
Shell is also the operator of the world’s largest gas to liquids plant, the Pearl GTL plant in Qatar.
But of course, these mega projects don’t come cheap. The U.S. projects listed above will have estimated costs over $10 billion each (Sasol ‘s is north of $15M and Shell’s is around $12B) — and yeah, cost overruns are commonplace in big projects of this nature. Indeed, expect to see a lot of legwork, planning and estimating before any ribbon-cutting ceremonies. And buyer beware.
Of note, one of the major contractors to build these massive plants is a company by the name of Technip (TKPPY.) Consider them the “picks and shovels” play in the GTL space — although it’s far from a pure play. However, considering the options above I’d rather bet on the companies getting paid billions than those about to shell it out — for now, at least.
There are also some smaller GTL players.
Compact GTL (private) has developed smaller scale GTL plants that help utilize stranded gas (onshore or off.) So instead of flaring or injecting the gas back into the ground, Compact GTL offers a way for companies and regions to utilize the gas. The technology is proven — and even tested by Brazil’s oil giant, Petrobras.
A publically listed company with a similar offering goes by the name of Velocys (OXFCF.) The company was recently awarded a contract in Pennsylvania’s Marcellus region to create the first commercial small-scale gas to liquids plan in North America. Certainly worth a look!
As far as smaller scale GTL plants go, Velocys is the one player to keep an eye on. Although, time will tell if this small scale GTL is the profitable business it’s cracked up to be.
If you’re reading a little hesitation in my words that’s because there is some!
Although I know the relative price differential between cheap natural gas and oil will narrow, there’s still a lot of factors that need to play out. And of the companies I’ve named above, other than Technip, the track record for share price appreciation is still to be seen. Stay tuned!
Keep your boots muddy,
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