Order Code RL32666
CRS Report for Congress
Received through the CRS Web
The Gas to Liquids Industry
and Natural Gas Markets
November 8, 2004
Specialist in Energy Economics and Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
The Gas to Liquids Industry and Natural Gas Markets
Technological improvements and investment commitments from the world’s
largest oil companies suggest the gas to liquids (GTL) industry is likely to expand
rapidly over the next decade. GTL uses large quantities of natural gas to produce
liquid petroleum products like diesel fuel and home heating fuel. The GTL industry
might become an important competitor to the liquefied natural gas industry (LNG)
in the effort to secure natural gas supplies. As a result, LNG markets may be tighter,
with higher prices, potentially altering LNG’s projected role in the U.S. natural gas
The Energy Information Administration projects U.S. natural gas consumption
increases of 37% by 2025, compared to 2002 levels. Much of this increased demand
is expected to be met by importing LNG. LNG is natural gas that has been cooled
to a liquid state to facilitate transportation. Although expanding LNG imports has
drawbacks, the main positive factor is the belief that worldwide, there are large
quantities of natural gas that have previously not had access to the market. Some
believe that as the supply of imported LNG expands, it will provide a price cap for
U.S. natural gas markets. An expanded GTL industry makes this result potentially
The GTL industry is poised for a major expansion based in Qatar, but also in
Nigeria and Australia. The expansion is being funded by the major oil companies,
in some cases in tandem with synthetic fuel companies and national oil companies.
The projected expansion of the industry is based on favorable market conditions in
addition to advances in technology. High oil and natural gas prices, declining capital
investment costs, and improvements in technology that allow large scale production
facilities are important factors in the industry’s expansion.
The GTL industry offers an attractive choice to nations with economically
stranded natural gas reserves because it allows those nations to diversify in the use
of their resources. Diversification allows producing nations to gain higher rates of
return than through a singular investment strategy. Consuming nations may find that
dependence on one supply source, in this case LNG, does not offer the supply
security and potential price stability of a diversified strategy.
For the United States, alternatives to increasing LNG imports include a pipeline
to bring natural gas from Alaska, expanded exploration and development in areas,
both on and off shore, that are currently restricted, and policies to enhance the
development of current reserves. None of these alternatives alone is likely to close
the projected gap between U.S. natural gas production and demand. The competition
for natural gas resources between the LNG and the GTL industries may alter the
parameters of the debate.
This report will not be updated.
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Economic Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Investment Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Gas Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Gas to Liquids Industry and Natural
Technological improvements and investment commitments by the world’s
largest oil companies suggest that the gas to liquids industry (GTL) is likely to
transform itself from a small, specialized producer to a large scale fuel producer over
the next decade.1 As expansion of GTL proceeds, the industry may become a major
consumer of natural gas, placing it in direct competition with the growing liquefied
natural gas (LNG)2 industry for access to natural gas supply. If competition leads to
tighter than expected natural gas supplies, the result is likely to be higher prices for
natural gas consumers over the same time frame that the United States looks to world
LNG markets to meet increasing domestic demand.
Natural gas consumption in the United States is projected to increase by 37%
to 31.2 trillion cubic feet per year in 2025, from a baseline of 22.8 trillion cubic feet
per year in 2002, according to the Energy Information Administration (EIA) in the
Annual Energy Outlook 2004 (AEO).3 Almost all of the increased demand over that
period is expected to be met through an expansion of LNG imports to the United
Large scale expansion of LNG consumption in the United States is expected
even though LNG has several drawbacks. Drawbacks to LNG expansion include the
large capital outlays for gas receiving plants in the United States, the political
instability and non-democratic governments of some potential LNG producing
nations, domestic opposition to facility siting, the lack of a transparent market to
determine prices, and the lack of an adequate non-dedicated, competitive, tanker
fleet. The major offset to these impediments is the belief that there are very large,
economically stranded, volumes of natural gas available in the world waiting to be
developed and brought to consuming markets. As these reserves are brought to
market, it might mean stable supply, and possibly reduced prices, for U.S. consumers.
1 GTL uses natural gas as a raw material to produce liquid petroleum products, specifically
middle distillates, which include diesel fuel and heating oil. The produced fuels have
inherently low sulfur content because of the low sulfur content of natural gas.
2 LNG is natural gas that has been cooled to a liquid form to facilitate transportation. When
delivered to the consuming market it returned to a gaseous state and injected into the
standard natural gas pipeline system.
3 Energy Information Administration, Annual Energy Outlook 2004,
4 In 2003, the United States imported about 16% of the natural gas it consumed from Canada
via pipeline. The largest portion, about 82%, is produced domestically. The remaining 2%
is LNG imported from a number of countries.
This report analyzes the development of an industry, GTL, which may grow into
a formidable competitor to LNG for worldwide natural gas supplies. While the GTL
industry is likely to compete for natural gas supplies, its output, which is mainly
liquid petroleum products, such as diesel fuel, will do little to satisfy natural gas
demand in consuming nations. The resulting net reduction in natural gas supplies
may result in instability in the form of tighter than projected availability, and higher
than expected prices in U.S. natural gas markets. These factors may be considered
additional impediments to the projected increased dependency on LNG.
This report provides and analyzes basic information concerning the GTL
industry to inform debate on broad energy legislation, as well as more specific natural
gas legislation on supply issues including an Alaskan natural gas pipeline as well as
LNG facility development.
The GTL industry can be viewed as an alternative to oil refining. The basic
technology of the industry dates back to 1923 when two German scientists, Franz
Fischer and Hans Tropsch (FT), invented a process that could convert natural gas to
a hydrocarbon mixture which could then be upgraded into petroleum products. The
FT technology provides an alternative to traditional crude oil refining, as liquid
petroleum products, most notably diesel fuel, can be produced from a non-liquid
input, natural gas.
The process was used by both Germany and Japan during World War II when
their access to adequate oil supplies was disrupted by allied forces. In the 1960s,
South Africa used the FT process to produce liquid fuels when the United Nations
imposed oil import sanctions on the apartheid government. The South African plant
used coal as a primary input rather than natural gas, demonstrating the flexibility of
the FT process. GTL production continues in South Africa at the Mossel Bay
facility, operated by Petro SA. The plant has a capacity of 22,500 barrels per day of
petroleum products. Neither the World War II facilities or the initial South African
facilities were commercial, profit making enterprises; rather, the facilities were
technological solutions to politically disrupted markets. Under normal market prices
they would not have been viable.
From the 1960s through the 1990s, several companies specializing in synthetic
fuels, as well as joint ventures between major oil companies and synthetic fuels
companies, explored and developed the basic FT technology as well as other
technological approaches. Improvements in cost, efficiency, and plant scale were
achieved. Today, enhanced catalyst design is developing as a key factor in improving
the production process and reducing capital costs per barrel of product.
The first fully commercial GTL plant was a 12,500 barrel per day (bpd) plant
built in Bintulu, Malaysia in 1993, and owned by Shell. However, an explosion at
the plant in 1997 closed it until 2000. Shell, along with other major oil companies
has remained interested in developing the GTL technology. ExxonMobil,
ChevronTexaco, ConnocoPhillips, and Marathon all either have demonstration plants
running, or have committed to investing in GTL investments, mostly in Qatar, but
also in Nigeria and Australia.
In 2001, Shell asserted that the capital expenditures for a new GTL facility
might decline from $50,000 per barrel to $20,000 per barrel as a result of scale
economies consistent with improved technology. The lower level of capital costs per
barrel translates into approximately $2 billion for a plant with a capacity of 100,000
bpd. This level of cost is comparable to the cost of a new oil refinery if built in the
United States.5 More recently, Chevron asserted that the capital cost of building a
small, 17,000 bpd GTL plant are about $25,000 per bpd, and experts at BP America
assert that the capital costs can approach $20,000 per bpd of product output.6
Economies of scale for very large plants, once they demonstrate technological
feasibility, might reduce capital costs even further.
Chevron also estimated that the total of fixed and variable costs for a 17,000 bpd
plant are about $5.00 per barrel. If natural gas were available at 50 cents per
thousand cubic feet, according to Chevron, the cash costs of GTL production might
total $10 per barrel.7 The price of natural gas assumed by Chevron, however, is only
a fraction of the current price in the U.S.8 More expensive natural gas inputs would
raise the per barrel cash cost of GTL products. The low price of natural gas used in
Chevron’s calculations underscores the importance of a large, economically stranded
source of natural gas for GTL production.
GTL is an attractive option for nations seeking to develop large natural gas
holdings, because traditionally they have had only two choices.9 If the geography
was favorable, they could develop their gas fields and connect them by pipeline to
consuming markets. If that alternative was not feasible, they could invest in LNG
facilities and ship their gas to consuming markets by tanker. In either case, the final
product they offered was natural gas, generally for use as a fuel for electric power
generation. If the consuming nation had significant domestic gas supplies, the price
earned by the producing nation would be based on the price of gas determined in the
5 A new oil refinery, the first to be built in decades, is in the permit process in Yuma,
Arizona. The estimated cost of the refinery is $2.5 billion for a facility that may process
150,000 barrels per day of crude oil. Max Jarman, Arizona Refinery Project Facing
Approval Process, The Arizona Republic, Online Print ed. July 29, 2004.
6 Alexander H. Tullo, Catalyzing GTL, Chemical & Engineering News, Vol. 81, No. 29,
July, 21, 2003. pp.18-19.
8 The futures price for natural gas was over $8 per thousand cubic feet on October 22, 2004.
Energy Daily, Daily Oil & Gas Price Review, Vol.54, No.205, October 25, 2004. p.3.
9 The traditional way of using natural gas associated with oil wells when there is no market
access, is flaring, burning off the gas as it rises from the well. More recently, natural gas
associated with oil production has been re-injected into the well to enhance wellhead
consuming market. If the consuming nation has no domestic natural gas supplies, the
price is likely to be determined as part of a negotiated long term contract, in many
cases indexed to the price of oil.
GTL offers nations seeking to develop natural gas resources a third alternative,
effectively allowing them to diversify their resources beyond natural gas markets.
Diversification allows the producing nations to compare relative rates of return from
GTL and LNG before choosing an investment strategy. The benefits of
diversification are enhanced because the products of the GTL industry do not
compete with LNG in the natural gas product market, they compete with petroleum
products. The GTL product mix includes a variety of middle distillates, including
a large proportion of ultra clean diesel fuel. This product mix is desirable, and likely
to earn a premium return, for two reasons. In the European market, and possibly in
the future the North American market, diesel powered automobiles and light trucks
are expanding their market shares and increasing their fuel needs. In addition, air
pollution regulations are clearly moving in the direction of very low, to zero, sulfur
content. Diesel fuel derived from GTL processes can meet the 2005 U.S. standards
for sulfur emissions without further processing. Producing complying diesel fuel
from crude oil at U.S. refineries requires investment at those refineries that might
total $4 to $13 billion to meet mandated on-road diesel fuel requirements.10 As world
demand for ultra clean fuels increases, it is likely that the ultra clean fuels produced
by the GTL industry will command premium prices, allowing GTL investments to
The pricing of diesel fuel in the world market is different from that of natural
gas, however. Since diesel fuel that meets national environmental regulations is a
fungible product whether derived from a traditional oil refinery or from the GTL
industry, and is perfectly substitutable, the price received by gas producing nations
for their GTL-processed natural gas is far more likely to be influenced by market
fluctuations than pipeline natural gas or LNG. The potential for market induced price
volatility represents a greater long term risk for producing nations pursuing a GTL-
based investment strategy compared to a long term, negotiated LNG supply contract.
The value of diversification offered by the GTL industry is that it gives countries
with undeveloped natural gas reserves expanded economic choice. Producing nations
can choose the alternative use for their gas reserves which offers the highest potential
return. If LNG, for example, is the only technologically feasible use for currently
stranded natural gas, then it is likely that profit margins associated with LNG will be
driven down as more and more nations supply the market. The choice of GTL allows
the returns to both LNG and GTL to be balanced as nations make economic choices
about which direction they will take to commercialize their natural gas resources.
However, the value of expanded choice is likely to be of the one time variety.
Because of the high capital costs and large gas inputs associated with each industry,
only the largest holders of reserves will be able to successfully develop both
10 D.J. Peterson and Sergej Mahnovski, New Forces at Work in Refining, Industry Views of
Critical Business and Operations Trends, RAND Science and Technology, 2003, p.64.
Most producers are likely to develop one, or perhaps two, alternative uses for
their natural gas reserves. Three nations; Malaysia, Nigeria, and Qatar currently are
involved in all three natural gas industries. The Malaysian operation is small, and
keyed to local and regional supply needs. Qatar has large reserves of natural gas and
may become the key nation in both the GTL and LNG industries.
The GTL industry has been reported to be on the verge of a boom in investment
for some time. In 2001, it was reported that the combination of high oil prices,
technical advances, and environmental regulations might set off an investment boom,
ultimately leading to production of 1 to 2 million barrels per day, worldwide, by
2015.11 High investment cost, technological problems, and natural gas price
uncertainty had delayed the expansion of the industry in the past.
This year, the number of announced projects has increased. Most of the
investment activity is to take place in Qatar, where ExxonMobil, Shell,
ConocoPhillips, Marathon, Sasol Chevron, and Qatar Petroleum, in conjunction with
others, have all announced projects. All of the announced projects are projected to
become operational by 2011. Taken together, their capacity is estimated to be
750,000 bpd of liquid petroleum products. Most will use proprietary technologies
that are planned to offer advantages over the basic FT process. Adding the existing
capacity in South Africa and Malaysia to the planned projects in Qatar, Nigeria, and
Australia, total capacity might reach 1 million barrels per day by 2010, even if no
additional new projects are announced or completed in the near term.12
The scale of investment is large. For example, the ExxonMobil project in Qatar
reportedly will cost $7 billion for a GTL plant of approximately 150,000-180,000
bpd, producing diesel fuel, naphtha, and lubricant basestocks. The Royal Dutch/Shell
Group and Qatar Petroleum agreed in 2003 to invest $5 billion in a GTL plant of
approximately 140,000 bpd capacity. ConnocoPhillips signed a letter of intent in
2003 to build a GTL plant with a capacity of 180,000 bpd. Other projects with U.S.
as well as foreign oil companies are either under construction, or planned with
agreements in place.
The investment costs for the ExxonMobil project were reportedly to be met
solely by the company, which is also to provide its proprietary technology and
management skills to the project, while partner Qatar Petroleum provides the natural
gas for the project.13 Only a few energy companies, mainly the largest oil companies
that have announced investment projects, have capital budgets large enough to
operate in the GTL or the LNG industries.
11 Alexander’s Gas and Oil Connections, GTL Industry Could Soon Turn Some of Its
Pipedreams into Projects, Vol. 6, Issue #16, August 28, 2001.
12 Petroleum Economist, Using all the Options, Vol. 71, No. 5, pp.16-20.
13 Oil Daily, ExxonMobil Commits to Qatar GTL Facility, Vol. 54, No. 134, July 15, 2004,
Because the GTL industry both competes for inputs with the LNG industry, and
competes for customers with the petroleum refining industry, key factors in economic
feasibility also span various energy markets. The price of oil is key. For a viable
GTL industry, oil prices must not collapse. Estimates of a key price for GTL
viability center around $20 per barrel. In 2001, the refiners’ acquisition cost for
crude oil was approximately $24 per barrel. Uncertainty regarding the $4 per barrel
premium of actual crude oil prices above the minimum price for GTL feasibility, or
the narrowness of the margin itself might have been an impediment to investment.
In October 2004, with crude oil trading at over $50 per barrel the $20 per barrel
minimum requirement for GTL feasibility seems likely to pose less of an
Comparative returns to LNG development also influence the economics of GTL.
LNG returns still appear to be adequate, even if they are not at levels they attained
10 or 15 years ago.14 LNG has become a mature industry. Even with the large
increases in demand projected in the AEO 2004, there has been little new project
development. 2004 has seen no new LNG projects begun in producing nations. This
might seem to indicate that GTL is a viable alternative, or that producers are waiting
to see the outcome of the elevated price levels for natural gas as well as oil before
making binding decisions.
Natural gas prices are also important in determining GTL feasibility. The cost
of natural gas to supply either a GTL or LNG facility is negotiated between the
producing nation and the investors, and likely has little relationship to observed
market prices, because the available alternative is not to sell the gas in consuming
markets, but to leave it undeveloped or flare it off. Reports of GTL investments
funded entirely by the major energy companies, but still in partnership with national
oil companies, or the government directly, suggest preferential prices will be
available to GTL facilities. However, the price of natural gas in consuming nations,
specifically the differential between natural gas and diesel fuel, is still relevant to the
choice between GTL and LNG investment. This is because natural gas sold as LNG
will earn the natural gas consumption price, and natural gas used for GTL will earn
the diesel, or more generally, middle distillate product prices.
Qatar is a clear choice for so many GTL projects because of its natural gas
reserve position. It has been estimated that as of January 1, 2004 Qatar had natural
gas reserves of over 900 trillion cubic feet.15 Qatar also has a substantial LNG
industry, exporting to Europe, Asia, and the United States. The reason for this
diversity, beyond the reserve position second only to Iran in the Persian Gulf region,
is location. Shipping distances from Qatar to the Atlantic and the Pacific LNG
markets are approximately equal, allowing Qatar to allocate supply by price.
14 Petroleum Economist, Using all the Options, Vol. 71, No. 5, p.16.
15 British Petroleum, BP Statistical Review of World Energy, p.20. Other estimates have put
natural gas reserves in Qatar at up to 1.2 quadrillion cubic feet.
The other two nations with GTL investment activity, Nigeria with 176 trillion
cubic feet of natural gas reserves, and Australia with 90 trillion cubic feet of natural
gas reserves, are not likely to support an industry as large as that developing in Qatar,
even though both have production capacity in excess of their domestic consumption
Large natural gas reserves are important to the GTL industry because the high
capital costs of investing in GTL facilities must be amortized over a long period of
time in much the same way as with an LNG facility. The facilities must also operate
at, or near, full capacity for the economics of the project to be feasible. GTL
facilities, like LNG facilities, are also heavy consumers of natural gas. The
ExxonMobil project in Qatar is expected to consume 1.5 billion cubic feet per day
of natural gas to produce 150,000 to 180,000 barrels per day of petroleum products.
The Royal Dutch/Shell 140,000 barrel per day facility is expected to consume 1.6
billion cubic feet per day of natural gas.17 The difference in consumption rates at the
two facilities may be due to both differences in technology as well as differences in
the final product mixes chosen by the companies. If these natural gas consumption
rates are extrapolated to an industry in Qatar producing about 1 million barrels per
day of petroleum products, it might mean that natural gas supplies of over 10 billion
cubic feet per day are required. For comparison, the total of U.S. imports of LNG in
2003 was about 506 billion cubic feet, and about 229 billion cubic feet in 2002.18
These annual totals suggest that the currently planned GTL industry might consume
natural gas at a rate of over six times U.S. LNG import totals for 2003 and at a rate
equal to approximately 15% of total U.S. natural gas consumption in 2003. The
resulting output, 1 million barrels per day of middle distillates and other products,
represents less than 5% of world consumption of middle distillates in 2003.19
The growth of the GTL industry is likely to have wide ranging effects on energy
markets in both producing and consuming nations. In some cases, consumers will
see prices increase, while in others they will see prices decrease. Rates of return for
industries that use natural gas, even though their final products may not be in
competition, will tend to equalize.
The GTL industry is an alternative to LNG for nations with
economically stranded natural gas reserves. Producing nations will
choose among alternative investments depending on the relative
returns to each, adjusting for variations in risk and capital investment
requirements. The outcome is likely to be an expansion of each
industry until risk adjusted returns are equalized. Competition is
17 Oil Daily, ExxonMobil Commits to Qatar GTL Facility, Vol. 54, No. 134, July 15, 2004,
18 Energy Information Administration,
19 BP Statistical Review of World Energy 2004, June, 2004. p.12.