Global Insight Perspective | |
Significance | The Palm gas-to-liquids (GTL) project would have been the world’s largest to date, processing some 154,000 b/d of synthetic fuels fed by Qatar’s North Field gas reserves. |
Implications | ExxonMobil’s withdrawal leaves Shell with the burden of pushing forward the frontiers of the GTL business, with its planned 140,000-b/d Qatari project due to break ground later this week for start-up in 2009. |
Outlook | ExxonMobil’s inability to make the project economics work, with all its existing Qatari experience and potential synergies, raises questions about the viability of other such initiatives in the current environment, particularly in the Gulf. Nevertheless, there are signs that other players, with cheap feedstock and nearby markets to offer, are taking a closer look at synthetic fuels—China, the United States and Australia are all possible candidates to take up the baton relinquished by Qatar. |
Palms Down
Last month, ExxonMobil gave a name to its long-standing Qatari gas-to-liquids (GTL) project, the world’s largest at 154,000 b/d, promising a final investment decision by the middle of the year.
One month later and the newly designated "Palm GTL" has been shelved, as the U.S. supermajor cited spiralling project costs due to inflated materials and support services fees, which even its extensive experience in the small Gulf state has proved unable to overcome. Initial reports indicate that project costs were estimated in the range of US$18 billion at today’s values, compared with some US$5-7 billion when the project was initially mooted in 2003-04 (see Qatar: 8 July 2005: Exxon Wades into Qatar GTL with Biggest Plant Yet).
However, ExxonMobil reported that it will not have to give up the reserve and production boost from Palm entirely, with QP prepared partly to compensate its loss with a 10% stake in the Barzan upstream development, also at the North Fields. The project is due to produce some 1.5 Bcfd of gas in an initial phase from 2012, focusing on the country’s burgeoning domestic market. This follows on from a previous domestic collaboration by the partners at al-Khaleej. While costs on this have still to be finalised, ExxonMobil officials have confirmed that they will be far less than those for the GTL scheme, potentially freeing up a significant tranche of capital expenditure for projects and acquisitions elsewhere.
Single Pearl
ExxonMobil's withdrawal not only takes the largest oil major out of the commercial synthetic fuels business for the time being, but also has the effect of leaving fellow pioneer, Shell, far more isolated at its 140,000-b/d Pearl GTL scheme, which is due to break ground this week. That project was signed off last year with an apparent acceptance of a doubling or trebling in project costs to between US$12 billion and US$18 billion, from initial estimates of some US$5-6 billion, again reflecting the pressures of the Gulf project climate where Qatar’s desire for mega-projects has played a significant role (see Qatar: 28 July 2006: Shell Speeds Through Pearl Decision Amidst Concern over Production Targets).
However, Qatari officials including Oil Minister Abdullah al-Attiyah have been keen to affirm that the Pearl project will go ahead as scheduled and that "no other projects are under threat" as a result of ExxonMobil’s announcement. He said that the problems with cost inflation are more general than Qatar alone, putting the onus on contractors to reduce costs. "Around the world costs are going up very sharply, it is not only Qatar that is affected. Most of our projects are being built by foreign companies. I hope contractors will focus on how to reduce their costs because otherwise, they will be losers," Attiyah told reporters.
Nevertheless, the thinking behind ExxonMobil’s withdrawal does inevitably raise questions about the rates of return that Shell can expect from its project, and indeed Sasol, which has been sanctioned to expand its newly operational plant at Oryx to 100,000 b/d in a second-phase development (see Qatar: 23 January 2007: Oryx GTL Behind Schedule but Expansion Plans Still Under Consideration). Other Qatari GTL projects, including those backed by Marathon/Petro-Canada and ConocoPhillips, have already been put on hold as a result of Qatar’s three-year gas moratorium to assess the North Field reserves, which now looks set to continue until at least 2009 (see Qatar: 27 April 2005: Qatar Eases Off the Gas: ConocoPhillips, Marathon GTL Projects Held Back and Qatar: 15 September 2006: Qatar Disappoints with Delay to North Field Gas Study till End of 2008).
Outlook and Implications
The scrapping of Pearl GTL means that Qatar’s chances of GTL market leadership for 2011-12 are now greatly reduced unless Sasol’s Oryx expansion is achieved in this time-frame and South Africa holds back plans for further synthetic fuels facilities—which are derived from coal reserves as well as natural gas. The Gulf player can, however, console itself with the likely realisation of plans for LNG market leadership, with achievable goals to export some 77 million tonnes of LNG in 2011-12, from around 26 million tonnes last year. In addition, ExxonMobil's apparent removal from GTL development will be hard felt by the industry as a whole, which has often cited the need for "critical mass" in synfuels projects, to both push forward the economics and help with commercialising the technology, to the financial markets and end-consumers.
Nevertheless, al-Attiyah’s comments on the damaging effects of project inflation on the country’s synthetic fuels business are worth examining. They underplay the prospects for the technology in countries with different project and market characteristics, notably those with cheap feedstock and nearby markets to feed, as well as a less scrupulous reliance on the top-tier contractors than Qatar has shown to date. In this way, recent expressions of interest from Australia, China and the United States can perhaps be seen as a possible next phase in the emergence of synthetic fuels, albeit with the focus on coal feedstock rather than natural gas (see World: 22 November 2006: GTL and Sisters: Resource Nationalism Takes a Turn Around the SynfuelsSector).