Pearl's Gas-To-Liquids project rolls out, taking its cues from many world markets

The sheer size of the plant shows how this is the "big time" for GTL technology. When both phases are online, Pearl will produce 140,000 b/d of liquids in the form of a distillate blendstock, and 120,000 b/d of NGLs. By contrast, the two other commercial GTL plants are 14,700 b/d (Shell's Bintulu plant in Malaysia) and 34,000 b/d (Oryx in South Africa, operated by Sasol.)

It's not certain just what the output from Pearl is going to be called, since it isn't exactly diesel, and it isn't exactly gasoil, but it most certainly is a distillate. Regardless of the name, it might head to many different markets. 

Being located in the Middle East, its output can easily go west to Europe, or east to Singapore and the rest of Asia. But the market consensus seems to be that Europe is a very strong market for Pearl's output, and that's in part because of the US.

The US is now a structural exporter of diesel. Total distillate exports have ranged from 651,000 to 874,000 b/d over the last several months, and within that, exports of ULSD have been at least 400,000 b/d. Those sorts of numbers represent a lot more than arbitrage opportunities; this flow is permanent, or at least as permanent as anything in markets is. Most of those exports are headed to Europe.

When the US exports ULSD to Europe, it generally is in the form of what's called "61 grade." It can fall short of the EU sulfur specifications of 10 ppm gasoil, since the US specification is 15 ppm, and its cetane content is inadequate. (Cetane is to diesel what octane is to gasoline.) The Pearl GTL product, if blended with 61 grade, solves both problems, because it's high cetane, and it's only about 3 ppm sulfur. So there's a natural market for Pearl in the ARA market as a blendstock with ULSD brought in from the US.

Pearl has another characteristic that makes it more of a blendstock than an end-use product: low density. The density level of 0.77 is low enough that it would be difficult to have it sold into the end-user market. So blending it with high density biodiesel, to get it up to normal transport fuel density of 0.842-0.845, is also a good match for Pearl's output.

But the real incremental barrel equation is going to be in whether Qatar is better off turning its gas into GTL, or its gas into LNG. While there is a baseload for both projects, there will be incremental supplies that could go either way.

It's an important outcome, because it will say a great deal about the ability of the world's growing gas supplies to displace oil in the transportation market. It's particularly significant because long-term models show a squeeze in oil supplies, with the likelihood that the tightest market will be for distillates. But the forecasts also show a potential bonanza of global natural gas supplies.

Turning that glut into a source of supply for the transportation market is the challenge.  Natural gas vehicles have the issue of needing different technology under the hood and an overhaul of the retail distribution system. Using natural gas to power the grid and feed Chevy Volt-type hybrids still run into the limitations of battery technology and vehicle cost. Turning natural gas into a diesel-like product has neither of those problems. 

An analysis of the economics put forth by Platts' Jonty Rushforth shows that for now, LNG wins the competition:

The project is designed to use 1.6 Bcf/d of gas as feedstock to produce 140,000 b/d of nearly sulfur-free oil products, and a further 120,000 b/d of condensate and natural gas liquids.

For the condensate, the project sold a cargo in April heard priced at parity to a small premium to Platts Dubai front-month crude assessment, which June 14 stood at $111.71/b, so the condensate and liquids output in that shipment could be worth upward of $13.4 million.

For the natural gas, however, Qatar could either process it into LNG or use Pearl to produce petroleum products. On June 13, Platts LNG FOB Middle East assessment stood at $12.30/MMBtu, meaning that if sold as LNG that gas could fetch some $20.2 million.

Market sources said Pearl products could likely sell at a premium to low-sulfur prices. Platts gasoil 50 ppm FOB Arab Gulf assessment was $132.21/b June 14, meaning that if sold as gasoil the natural gas feed could be worth around $18.5 million, less than for the LNG. Furthermore, the costs associated with the gas-to-liquids process are currently significantly higher than for liquefaction.

The Pearl project cost $19 billion, or roughly $371.82 per barrel per year of capacity. In comparison, the 7.8 million mt/year Qatargas 4 LNG project, completed in 2010 and also a partnership between Qatar Petroleum and Shell, cost around $8 billion, or roughly $107.96 per boe per year of capacity.

So an incremental amount of gas, sitting in Qatar, is going to be valued on the basis of everything from LNG prices in Japan to diesel prices in the US. It's going to be quite a barometer.