- Associated Press - Sunday, February 15, 2015

CASPER, Wyo. (AP) - Two days before the Wyoming House of Representatives approved a bill to lure construction of gas-to-liquid plants in the Cowboy State, the South African energy giant Sasol Ltd. announced it was suspending plans to build a similar facility in Louisiana.

Low oil prices, Sasol executives said, were to blame for the delay in the $14 billion project.

Sasol was not alone. Two weeks earlier, Royal Dutch Shell had dropped plans for a $6.8 billion plant in Qatar that would have turned natural gas into industrial chemicals.

The decision marked the second time in as many years that Shell had given up on designs for a gas-to-liquids facility.

The company scrapped a proposal for a $20 billion plant in Louisiana in 2013. That project would have turned natural gas into diesel, jet fuel and petrochemicals, but the company ultimately concluded that it was not economical.

The growing list of suspended and abandoned gas-to-liquids plants underscores the difficulty of Wyoming’s effort, analysts said. The projects’ billion-dollar price tags coupled with rapid swings in commodity prices make investors leery of financing the behemoth facilities, they said.

Only a handful of gas-to-liquids plants are in operation around the world. The next to be built in the United States will be the country’s first.

“I think the economics of it are pretty questionable right now,” said Sandy Fielden, director of energy analytics at RBN Energy, a Houston consulting firm. “If someone can figure out how to make that work, then good luck to them.”

Wyoming politicians have long promoted the idea of developing facilities that would turn the state’s raw minerals into a more valuable final product.

In 2008, the state committed $50 million to a coal gasification research center at the University of Wyoming, only to see GE Energy pull out of the project three years later.

Supporters of the most recent measure acknowledge that gas-to-liquid facilities are financially risky. But they argue that the state bill to promote such projects limits Wyoming’s exposure and carries significant upside.

A GTL plant, as gas-to-liquid facilities are often called, would stimulate demand for Wyoming minerals, help prop up prices and inject a wave of new jobs and tax revenue into the state, they say.

“If we can bring one facility to the state, whether it is gas-to-liquids or something else, we’ve done a good thing,” said Jeremiah Rieman, natural resource policy director for Gov. Matt Mead, who supports the bill.

The bill passed by the House calls on Wyoming to supply the plant with up to $50 million in raw feedstock. The state would contract with a producer to buy that feedstock, which could be coal, natural gas or some other raw mineral.

DKRW Advanced Fuels has proposed converting coal into gasoline and other fuels at a planned $2 billion gasification plant in Medicine Bow.

Two companies, Wyoming GTL and Nerd Gas, are exploring the prospects of turning natural gas into diesel fuel. Both have testified in support of the bill.

Under the plan, Wyoming would pay the plant to take the state’s feedstock and convert it to a final product like diesel. This is often called a “tolling fee.” The final product would then be sold, and Wyoming would collect the proceeds.

There are two advantages to this approach, the bill’s supporters say. First, it provides the plant with a guaranteed customer: Wyoming.

“The real benefit of the bill is to sign that contract with the company, and they can (then) go to their investors and say ‘We have 10 percent of plant capacity guaranteed,’” Rieman told the Casper Star-Tribune (https://bit.ly/178Wdbi). “It helps to remove one risk the private sector might have to finance these projects.”

The second benefit of the bill is that it limits the risk to Wyoming, supporters say. Under the proposal, the state is allowed to enter into a contract with a plant only once it’s up and running.

Sen. Michael Von Flatern, R-Gillette, said he is skeptical a GTL plant will ever be built in Wyoming because of the challenge of financing such a project. He still supports the bill because he believes the legislation limits the risk to Wyoming.

“They have to build the plant, prove the process and find the market,” said Von Flatern. “All the state has to do is provide the raw material, and when they sell the product, we take the receipt.”

Von Flatern chairs the Senate Minerals, Business and Economic Development Committee, which voted 5-0 to recommend the bill to the full Senate.

Not all lawmakers agree with that analysis. The House vote was 40 in favor and 20 against.

Sen. Cale Case, a Lander Republican, noted that the state could lose money on the proposition if natural gas prices rise or diesel prices decline.

“I think it is a little bit of a creative way to subsidize an industry that just hasn’t panned out. If it had panned out or could pan out, the private sector would be there,” Case said. “We’ve had a lot of enhanced fuel efforts in Wyoming. It goes back two decades. Not a single one has come to fruition.”

The Lander lawmaker also questioned the bill’s constitutionality. The state constitution prevents Wyoming from loaning money to a private business.

Supporters say it is not geared toward a specific company and is more akin to the economic development loans issued by the Wyoming Business Council.

GTL plants are based on a simple idea. A company takes a cheap input, like natural gas or coal, and converts it into a more expensive final product, like diesel fuel or fertilizer.

For the economics to work out, the cost of the input has to be low and the price of the final product must be high. Economists call this price differential a spread.

“Big spreads don’t endure,” Michelle Foss, chief energy economist at the University of Texas’ Center for Energy Economics, wrote in an email. “People are forever proposing projects to try to capture them, but inevitably the underlying dynamics shift - high commodity prices push demand down and prices then fall, cheap prices push demand up and prices then rise - stranding the proposed, high-risk, expensive ideas.”

High demand for diesel in the Rocky Mountain region and an abundant supply of natural gas make Wyoming an attractive location for a gas-to-liquids facility, said Gene Humphrey, president of Wyoming GTL.

The company is considering Cheyenne as one of two locations for a $1.8 billion GTL plant that would turn natural gas into diesel fuel. A third location under consideration has been eliminated.

Cheyenne would likely be the preferred location if state lawmakers pass the bill before the Senate, Humphrey said. He did not disclose the other potential location.

The project is viable because it is smaller than the facilities proposed on the Gulf Coast, Humphrey said. It would produce 15,000 barrels of diesel daily, compared with the 140,000 barrels proposed at Shell’s abandoned $20 billion facility.

“We believe the small regional type of refinery, which is what this is, there is a niche for this kind of facility,” Humphrey said. “We basically have less capital risk. Shell and the major oil companies were playing in much larger projects. They had huge amounts of capital in those projects.”

The spread between natural gas and diesel fuel also remains favorable, he said.

“I don’t know why that is,” Humphrey said. “I think the demand for diesel is so much larger and growing in the U.S. that is what is holding (it) up.”

Analysts took a different view. The spread on natural gas and diesel prices when the Sasol project in Louisiana was announced several years ago was 50-to1, Foss said. Today, that spread is closer to 16-to-1.

GTL plants face another challenge, said Fielden, the RBN consultant. The technology to convert oil to diesel is proven and more efficient. Oil is also abundant now thanks to the proliferation of drilling in shale plays across to the United States.

“There are circumstances where they make sense, but they are limited. If the technology were simpler, there would be more uses of it,” Fielden said. “The fact is it is more complicated.”


Information from: Casper (Wyo.) Star-Tribune, https://www.trib.com

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