Shell will press on with new plants to convert gas to liquid fuels, its investment and technical edge leaving its peers behind in the process once seen as a radical game changer.
The company has seen cost overruns at its flagship Qatar plant, canceled a U.S. project and is relying on a favorable link between prices for feedstock natural gas and oil, factors which have jangled the nerves of some investors in Royal Dutch Shell.
Investors are also wary of the massive upfront costs companies face in building the gas-to-liquids plants. Only Shell and South Africa's Sasol have so far made GTL plants work on a large scale.
"Shell is so far ahead technically," said Ed Osterwald, who has advised companies and governments on GTL and is a partner at consultant Competition Economists Group. "It is hard to see how another large company is going to replicate that."
Recent indications on GTL's prospects have been mixed. Costs overran at Shell's $19 billion plant in Qatar. In December it canceled a proposed plant in Louisiana as costs rose.
But last week, Sasol said it will carry out a feasibility study to build a large site in Mozambique with Eni of Italy. Shell is also studying the feasibility of building a plant there.
The plants are based on a process developed in the 1920s by two German scientists, Franz Fischer and Hans Tropsch. Shell has developed the process further and has more than 3,500 patents. Sasol also has its own GTL technology.
Only a handful of projects exist. Shell operates Pearl in Qatar, the world's largest, and has a smaller site in Malaysia. Sasol has a plant in Qatar and plans to build more, including in the United States. A Chevron project in Nigeria using Sasol technology is starting this year.
A decade or more ago, the prospect for GTL looked brighter. "Gas into oil may revolutionize energy" read a Reuters headline from 1998. Exxon Mobil in the early 2000s planned a similar plant to Pearl, but in 2007 canceled it.
Shell says that the cancellation of its own U.S. project does not mean it has given up on expanding.
"We continue our investment into technology development and product development to increase the value of future GTL projects," said Guy de Kort, a Shell vice president, at a conference in London.
"We are pursuing other opportunities as well. But the economics have to be convincing enough to put our money there."
Some Shell investors are less enthusiastic than executives about large GTL projects. Costs at Pearl soared to $18-$19 billion from $5 billion initially. Shell's shares rose after it canceled the U.S. project on Dec. 5 last year.
"Returns from gas-to-liquids projects are not very predictable," said Ivor Pether of Royal London Asset Management, which holds Shell shares.
"They depend on the spread being right between volatile gas input costs and the output price of the product, such as diesel, rather like an arbitrage investment.
"When Shell canceled that $20 billion Gulf Coast GTL project at the end of last year, it was probably the first sign things were changing at the company, with greater focus on capital discipline. The shares responded well on that day and pretty much started outperforming from that point."
Shell is happy with how Pearl is performing. Even executives at rival companies say the investment turned out well as oil prices have risen since 2006, much more than gas prices.
"You have to believe that that arbitrage gap is going to sustain itself," said Osterwald. "It is very expensive and there are a lot of risks, but in the right way it can be very successful."
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